MarketView for May 28

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Wednesday, May 28, 2008

 

 

 

 

Summary

  

Stock prices were somewhat higher on Wall Street on Wednesday as a report pointing to stronger business spending added some momentum to the shares of blue-chip computer firms and heavy equipment makers, overshadowing the latest signs of turmoil in the financial sector.

 

Shares of technology companies such as IBM and Hewlett-Packard gained ground after the latest durable goods report indicated an unexpected increase in business investment last month. IBM ended the day up $2.22, or 1.74 percent, to close at $129.54, making it the largest positive contributor on the Dow Jones industrial average. Hewlett-Packard ended the day up $0.82, or 1.79 percent, to close at $46.52. Research in Motion gained $2.67, or 1.98 percent, to close at $137.80.

 

Shares of Caterpillar ended the day up $1.24, or 1.51 percent, to close at $83.19 and Deere's shares gained $2.72, or 3.41 percent, to close at $82.58. Alcoa was up $1.19, or 2.95 percent, closing at $41.57. At the same time, fears of increased loan losses crept back into the market and limited gains overall after Key, a large Midwestern bank, said its write-offs for the year are likely to be double what it had previously forecast. As a result, Key ended the day down $2.29, or 10.43 percent, to close at $19.66.

 

The news regarding Key contributed to increased volatility of the shares of other regional banks. Fifth Third fell $0.70, or 3.58 percent, to close at $18.85, while Comerica ended the day down $1.41, or 3.80 percent, to close at $35.66.

 

Shares of American International Group fell nearly 5 percent after Citigroup said the insurer may need even more capital after raising $20 billion just last week. AIG ended the day down $1.71, or 4.67 percent to close at $34.91.

 

The retail sector gained after apparel maker Polo Ralph Lauren RL posted sharply higher quarterly earnings on Wednesday. Chico's also posted a better-than-expected quarterly earnings number. Ralph Lauren ended the day up $7.25, or 11.74 percent, to close at $69.00. Chico's ended the day up $0.97, or 13.53 percent, at $8.14.

 

Trading was extremely light on the New York Stock Exchange, with about 1.19 billion shares changing hands, well below last year's estimated daily average of roughly 1.9 billion, while on NASDAQ, about 1.82 billion shares traded, short of last year's daily average of 2.17 billion.

 

Durable Goods Orders Up and Down

 

New orders for durable goods fell last month but demand outside of transportation fell and a gauge of business investment rose sharply, suggesting surprising strength in the factory sector.

 

According to the report by the Commerce Department, orders for durable goods, items intended to last three or more years, fell 0.5 percent in April after a 0.3 percent decline in March. While orders for transportation equipment fell 8 percent as demand for civilian aircraft fell 24.4 percent, if you strip out the transportation sector, the durable goods number rose 2.5 percent, that statistic’s largest gain since last July.

 

 A closely watched proxy for business spending, non-defense capital goods orders excluding aircraft rose a surprising 4.2 percent, the largest gain for that statistic since last December. Taken together, Wall Street quickly reached the possibly erroneous conclusion that the economy may not be as bad off as was previously thought.

 

As a result, the data provided some slight momentum to the markets.  At the same time, prices for government bonds fell and the dollar rose as the data supported traders' bets the Federal Reserve would raise interest rates later in the year. Fed officials have recently signaled a desire to move to the sidelines, and traders in interest-rate futures have priced in about a 50 percent likelihood rates could move higher by late October.

 

"The key to maintaining low inflation and inflation expectations is likely to be the timeliness and magnitude of decisions we make to reverse course," Minneapolis Federal Reserve Bank President Gary Stern said.

 

Motor vehicle orders fell 3.3 percent, due to the sagging economy, which contributed to the weak demand for transportation goods. However, electrical equipment orders surged 27.8 percent, the steepest increase on record, which analysts attributed to strong overseas demand that has been driven by a weak U.S. dollar. Machinery and primary metals orders also rose. At the same time, shipments of durable goods rose 1.2 percent, the sharpest gain since January.

 

Fed Governor Mishkin Resigns

 

Federal Reserve Governor Frederic Mishkin has resigned effective August 31, the Fed said on Wednesday, leaving the central bank's board thinly staffed as it navigates through a credit crunch and period of slow growth. In his letter of resignation, Mishkin said is returning to his teaching post at Columbia University's Graduate School of Business. He joined the Fed board in September 2006 for a term ending in January 2014.

 

"Rick's contributions to the intellectual underpinnings of monetary policy at the Federal Reserve have been invaluable," Fed Chairman Ben Bernanke said in a statement. Mishkin's 24-month tenure on the Fed's board would be the shortest since Alan Blinder spent 19 months as Fed vice chairman from June 1994 to February 1996.

 

Mishkin's departure will leave the Fed's Board of Governors with three of its seven seats vacant. Bush has nominated two people to fill vacant spots and has tapped Gov. Randall Kroszner to serve a full 14-year term, but the Senate has not confirmed the nominations in an election-year standoff.

 

If the Senate does not approve any pending nominees by the time Mishkin steps down, as appears likely, the central bank would be operating with just four board governors for the first time since cabinet members and agency heads served as ex-officio members in the 1930s.

 

The normally seven-person board serves as the nucleus of monetary policy-making. Each board member regularly votes on interest-rate decisions, as does the head of the New York Federal Reserve Bank. The presidents of the Fed's 11 other regional banks vote on a rotating basis, with a total of five regional presidents voting at each rate-setting meeting.

 

The board make-up after Mishkin leaves would put governors named by the president and confirmed by the Senate in the minority among the voting members on the rate-setting panel.

Some analysts believe the regional presidents are more inclined to raise rates to squelch inflation, and less accountable to Congress, because they are not subject to the confirmation process.

 

The regional bank chiefs are chosen by boards of directors comprised of private-sector representatives, although the appointments are subject to approval by the Fed's Washington-based board.

 

Mishkin's decision to step down comes not only as the central bank wrestles with a weak economy and surging prices for food and energy, but also as officials begin to consider changes to oversight of the financial system in light of the credit crisis sparked by rising mortgage delinquencies.

 

A prominent academic, Mishkin cut a wide theoretical swath as a Fed official. In recent speeches, he argued that the Fed should not prick asset price bubbles because interest rates are too blunt a tool. He also argued that policy-makers should not focus too heavily on energy price increases, because doing so could lead to an erratic money policy.

 

Mishkin has argued, like Bernanke, that Fed policy could be bolstered by a stated numerical inflation target. He co-authored a book on the subject with Bernanke, whom he has known for more than 25 years.

 

The Fed last November announced it would issue quarterly forecasts instead of two forecasts a year, and would make projections three years into the future instead of two, providing more information about the rate of inflation policy-makers deem acceptable. However, it stopped short of setting explicit inflation targets.

 

Dow Chemical Raising All Prices

 

Dow Chemical, the country’s largest chemical manufacturer, said on Wednesday it would raise prices for all products by up to 20 percent, the latest signal that escalating energy prices were stoking inflation. Dow said the price increases will take effect on June 1 for all its chemicals and plastics, used in thousands of products from paints and adhesives to insecticides and packaging.

 

The move came as little surprise since prices for natural gas, a key chemical industry feedstock, have jumped by 56 percent since the end of 2007, and crude oil prices have risen 32 percent to above $125 per barrel. While Dow makes news with its announcement, others have preceded it. Albemarle, Nalco Holding and Praxair have also announced price increases in recent months.

Rohm and Haas said last month said it would apply an indexed raw material and energy surcharge to a variety of products. The index will be adjusted up or down monthly, based on the collective changes in key raw material, crude oil and natural gas costs.

 

The price increases will hurt some sectors more than others. Makers of plastic packaging like Sealed Air and Bemis, which have already seen profits hurt by higher resin costs, are likely to see cost pressures mount. Paints and adhesives manufacturers are also likely to feel the pinch, as chemical costs form a large portion of their overall expenditure.

 

The price increases by Dow and others are also likely to exacerbate the pain for consumer goods makers already hurt by a slowing economy and a slump in the housing market.

 

In 2007, Dow's feedstock and energy costs rose by $2.5 billion to $24.6 billion, accounting for about half its total costs. Dow said its cost of energy and feed stocks surged 42 percent in the first quarter from a year earlier, and the jump in crude oil and natural gas prices was continuing. Dow has sought to combat high energy prices by forming joint ventures with companies in the Middle East and North Africa that have access to cheaper raw materials. Dow’s shares closed out the day up $0.60, or 1.49 percent, at $40.83.