US Market tries to stabilize itself
US Market ended the week on Friday, 18 July with decent gains. Drop in
oil prices, the rally in the financial stocks, and better-than-feared
earnings news were the major reasons for this turnaround. Even on the
last day of the week, Friday, the earnings misses by two behemoth
companies weighed heavily on the tech sector but even so, the broader
market still eked out a slight gain.
The Dow Jones Industrial
Average gained 396 points for the week to end at 11,496.57. Tech -
heavy Nasdaq gained 43.7 points at 2,282.78. S&P 500 gained 21.19
points to end at 1,260.68. In percentage terms, Dow, S&P 500 and
Nasdaq gained 3.6%, 2% and 1.7% respectively.
The financial
sector which had came under severe pressure last week once again
resumed journey in a lackluster fashion during the beginning of the
week. In the first couple of days, the sector registered 5-6% declines
each day. But then it tried to make a decent comeback. The decline in
financial sector was due to a couple of reasons. First, it occurred to
many that IndyMac's failure was a hint of many more bank failures.
Secondly, it was the continued pressure on Freddie Mac and Fannie Mae.
Treasure Secretary Henry Paulson came out with a plan that intended to
shore up confidence in the idea that neither Fannie Mae nor Freddie Mac
would be allowed to fail. The three main tenets of the plan were - a
provision for a temporary increase in the line of credit the government
sponsored enterprises (GSEs) have with Treasury, temporary authority
for Treasury to purchase equity in either GSE and providing the Fed a
consultative role in the new GSE regulator's process for setting
capital requirements.
But the market did not pay much heed to the above following the result of Freddie's $3 billion sale in short-term notes.
On Tuesday, 15 July, Federal Reserve Chairman Ben Bernanke, in his
semi-annual monetary policy testimony said that the U.S. economy is
facing significant risks to growth. As per him, rising energy prices,
reduced access to credit and a further deepening in the U.S. housing
slump have created significant downside risks to the outlook for
growth. Bernanke also said that the weakening dollar has contributed to
the rise in crude prices. He said it is too difficult to assess how
much of an impact it has. Bernanke feels the trade deficit is largely
to blame for the dollar's decline.
Market registered significant
losses during the first couple of days. But the positive part was that
crude prices were cracking. After touching $146.37 at their high
Monday, 14 July, crude prices ended Tuesday's session at $138.74. The
slide, though, didn't end there. The selling persisted for the
remainder of the week, with prices settling at $134.60 on Wednesday,
$129.29 on Thursday and $128.96 on Friday. The latter price marked an
11% decline from the prior week's close.
But since Wednesday, 16
July, financial sector witnessed a good rally and surged 21% in the
last three days. Wells Fargo provided the spark that fueled the
monstrous rally. On Wednesday it delivered better-than-expected
earnings results. The momentum was carried on Thursday that was driven
by better-than-expected earnings news from JPMorgan Chase.
Among other earning reports, companies like United Technologies,
Honeywell, Johnson & Johnson, IBM all exceeded estimates, offering
an important reminder that the earnings environment outside the
financial sector isn't as bad as one might think. But disappointments
were provided by tech giants Google and Microsoft on Friday. The miss
weighed on the Nasdaq and the tech sector on Friday and the index ended
in the red on that day.
Citigroup reported a loss that was less
severe than feared. That was another reason for the financial sector to
cheer. The firm also announced more than $7 billion in write-downs,
though the extent of those adjustments was 40% less than the previous
quarter. That story helped to more than nullify the effect when Merrill
announced a steeper-than-expected loss for its most recent quarter.
In other economic news, June inflation rose by a higher-than-expected
amount due to rising energy and food costs. Core inflation also was
higher than expectations due to larger increases in the indexes for
shelter, tobacco and smoking products, and the apparel index.
Specifically, June Consumer Price Index (CPI) rose 1.1%
month-over-month, higher than the expected increase of 0.7%. Core CPI,
which excludes food and energy, rose 0.3%, which was also higher than
the consensus estimate of 0.2%.
The Labor Department also
reported that Industrial production rebounded to a 0.5% gain in June
from the decline of 0.2% in May. The gain was in part due to a 5.4%
increase in the output of motor vehicles and parts as activity resumed
at plants that had been idled during the American Axle strike.
Separately, capacity utilization increased to 79.9% from 79.6%.
Among interesting corporate news, Yahoo rejected a joint proposal from
Microsoft and Carl Icahn that called for a restructuring of Yahoo,
which would include Microsoft taking over Yahoo's search business.
In the M&A arena, Anheuser-Busch finally agreed to be bought by
InBev, after the Belgian company increased its offer to $70 per share,
or $52 billion, from $65 per share. Also, Waste Management offered to
acquire Republic Services for $34 per share in cash, or roughly $6.2
billion, a 22% premium over RSG's closing price.
Executive Summary
For the week, indices registered decent gains. In percentage terms, Dow
and Nasdaq gained 3.6% and 2% respectively. S&P 500 gained 1.7%.
Drop in oil prices, the rally in the financial stocks, and
better-than-feared earnings news were the major reasons for this
turnaround. The financial sector lost 12% in the first two days of the
week but gained 21% in the last three days.
For the year, Dow, Nasdaq and S&P 500 are down by 13.3%, 13.9% and 14.1% respectively.
The
coming week once again has a number of important companies to announce
their earnings. Other than that, behavior of oil prices and the
financial stocks will also play a role in driving the market.
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