Don’s Outlook 8/27/08
Energy prices resumed their role as the driving force behind the stock market yesterday, and the major market gauges finished mixed as oil surged on hurricane fears. The Dow Jones Industrial Average added 27 points, or 0.2 percent, to close at 11,413. Large-cap financials and energy companies provided a boost to the index of 30 blue-chips; Citigroup and JPMorganChase each gained 1.3 percent, while shares of ExxonMobil rose 1.6 percent. The broader market gauges were mixed. The S&P 500 gained 5 points, or 0.4 percent, to 1,272, while the Nasdaq Composite Index slipped 4 points, or 0.2 percent, to close at 2,362. A 6.6 percent decline in chipmaker Marvell Technologies Group dragged on the tech-heavy Nasdaq, and the benchmark for the semiconductor industry, the Philadelphia Semiconductor Index, was off 1 percent.
Financial shares made gains yesterday, despite a new report from the Federal Deposit Insurance Corporation—the entity that insures U.S. bank deposits up to $100,000—that revealed a spike in the number of institutions on its troubled banks list. According to the FDIC, there were 117 banks on the list at the end of the second quarter, a 30 percent increase since the end of March. More troubling for investors, however, is the amount of assets represented by the expanded list: nearly $80 billion, as opposed to just $26 billion at the end of the first quarter. Some market observers see a silver lining in the FDIC’s new data: The failure of weaker banks could provide an opportunity for larger, better-capitalized institutions to grow their markets.
The Federal Reserve yesterday released the minutes of its last interest rate-setting meeting on August 5. According to the minutes, most members of the Fed’s policy making body, the Federal Open Market Committee, see both the rate of inflation and economic growth slowing in the second half of the year. The minutes also revealed that the FOMC members are in general agreement about the direction of monetary policy—the next move will almost certainly be an interest rate increase—but they will let economic conditions dictate the timing of any rate hike. FOMC left the key federal funds rate unchanged at 2.0 percent at its last meeting.
Another piece of the gloomy housing picture fell into place earlier this week. According to the Case-Shiller home price index, the measure most economists believe provides the best picture of the overall residential real estate market, housing prices fell nearly 16 percent over the past year in the 20 largest U.S. cities, although 9 metropolitan regions reported price increases. In a separate report, the Commerce Department said that sales of single-family homes grew by 2.4 percent in July, although the median price of a home fell 6.3 percent on a year-over-year basis. The increase in seasonally-adjusted sales of single-family homes combined with the falling median price is an indication that banks are resorting to foreclosure sales to clear their inventory of non-performing properties.
The price of oil rebounded in trading on the New York Mercantile Exchange as futures traders eyed Hurricane Gustav, which gained strength yesterday as it passed over western Haiti. The benchmark grade of light, sweet crude settled at $116.27 a barrel, a gain of 1 percent. The contract for September delivery of natural gas spiked 5.8 percent. Meteorologists have placed Gustav on a track to enter the Gulf of Mexico Sunday; if the storm continues to gain strength, it could force oil and natural gas platforms to shut down for several days.
