July 28, 2009

Investors Cautious Following Rally

Following a substantial two-week rally in the markets, investors remain cautious after the government released data concerning home prices and consumer confidence. The markets are also being influenced by an influx of company earnings, which have been mixed thus far this week. During the recent rally, the markets have gained more than 11%, with the Dow Jones closing the July 27 session above the 9,100 mark for the first time since November 5 of last year.

The first of two government reports released on Tuesday was the Standard & Poor's/Case-Shiller home price index of 20 major cities, which showed an increase of 0.5% in May over April’s reading. Although a positive sign for the housing industry, the index remains more than 17% below last year’s reading in the same month.

Meanwhile, the 10-city index revealed a 0.4% advance from April’s showing, but it too remains nearly 17% below last May’s reading. To date, home prices currently sit 32% lower than its peak three years ago and remain at a level not seen since the middle of 2003.

Despite the recent rush within the markets, the nation’s confidence worsened in July, as job security and personal financial stability outweighed surging stock prices. For the month, the Consumer Confidence Index revealed a reading of 46.6, down more than 5% from June’s reading of 49.3.

July’s reading marks the second consecutive month in which consumers have curtailed spending, following the spring’s increase in confidence that helped the markets rebound from 12-year lows.

In company earnings, the largest U.S.-based steel producer, United States Steel Corp. (X) announced before the bell that the company posted a loss in the 2Q on weakness based in the global economy. Following their recent quarterly loss, the company also warned investors about an operating loss in the upcoming 3Q.

For the recent period, U.S. Steel recorded a loss of $392M, or $2.92 per share, in sharp contrast to the company’s profit in the same quarter a year ago of $668M, or $5.65 per share. The current loss reflects an industry-wide decline in demand that originated last year.

Overall sales for the company retreated as well, falling from $6.74B to $2.12B, a decrease in revenues of nearly 69%. On average, analysts within the industry were looking for the steel maker to post a quarterly loss of $3.45 per share on total sales of $2.39B.

During U.S. Steel’s 1Q, which ended in April, the company posted their first quarterly loss in more than five years. With the world’s financial status in peril, the company has had to take drastic measures in order to combat plunging demand, including laying off thousands of works, as well as idling production plants.

By the sound of the closing bell, shares of X were down more than 2%, giving up $0.92 to end the day at $40.35 per share. Over the past 52 weeks, the stock has traded between $16.66 and $170.85 per share.

In an unexpected turn of events, one of the largest suppliers of office products and services in the world, Office Depot Inc. (ODP) confirmed prior to the market’s opening that the company’s loss during the 2Q came in worse-than-anticipated, as sales declined and stores were closed. The company is currently working on a turnaround plan.

For the quarter, ODP booked a loss of $82.6M, or $0.31 per share, compared to a loss of $2M, or $0.01 per share a year ago. Excluding one-time charges related to store closings and restructuring costs, Office Depot recorded a net loss of $0.22 per share.

Revenues declined during the period as well, falling from $3.61B to $2.82B, a decrease in sales year-over-year of almost 22%. Analysts, within the industry were looking for the office supply chain to post a loss of $0.12 per share on overall sales of $2.88B.

"Second quarter business results met our expectations given the challenging economic conditions and the period's normal seasonality. However, the successful execution of our liquidity initiatives generated positive cash flow before financing activities in the second quarter, significantly exceeding our expectations," commented Mike Newman, CFO of Office Depot.

With the July 28 session concluding, shares of ODP plunged more than 18%, falling $0.97 to finish the day at $4.38 per share. Over the course of a year, the company’s stock has traded as high as $8.50 per share and as low as $0.59 per share.

Operating as the nation’s largest independent oil refiner, Valero Energy Corp. (VLO) made it known before the opening bell that a loss was incurred during the 2Q, as lower margins and weakened demand pushed the bottom-line below the breakeven point.

Results for the 2Q showed a loss of $254M, or $0.48 per share, in contrast to the previous year’s profits of $734M, or $1.37 per share. Earnings were greatly affected by the lack of demand for gasoline and other refined products.

Revenues for the quarter plunged more than 51% during the period, slipping from $36.6B to $17.9B. In the meantime, analysts were looking for the refining company to post a quarterly loss of $0.50 per share with overall revenues totaling $16.28B.

Commenting on the company’s results was Bill Klesse, Valero's Chairman and CEO, "This is a very challenging environment for sour crude oil refiners. The downturn in the global economy has sharply reduced demand for refined products at a time when new refining capacity is coming online around the world."

Across the industry, refiners have been hit hard during the recession as demand for all types of fuels have led to an increase in inventories.

At the close of trading, shares of VLO were down more than 2%, losing $0.45 to end the session at $18.32 per share. Within the past year, shares of Valero have traded as low as $13.94 and as high as $36.22 per share.

With traders taking profits from a three-week rally within the crude markets, oil prices were curtailed by the end of trading on July 28, as the price of light, sweet crude for September delivery dropped $1.15 to settle at $67.23 a barrel.

In additional NYMEX trading, gasoline for August delivery slipped $0.0241 to settle at $1.9106 a gallon, while heating oil dropped $0.0299 to settle at $1.7647. Natural gas for August delivery retreated $0.069 to settle at $3.535 per 1,000 cubic feet.

Government debt vehicles advanced in trading today, despite the Treasury Department’s $42B auction of 2-year notes. Over the next two days, the government is set to auction an additional $39B worth of 5-year notes on Wednesday, as well as $28B worth of 7-year notes on Thursday.

By the sound of the closing bell, the benchmark 10-year note was up 9/32 to 95 12/32 while yielding 3.68%, down from the previous session’s rate of 3.73%. Meanwhile, the longer, 30-year note was higher as well, gaining 1 9/32 to 95 7/32 and yielding 4.54%. Lastly, the auctioned 2-year note was down 3/32 to 100 2/32 while yielding 1.08%.

Inside the Forex markets, the Euro advanced to its highest point of the year versus the U.S. Dollar earlier in today’s trading, buying $1.4303 before settling at $1.4163, down from Monday’s price of $1.4243. The Euro last traded above the $1.43 mark back in December 2008. The recent surge in the European paper came from strong economic signals, which led investors to place their capital in foreign markets.

In additional Forex trading, the British pound traded lower versus the Dollar as well, buying $1.6432, down from last night’s price of $1.6498. Against the Japanese yen, the greenback slipped in value, falling from 95.24 to 94.64.

By the sound of the closing bell on the July 28 session, the Dow Jones Industrial average slipped 11.79 points, or 0.1%, to end Tuesday’s trading at 9,096.72, while the broader market indicators finished the day mixed.

The S&P 500 index slipped 2.60 points, or 0.3%, to end the day at 979.60, while the tech-heavy NASDAQ composite index gained 7.62 points, or 0.4%, to conclude the session at 1,975.51.

2009 Better Trades Article

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BRIAN MULLIN