Equity investors may have been able to shrug off more problems in the banking sector Tuesday, but a spike in oil prices to $100 per barrel knocked the wind out of the stock market. The fresh rise in crude was a sobering reminder that the credit crunch and housing slump aren’t the only factors threatening to hinder U.S. economic growth.
Major U.S. stock indexes closed lower on Tuesday, as a broad-based rally in commodities such as oil, metals and agricultural products siphoned off interest from equities. Earlier in the day, stocks had benefited from a strong earnings report by leading retailer Wal-Mart Stores (WMT) and progress made by the largest bond insurers toward restructuring their operations, which overshadowed an admission by Credit Suisse Group (CS) that it overvalued its mortgage-backed securities by $2.85 billion.
On Tuesday, the Dow Jones industrial average finished 10.99 points, or 0.09%, lower at 12,337.22. The broader S&P 500 index edged down 1.21 points, or 0.09%, to 1,348.78. The tech-heavy Nasdaq composite index shed 15.60 points, or 0.67%, to trade at 2,306.20.
Profit-taking wiped out earlier stock gains, especially among the technology names listed on Nasdaq, with Google (GOOG), Yahoo (YHOO), Onyx Pharmaceuticals (CS) and Given Imaging (GIVN) leading the retreat.
On the New York Stock Exchange, 18 stocks traded lower for every 14 showing gains, while on the Nasdaq the ratio was 16-14 negative.
Oil prices extended their four-day rally on deepening supply concerns after Alon USA's Big Spring refinery in Texas was shut down by a fire on Monday. Then, just before 2:30 p.m. ET, the March crude futures contract touched $100 per barrel for the third time in less than two months, settling at $100.01. The immediate catalyst was reported to be threats of violence by Nigerian rebels that could interrupt production at a time when traders fear OPEC may decide to cut output at its next meeting on March 5.
But the spike in oil prices is part of a resurgence in strength across all commodities, which is all the more surprising to some economists who have predicted a U.S. recession is on the way if not already in effect. Metal prices have also surged in recent days, led by platinum, spurred by supply concerns amid production disruptions caused by power outages in South Africa.
"What’s odd about it is we can see all sorts of [signs of a] slowdown in the economy, and a slower economy is supposed to relieve upward price pressure on commodities. That just doesn’t seem to be happening," said Douglas Peta, market strategist at Seligman & Co. in New York.
The best explanation for that would seem to be greater demand for all kinds of commodities in developing countries such as China and India, he said.
China's latest economic plan calls for ramping up spending on infrastructure to $1.0 trillion over the next five years, while India will increase its infrastructure budget by 130% over the same time period, said Frank Holmes, a commodities fund manager at U.S. Global Investors in San Antonio, Texas.
"When you have 40% of the world’s population come out with government policies mandating an increase in spending, this is a catalyst" for commodity price gains," Holmes said. "The commodity component is not as detrimental to the cost of an infrastructure project as it is in North America," where labor costs are already much higher.
After the crippling snow storms in China during the lunar new year celebrations, the Chinese government, which had planned to pull back on lending in order to cool down the economy, decided to "open the spigots" on infrastructure spending, Holmes said. New expressways account for 24% of the latest infrastructure budget, while railways account for 22% and power generation 34% of the budget, he said.
Japan's worries about steel supply shortages caused steelmakers in that country to agree to pay 65% more for the iron ore it buys the Brazilian mining conglomerate Companhia Vale do Rio Doce SA, the sharpest price gain in three years and a price that sets the benchmark for global prices.
Increasing demand for grains as growing wealth in the Asian economies drives an appetite for higher meat consumption suggest that the earnings power of agriculture-related stocks, especially since the supply of arable land worldwide is declining, said Peta at Seligman.
Notwithstanding strong commodity prices, speculation about whether the U.S. economy has already sunk into a recession continues to undercut hopes for a sustainable rebound in the equities market. But Daniel Laufenberg, chief economist at Ameriprise Financial, said he doubts a recession has started.
Despite the sluggish start to 2008, real gross domestic product is still expected to grow 3.3% over the four quarters of 2008, which seems reasonable given the size of monetary stimulus the Federal Reserve has already provided the $168 billion of fiscal stimulus expected to be in place by mid-year, Laufenberg wrote in a report distributed on Feb. 18.
"If the economy is not in recession, then already intense inflationary pressures never subside, putting the survival of the expansion at risk," he wrote. He predicts a recession would be induced by consumers pulling back in response to higher inflation and would probably begin in 2009 at the earliest.
The boards of Delta Air Lines (DAL) and Northwest Airlines (NWA) are set to meet on Wednesday to vote on a merger that would create the world's largest airline by traffic. But both companies are still trying to reach agreements with their unionized pilots to achieve a common contract, a method for blending the pilots' seniority systems, and the amount of equity the pilots would receive. While the pilots can't veto a deal, failure to get their support might make it more difficult to pull off a merger, the Wall Street Journal reported.
Leading this week's economic data, the National Association of Home Builders and Wells Fargo Bank reported a slight uptick in the Housing Market Index to 20 in February from January's reading of 19. The Index, which surveys home builders on current sales, buyer traffic through model homes and expectations for sales over the next six months, showed sentiment improved in all regions but the Midwest, with buyer traffic and sales up, while sales expectations declined.
The housing market isn't expected to put in a bottom until sometime in 2009.
Later this week, investors will be looking at reports on inflation, with the January consumer price index, scheduled for release on Wednesday, expected to inch up 0.2% on a core basis and 2.4% year-over-year. January housing starts figures also come out on Wednesday, with the market anticipating a 5.4% rebound to a 1.055 million unit annual level based on better weather and favorable comparisons to the 14.2% plunge in December. Initial jobless claims, set for Thursday, are expected to be steady at 348,000.
Among other stocks in the news on Tuesday, Credit Suisse shares fell 4.4% after the bank estimated a $2.85 billion writedown for first quarter, based on the repricing of certain asset-backed positions in its Structured Credit Trading business due to significant adverse market developments. That is expected to translate to a net income hit of about $1 billion. The bank says the internal review has identified mis-markings and pricing errors by a small number of traders. Bear Stearns kept its underperform rating on the stock.
Kaiser Aluminum (KALU) shares jumped 9.3% after the aluminum products manufacturer posted a fourth-quarter profit of $1.20 per share, double the 59 cents it earned in the year-ago period, on a 7.4% increase in sales. The results far surpassed the 93-cent forecast among Wall Street analysts.
Quidel Corp. (QDEL) shares climbed 13.0% after Caris & Co. reiterated its above-average rating ahead of the company's fourth-quarter conference call scheduled for Feb. 21. Caris believes investors will be focused on flu testing demand in light of growing influenza activity and contribution from recently signed deals to the company's market-leading flu franchise. Quidel provides diagnostic tests for infectious diseases and reproductive health.
European indexes were trading higher on Tuesday, but well off earlier highs. In London, the FTSE 100 index rose 0.34% to 5,966.90. In Paris, the CAC 40 index climbed 0.49% to 4,885.83. Germany’s DAX index was up 0.50% to trade at 7,002.29.
Asian markets finished stronger. Japan’s Nikkei 225 index gained 0.90% to close at 13,757.91. In Hong Kong, the Hang Seng Index ended up 1.53% at 24,123.17.
Treasury bonds slid on a burst of strength in equities. The 10-year note fell 19/32 to 97-05/32 for a yield of 3.85%, while the 30-year bond dropped 25/32 to trade at 95-30/32 for a yield of 4.63%.