MarketView for May 23

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Friday, May 23, 2008

 

 

 

 

Summary

 

Wall Street chalked up its worst week in three months as rising oil prices continued to bring about renewed concerns over inflation and sent the share of companies dealing in any energy sensitive environment heading south. Since the start of the year oil prices have climbed by more than 30 percent, sapping consumer spending on everything from driving to shopping.

 

Economic bellwethers such as General Motors, United Technologies and Caterpillar were among the largest drags among the stocks making up the Dow Jones industrial average. General Motors saw its shares hit a 26-year low after the company said strikes had reduced its earnings by a total of $2.8 billion. GM shares were down 83 cents, or 4.50 percent at $17.60, while United Technologies' shares fell $1.83 or 2.55 percent to close at $70.01. Caterpillar ended the day down 67 cents, or 0.81 percent to close at $81.55.

 

For the week, the Dow fell 3.9 percent, the NASDAQ fell 3.3 percent and the S&P 500 posted a decline of 3.5 percent. For all three indexes, it was their worst weekly percentage drop in three months.

 

Data from a realtors group showed a decline in existing home sales that was less than expected. However, the report gave a mixed picture, with inventories of unsold homes rising 10.5 percent last month.

 

Shares of American International, the world's largest insurer, fell 86 cents, or 2.27 percent, to close at $36.95. Moody's Investors Service cut the company's credit rating, citing losse27 from its exposure to the U.S. mortgage market and credit derivatives.

 

The Cheesecake Factory saw its share price fall $1.34, or 6.42 percent, to $19.53, while Darden Restaurants, DRI the operator of the Red Lobster chain, fell $1.47, or 4.43 percent, to close at $31.74.

 

Belgian brewer InBev is apparently working on a bid for Anheuser-Busch, whose shares ended the day up $4.03, or 7.66 percent, to close at $56.61.

 

Trading volume was light on the New York Stock Exchange, with about 1.1 billion shares changing hands, below last year's estimated daily average of roughly 1.9 billion, while on NASDAQ, about 1.69 billion shares traded, also short of last year's daily average of 2.17 billion.

 

Crude Prices Continue To Rise

 

The price of crude oil rose on Friday on the weak dollar and ongoing long-term supply concerns briefly pushed oil to a peak over $135 per barrel this week. Sweet domestic light crude settled up $1.38 per barrel at $132.19, after hitting a record $135.09 during intraday trade on Thursday. London Brent settled up $1.06 per barrel at $131.57.

 

Oil prices continue to climb as investors seeking a hedge against inflation speculators betting o a falling dollar continue to enter the market. The dollar looked set on Friday for its steepest weekly fall against a basket of major currencies in two months on concerns about the economy's vulnerability to slower growth and rising inflation.

 

Further support is the result of a continual fanning of worries over whether the available supply of crude oil is going to be able to keep up with demand over the next few years amid forecasts for tepid growth outside of OPEC. Non-OPEC production has stagnated and is estimated to remain below 50 million barrels per day this year. Resource nationalism by oil producing countries emboldened by high prices will do its part to continue to limit international oil companies access to reserves, thereby damping long-term supply growth forecasts and lifting long-dated crude futures.

 

High oil prices have hurt demand growth in top consumer the United States, and could curb usage in Asia as well. "In many ways you are starting to see a demand response," said Lawrence Eagles of the International Energy Agency.

 

Data released on Friday showed that highway miles driven in March fell 4.3 percent from a year earlier, the first March since the last major oil shock in 1979. Road travel in the United States during the Memorial Day holiday this weekend is expected to be 1 percent lower than last year, the first decline since 2002.

 

Oil consumers have called upon OPEC to increase output to help alleviate the pain of rising fuel costs. However, OPEC Secretary-General Abdullah al-Badri repeated on Thursday that the group's stance is that it can do nothing to lower oil prices in a "crazy" market, blaming record prices on factors geopolitical tensions, speculation and the weak dollar.

 

Real Estate Stats Continue To Fall

 

Sales of previously owned homes fell last month and the backlog of unsold properties hit a record high, according to the National Association of Realtors (NAR). The data suggests that the market's downturn still has a long way to go. Home resales fell 1 percent in April to a 4.89 million-unit annual rate, the NAR said. The stock of unsold homes surged 10.5 percent to 4.55 million units, leading to warnings of further housing market woes ahead.

 

At April's sales pace, the supply of homes was 11.2 months' worth, the highest since the trade group began tracking single-family and condo properties together in 1999. For single units, the supply was 10.7 months' worth, the most in 23 years.

 

The report showed the median home price in April was down 8 percent from a year ago, at $202,300. It was the second-largest price decline on record, following the biggest drop in February.

 

NAR Chief Economist Lawrence Yun said that foreclosed homes, which sell at substantially lower prices, were increasingly showing up in the existing home sales data.

 

"Several markets are seeing a significant rise in home sales," Yun said. "These markets are also the markets that have witnessed a substantial decline in prices."

 

Sales declined in the Northeast, Midwest and South but rose in the West, by 6.4 percent. But prices in the region were off 16.7 percent from a year ago, the sharpest regional price decline.

 

The trade association said last month's existing home sales pace was 17.5 percent below the rate of April 2007, with single-family home sales off 16.1 percent and sales of multiple family units down 27.9 percent.

 

Hope Belgian Brewer InBev NV Likes Clydesdales

 

Although there is no official news, apparently it is no secret that Belgian brewer InBev NV is working on a $46 billion bid for Anheuser-Busch. News of a possible deal, which would be the largest in alcoholic drink history, sent Anheuser shares up as much as 10 percent on Friday while shares of InBev closed down 2.9 percent at 48.88 euros.

 

The news was first reported by the Financial Times stating that a deal was expected at about $65 per share, but despite extensive due diligence and work on an offer, InBev was not about to "push the button."

 

It appears that a financing package of $50 billion had been provisionally arranged through JPMorgan and Santander and that the bid had been discussed at an InBev board meeting on April 28 and at a meeting on Thursday. Furthermore, InBev is considering a hostile bid if Anheuser management refuses friendly talks.

 

A deal at $65 a share represents a 23.6 percent premium over Anheuser's closing stock price of $52.58 on Thursday, the day before the report. The stock closed up 7.7 percent at $56.61 on Friday.

 

Talk of a possible bid by InBev, brewer of Stella Artois, Beck's and Brahma, for Anheuser-Busch heated up in the past week after surfacing several times before. A Brazilian newspaper reported preliminary merger discussions as far back as February 2007.

 

A $65 per share bid would value Anheuser-Busch at about 13 times annual earnings before interest, taxes, depreciation and amortization for the domestic beer business.

 

InBev, formed from the 2004 merger of Belgium's Interbrew with Brazil's AmBev, has a fraction of the U.S. market but very mature businesses in western Europe. It also has growth in Eastern Europe, Asia and Latin America, notably in the key market of Brazil.

 

Anheuser-Busch dominates the United States and also has an equity stake in China's Tsingtao. But it has struggled recently as U.S. consumers abandon domestic beer for wine, spirits, foreign beers or small-batch craft brews.

 

The beer industry is experiencing a wave of consolidation, with SABMiller Plc and Molson Coors Brewing Co aiming to combine their U.S. units and Scottish & Newcastle agreeing to be broken up by Carlsberg A/S and Heineken

 

Moody’s Begins to See the Error of Its Ways

 

The chief executive of Moody's said on Friday he recognizes the seriousness of questions raised by media reports about an error in a model the ratings agency uses in certain European debt ratings. In a letter to customers, CEO Raymond McDaniel said he will act "quickly and decisively to address any need for changes" to the way Moody's assigns ratings.

 

McDaniel also said it "is inconsistent with Moody's analytical standards and company policies to change models and methodologies for any reason other than to improve the accuracy of our ratings."

 

The Financial Times on Wednesday said a coding error in a computer model resulted in some products being awarded ratings up to four notches higher than merited.