Don’s Outlook 9/3/08
Oil prices plunged yesterday as traders unwound bets that Gustav—once a category 3 hurricane and now just a line of thunderstorms—would knock out energy production in the Gulf of Mexico. The drop in oil dragged down energy stocks, along with the broader market, and the Dow Jones Industrial Average slipped 27 points, or 0.2 percent, to 11,517. The major market gauges had been up around 1 percent each earlier in the session, but concerns over slowing economic growth squelched that early rally. The S&P 500 fell 5 points, or 0.4 percent, to 1,278, and the Nasdaq Composite Index gave back 18 points, or 0.8 percent, to close at 2,349.
The front month contract for the benchmark grade of crude oil fell 5 percent in New York trading yesterday to settle at just under $110 per barrel, but the sell-off in oil did little to cheer investors. While many analysts were predicting over the summer that oil in the $100 to $105 per barrel range would be bullish for stocks, investors now appear to be concerned that the steep drop-off is a sign that the global economy is slowing down too rapidly.
The Commerce Department said this morning that factory orders rose 1.3 percent in July, led by a sharp uptick in demand for commercial aircraft and heavy machinery from U.S. manufacturers. The July data follows an even stronger performance by the manufacturing sector in June, when the overall number of orders jumped 2.1 percent. The relatively weak U.S. dollar has made exports more competitive and helped offset sluggish demand in the domestic market for big-ticket items like automobiles and household appliances.
While the Commerce Department’s data has shown growth in factory orders for five consecutive months, another important industrial indicator, the Institute for Supply Management’s manufacturing index, fell slightly last month, from July’s reading of 50.0 to 49.9 in August. Any reading below 50.0 indicates contraction in the sector. Despite tipping into official “contraction” territory, there was some good news in the latest ISM data. The price pressure on manufacturers eased considerably last month, with the index that measures manufacturing inflation falling from 88.5 to 77.0. Although still inflationary, the decline in the price index for August represented the biggest drop since 2006. The reading primarily reflects lower energy prices. Additionally, the new orders index increased from 45.0 to 48.3.
The financial sector is still struggling. Fitch Ratings downgraded the preferred stock of Fannie Mae and Freddie Mac yesterday. Bailout rumors have swirled around the troubled government-sponsored mortgage giants since this summer, as investors grew concerned that Fannie and Freddie didn’t have enough cash to meet their short-term obligations. Lehman Brothers, which will post quarterly earnings later this month, is reportedly shopping its lucrative money management business around in a bid to bolster its capital cushion. Most analysts believe Lehman is the weakest of Wall Street’s remaining four investment banks.
On Friday, the Labor Department will report employment data for August. Payrolls have declined for seven consecutive months, and economists are calling for a loss of 75,000 jobs in August and for the overall rate of unemployment to edge up 0.1 percent to 5.8 percent. In addition, the Institute for Supply Management releases its service sector index on Thursday. Analysts who follow the so-called “non-manufacturing” index are looking for a reading of 50.0, a gain of 0.5 percent from last month.
