MarketView for May 22

MarketView

Events defining the day's trading activity on Wall Street

Lauren Rudd

Thursday, May 22, 2008

Summary

It was a volatile day on Wall Street on Thursday but one that the major equity indexes with closing numbers in positive territory, ending two days of steep declines as energy prices pulled back from record highs and a proposed acquisition in the utilities sector set a more positive tone to trading activity. NRG Energy made an unsolicited bid to acquire Calpine for about $11 billion.

Also helping the positive numbers was a pullback in the price of crude oil despite a record high early in the trading day, which sent speculators looking for bargains, particularly among the airline and financial stocks. In particular, American Airlines parent AMR posted the sharpest gain, rallying more than 5 percent. AMR's jump outpaced a 3 percent rise in the Amex airline index.

The pain in the airline industry was underscored on Wednesday by news that American Airlines would cut domestic capacity by as much as 12 percent and begin charging a $15 fee to check a single bag. AMR was up 34 cents, or 5.47 percent to close at $6.56, while the shares of United Airlines parent UAL was unchanged at $8.15. Delta was also unchanged for the day, closing at $5.77.

Meanwhile, JPMorgan saw its shares rise 63 cents, or 1.49 percent, to close at $43.05 percent, while Citigroup gained 66 cents, or 3.13 percent, to close at $21.72. Children's Place Retail Stores reported higher quarterly earnings on increased sales, sending its shares up $4.63, or 16.33 percent, to close at $32.98.

In other news, Ford Motor was a drag on the market after the automaker abandoned its profitability goal for 2009. Ford ended the day down 64 cents, or 8.21 percent, to close at $7.16.

Among the day’s key economic news, was a statement from the Labor Department indicating that weekly jobless claims fell by 9,000 to the lowest level in a month.

Economic News Continues To Look Grim

Home prices fell by a record 1.7 percent in the first quarter of this year as the number of workers collecting jobless benefits reaches a four-year high, underscoring the economy's woes. The continued slump in housing prices in the first quarter pushed prices 3.1 percent below their year-ago level, the Office of Federal Housing Enterprise Oversight said. Like the quarter-to-quarter drop, the decline was the biggest in the 17 years the housing regulator has tracked the data.

OFHEO said prices fell 0.4 percent in March from February and are now down 3.7 percent from their April 2007 peak. Other home price measures have shown even steeper declines.

A separate report from the Labor Department showed first-time claims for state unemployment benefits unexpectedly fell 9,000 last week to 365,000. However, the number of workers still on the benefit rolls after drawing an initial week of aid held at 3.073 million in the week ended May 10, the latest for which figures were available. The last time so-called continued claims were higher was in March 2004.

The plunging housing sector and tighter credit conditions have pushed the economy to the edge of, if not into, recession. At the same time, continued claims for jobless benefits have held above the 3 million mark for four straight weeks, a sign of the difficulties workers face getting back on the payrolls.

While initial filings dipped last week, a four-week average of new claims, a more reliable guide to underlying labor trends because it irons out weekly volatility, rose to 372,250 from 367,250 in the previous week.

Price of Crude Oil Falls

Oil prices pulled back sharply from a record above $135 a barrel on Thursday as dealers took profits and a rising dollar dampened commodities markets. Domestic sweet crude settled down $2.36 at $130.81 per barrel rising early in the session to a record $135.09. London Brent crude settled down $2.19 at $130.51, after reaching $135.14 per barrel.

The pullback came after crude rallied more than a third since the start of the year, driven by worries about tight stocks of refined products in the near term and mounting global demand over the longer term.

Oil is up six fold since 2002, propelled by rising consumption in China and other developing countries. Concerns over the availability of supply long-term also contributed to the recent price rally. As a result, crude for delivery December 2016 moved as high as $145.60 per barrel, making it the loftiest contract on the futures curve.

Short-term, crude surged in price on Wednesday after weekly domestic data indicated that crude stocks declined by 5.4 million barrels.

OPEC Secretary-General Abdullah al-Badri said on Thursday that OPEC can do nothing to lower oil prices, and called the oil market "crazy". The United States has repeatedly called on OPEC to boost its output to try to calm markets, but the group has said no increase is needed.

Retailers Surprise Wall Street

Apparel and jewelry retailers surprised Wall Street with better-than-expected earnings on Thursday as cost-cutting measures and inventory controls offset the impact of the weak economy. Children's Place Retail and Limited Brands, whose shares have all lost more than 30 percent over the last year, saw sizable market gains on Thursday, after reporting better-than-expected quarterly profit in a weak environment.

Children's Place, whose shares jumped as much as 18 percent to a nine-month high, said its operating margin improved 20 basis points in the first quarter and that its plan to turn around its business by updating merchandise, cutting costs, and exiting the Disney Store business was paying off. Children's Place ended the day up $4.63, or 16.33 percent, to close at $32.98

Limited also cited better margins due to efforts to reduce inventory and manage costs. Keeping inventory levels slim, in line with lower consumer demand, means chains can avoid heavy discounting necessary to move unsold merchandise. Limited ended the day up 54 cents, or 2.95 percent, to close at $18.85.

AnnTaylor Stores has been working to improve its store environments and marketing messages. Its profit topped the average Wall Street estimate by a penny, but its stock fell after Chief Executive Kay Krill said on a conference call that consumers appeared to require increased promotions to encourage spending. That, coupled with a need to spend more on marketing to these cash-strapped consumers, led the apparel retailer to give a profit forecast for the current quarter that was less than the Street was expecting. AnnTaylor reaffirmed its full-year outlook. AnnTaylor ended the day down 19 cents, or 0.71 percent, to close at $26.58.