American Markets Update

Posted on | August 17, 2009 |

Wall Street opened sharply lower today despite the release of upbeat regional manufacturing data in the US. A report released this afternoon revealed that manufacturing in the New York region expanded for the first time in more than a year.

The Federal Reserve Bank of New York’s general economic index rose to a reading of 12.1 in August (readings above zero are expansionary), substantially better than Bloomberg’s median estimate for a rise to 3, from -0.55 in July. The improvement in manufacturing has been attributed to a speedy inventory rundown, which is now beginning to kick-start the manufacturing industry.

‘Inventories were drawn down to such amazingly low levels that companies need to start bringing them back,’ explained Tom Porcelli of RBC Capital Markets. ‘We are coming out of the recession. It’s probably over at this point.’ [1]

Investors, however, appeared to shrug off this development which seems to be boding well with the American economic recovery story. By 3.30pm (London time) the Dow Jones Industrial Average was trading 173.89 points (-1.92%) lower at 9142.37, while the broader S&P 500 was 21.46 points (-2.14%) below its previous close at 982.63.

Lowe’s Cos, the second-largest home improvement retail company, was in focus this afternoon after unveiling a 19% decline in quarterly profits. It blamed the weaker bottom line results on deterring weather conditions and recessionary pressures, which kept a lid on consumer spending.

Lowe’s reported second-quarter earnings of $759 million, or 51 cents a share, down from $938 million, or 63 cents a share, the year before. Excluding a pre tax charge of $48 million, profit was 54 cents a share, in line with Reuters’ expectations.

Second-quarter sales fell 4.6% to $13.8 billion, while sales at stores open at least a year, an important retail gauge, tumbled 9.5%. The revelation of third-quarter earnings forecasts that trailed consensus estimates was also disappointing.

Lowe’s said it expects earnings to come in between 21 and 25 cents a share, trailing Reuters’ expectations for a profit of 27 cents a share. It also said it expects total sales to decline between 2% and 5% and same store sales to drop between 6% and 10%.

Shares in Lowe’s Cos Inc tumbled 8.9% to $20.80. Rival Home Depot fell 4.4% to $25.94.

US banks were also trading lower this afternoon, with the likes of Citigroup, Bank of America and Wells Fargo down 2% to $3.96, 4.1% to $16.67 and 2.8% to $26.96 respectively.

Electronic Arts slid 5.7% to $20.07 a share this afternoon despite an executive of the company saying it will benefit from stronger business in Europe, Africa and the Middle East in the second half.

Coca-Cola managed to buck the negative trend, at least temporarily, rising 0.06% to $48.50 after financial news provider Barrons said the company’s shares could rise as much as 20% on the back of cost cutting and emerging market growth.

Elsewhere, it has come to light that China Investment Corporation (CIC), the country’s sovereign wealth fund that invested in Morgan Stanley and Blackstone, is planning to invest up to $2 billion in US mortgages.

‘The Chinese government is always trying to seek a more ideal way to invest in US assets rather than purely buying US government bonds all the time,’ an unidentified source said. ‘Some might think $2 billion for a $200 billion sovereign fund is not big money, but it can be regarded as an innovative and positive option for Chinese investment.’ [2]

It has also transpired that the Federal Reserve has extended its Term Asset Backed Securities Loan Facility, or TALF program, for newly issued commercial mortgage-backed securities in an attempt to stem rising defaults and falling prices in the commercial real estate industry.

[1] Source: Bloomberg News (17 August 2009)
[2] Source: Reuters News (17 August 2009)

By Anthony Grech, Research Analyst, IG Index.

Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.

The above comments do not constitute investment advice and neither IG Index nor Spread-Betting.org accept any responsibility for any use that may be made of them.

IG Index is Authorised and regulated by the Financial Services Authority, register number 114059.

Comments