MarketView for April 29

MarketView

Events defining the day's trading activity on Wall Street

Lauren Rudd

Tuesday, April 29, 2008

Summary

The major equity indexes managed to end the day on Tuesday pretty much where they started at the opening bell as setbacks for two drugs weighed down the pharmaceutical sector, offsetting a retreat in record high crude oil prices. As is generally the case, the Street turns cautious the day prior and the day of a meeting of the Fed concerning interest rate decisions. The Fed is expected to lower interest rates one last time by a quarter of a point and then signal that it is done for a while as it assesses the situation. Keep in mind that the lags involved are about 6-8 months minimum.

The prospect of steady rates helped support the dollar and contributed to a 2.5 percent drop in oil prices from a record high. Crude's decline sparked a rally in airlines, but dragged on energy-related shares.

Merck saw its share price take a beating after the company said the FDA rejected a new cholesterol drug, prompting brokerages to cut price targets on the stock. At the same time, Genentech and Biogen Idec said jointly that a study of one of its cancer treatments failed to show the drug was also effective for treating lupus.

Shares of fell in after hours trading on word that Citigroup plans to sell $3 billion of common stock to bolster its capital levels.

The price of sweet domestic crude for June deliver settled down $3.12 per barrel at $115.63, a price that was well below Monday's record of almost $120 per barrel. That had a tendency to hurt energy stocks with Schlumberger, an oilfield services firm, falling $3.10, or 3.03 percent, to close at $99.26. Oil and gas producer Apache APA fell $5.22, or 3.79 percent, close at $132.68.

It wasn't all gloom in the oil patch. Goldman Sachs upgraded the integrated oil sector to "attractive" from "neutral," saying risk/reward was most favorable for the "super majors" such as ConocoPhillips and Chevron. Chevron saw its share price rise $2.24, or 2.42 percent, to close at $94.74, supporting both the Dow and the S&P. ConocoPhillips was up $1.01, or 1.20 percent, to close at $85.45.

Consumer Confidence Plummets

Consumer confidence fell to a five-year low this month in light of the worst outlook for jobs since late 2004 as consumer indicated that they expect inflation will accelerate to a pace last seen in the early 1980s. The news cemented the prevailing view that the Federal Reserve, which is to open a two-day policy meeting later on Tuesday, would signal an end to its aggressive campaign of lowering interest rates.

According to the Conference Board, its index of consumer sentiment fell to 62.3 in April, the lowest reading since March 2003, when the Iraq war was launched, from an upwardly revised 65.9 in March. The monthly survey's gauge of inflation expectations hit 6.8 percent from 6.1 percent in March. It was the highest reading on inflation expectations since a matching 6.8 percent in September 2005.

According to the Standard & Poor's/Case Shiller home price index, 17 of the 20 metropolitan regions measured posted record annual declines. "There is no sign of a bottom in the numbers," David Blitzer, chairman of the index committee at S&P, said in a press release.

Eight of the top 20 metro areas, as well as both composite measures, had their biggest monthly declines in February, S&P said in the release.

The plummeting housing market was a key factor weighing on sentiment in last Friday's Reuters/University of Michigan gauge of consumer sentiment, which hit its weakest level in 26 years. Worries over jobs and inflation have been common themes in the Michigan and other consumer gauges.

The Conference Board's measure of inflation expectations marked the highest reading since a matching 6.8 percent in September 2005 in the aftermath of Hurricane Katrina, which briefly sent energy prices soaring. Food and energy prices in recent months have remained stubbornly high amid a global boom in commodities and a weak U.S. dollar. The last time the government's consumer inflation gauge reached 6.8 percent was 1982.

The Conference Board's gauges of consumer concerns about the job market were at their worst since autumn of 2004.

Housing Price Fall Once Again

Home prices suffered another record drop in February as the housing sector showed no signs of an end to the sector's worst slump in a generation. Prices of existing U.S. single-family homes extended their slide in February, falling 2.6 percent to 175.94 in February from the previous month for an annual decline of 12.7 percent., according to the Standard & Poor's/Case Shiller home price index.

In addition, U.S. home foreclosure filings jumped 23 percent in the first three months of the year from the last quarter of 2007, and more than doubled from a year earlier, as more overextended borrowers failed to make timely payments, real estate data firm RealtyTrac said on Tuesday.

Crude Prices Tumble Off Previous Highs

The price of crude oil fell sharply on Tuesday, retreating from a record high as a rebound in the dollar spurred selling and as fears over a rash of global supply disruptions began to recede. The price of domestic sweet crude for June delivery settled down $3.12 per barrel at $115.63. London Brent crude settled down $3.33 at $113.41 per barrel.

Oil prices had hit the peak Monday near $120 a barrel as a strike at a Scottish oil refinery forced the shut-in of North Sea crude production and a strike and militant attacks in Nigeria cut another chunk of output.

Workers at the Grangemouth refinery returned to work on Tuesday after the two-day strike, allowing BP to begin the restart of a major crude pipeline from the North Sea connected to the Grangemouth site.

Resumption of talks between Nigerian unions and Exxon Mobil to end a six-day strike that has shut in much of the U.S. oil major's Nigerian output also helped oil's retreat. The strike and attacks by Niger Delta rebels have slashed oil production in the world's eighth-largest exporter by half.

Confidence in Merck Falls Out Of Bed

Confidence in Merck’s prospects going forward withered on Tuesday, along with its stock price, after the Food and Drug Administration (FDA) surprisingly rejected Merck’s treatment to raise levels of "good" HDL cholesterol. Shares of Merck, already battered by this year's failed trial of its blockbuster Vytorin cholesterol drug, are down 36 percent for the year.

Merck for years has touted the drug, which it had planned to call Cordaptive, as one of its most important experimental medicines and a major new weapon to prevent heart attacks and stroke. But the FDA late on Monday slapped the product down with a so-called not-approvable letter. The issuance of a not-approvable letter suggests that there is a serious deficiency in the drug application.

Merck did not explain why the FDA spurned Cordaptive, other than to say the agency wants additional information on the drug. It is an extended release form of niacin that is combined with a chemical meant to reduce flushing, an uncomfortable redness and burning of the face and neck that is a side effect of niacin.

There was some speculation on the Street that the FDA rejection was due to the same type of blood-clot risk that had sparked the withdrawal of Merck's arthritis drug Vioxx, although no such risk has been reported from the medicine's clinical trial data. The issue was also raised that the FDA, seen as increasingly cautious after the 2004 withdrawal of Vioxx and controversy over the failed Vytorin study, won't clear Cordaptive until long-term trials establish it can prevent heart attacks and improve other health-related outcomes.

Now there is also the concern that the rejection could raise doubts over whether the FDA would be willing to approve another potentially lucrative Merck drug, now in development, that combines Cordaptive with Merck's older Zocor cholesterol fighter.

The setback for Merck spelled good news for rival Abbott Laboratories, whose Niaspan drug is the leading niacin HDL-booster on the market. Merck’s shares ended the regular trading day down $4.30, or 10.38 percent, to close at $37.14.