Don’s Outlook 8/13/08
Another round of write-downs from financial sector heavyweights such as Citigroup and Swiss banking giant UBS left investors cold on Tuesday, despite the ongoing decline in oil that has been generally bullish for equities. The Dow Jones Industrial Average lost 140 points, or 1.2 percent, to close at 11,642. JPMorgan Chase, which said it would take an unexpectedly large $1.5 billion loss on its portfolio of mortgage-backed securities, led the blue chips lower with a 9.5 percent decline in its share price. The broader market indexes also lost ground. The S&P 500 slid 16 points, or 1.2 percent, to 1,290, and the Nasdaq Composite Index retreated 9 points, or 0.4 percent, to close out the session at 2,431.
Oil continued to head lower yesterday, although the prospect of easing energy prices and more cash in consumers’ pockets wasn’t enough to overcome the bad news emanating from the financial sector. The front month contract declined $1.44 to settle at $113.01 in trading on the New York Mercantile Exchange. Since hitting an all-time record high over $147 a barrel early last month, oil has declined more than 23 percent, and some energy market analysts are speculating that the price could fall to $100 a barrel by Labor Day.
While the summer sell-off is a welcome reprieve for consumers and has been generally bullish for stocks, the long-term supply and demand picture suggests it’s a temporary development rather than the beginning of a new secular trend. Thus far, the markets have largely shrugged off Russia’s invasion of the tiny Caucasus nation of Georgia, a key transit point between Caspian Sea oilfields and markets in Europe. Although BP, which operates one of the pipelines running through southern Georgia, has shut down the conduit as a precaution, there are no reports of damage. Russian president Dmitry Medvedev announced yesterday that he had ordered an end to military operations there.
While financial firms continue to struggle, U.S. exporters had a banner month in June. The Commerce Department said that the nation’s trade deficit shrank unexpectedly by 4.1 percent, to $56.8 billion as shipments abroad hit an all-time high. The relatively weak dollar has been fueling foreign demand for U.S.-made products. At home, however, the picture turns a bit gloomier. Retail sales decreased by 0.1 percent in July, although economists attributed most of that decline to the soft market for automobiles and parts. Excluding the automotive sector, retail activity increased by 0.4 percent, in line with analysts’ forecasts.
Biotechnology giant Genentech today rejected a $43.7 billion bid from Swiss pharmaceutical company Roche but said it would consider other offers. Roche already owns a majority stake in Genentech and was looking to lock up the remaining 44 percent as competition among big pharmaceutical firms for the next blockbuster drug heats up. Drugmakers like Roche, Pfizer and Merck have been on something of a shopping spree in the small- and mid-cap biotech space over the past decade or so, acquiring companies with promising products in development instead of developing their own drugs in house. Having turned Roche away—at least for now—Genentech becomes the first large-cap biotech company in many years to be “in play,” and some analysts believe a wave of consolidations could soon sweep the sector.
Second-quarter earnings have been coming in better than expected, despite the fact that the financial sector is continuing to struggle with mortgage-backed bond-related writedowns and tight credit conditions. Excluding financials, earnings for the S&P 500 are up about 11 percent over last year, with tech companies and telecoms leading the way. The Federal Reserve’s preferred inflation gauge, the core index of the personal consumption expenditures, remained in line with recent readings—it was up 2.3 percent for the year ending in June. While that figure is slightly above the Fed’s target range of 1 to 2 percent annual growth, it was mild enough to allow the central bank to hold the key federal funds rate at 2.0 percent at its last meeting.
