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Stocks closed lower to cap a mixed month for the markets as a largely solid second-quarter earnings season and rising hopes of an end to interest-rate increases were offset by concerns over slowing economic growth and the conflict in the Middle East. Investors are stepping back amid concerns about rising oil prices and how much longer the Federal Reserve will keep raising interest rates.

Today, the Dow Jones industrial average closed down 34.02 or 0.3% to 11,185.68, the broader Standard & Poor’s 500 index closed down 1.89 or 0.1% to 1,276.66, and the tech-heavy Nasdaq composite closed down 2.68 or 0.1% to 2,091.46. For July, the DOW rose about 0.3%, the S&P gained around 0.5%, and the Nasdaq fell 3.7%.  This is the fourth straight month of loss for the Nasdaq.

Market breadth was negative. On the New York Stock Exchange, losers beat winners nearly 17 to 14 on volume of 900 million shares. On the Nasdaq, decliners topped advancers by 15 to 13 on volume of 970 million shares.

Rising oil prices and comments by two Fed officials that suggested an end to interest-rate hikes may not happen as soon as had been hoped led to the slide today. Investors now await the next week’s Federal Reserve policy-setting meeting to wait and see what the Fed does. St. Louis Fed president William Poole, said there is still a 50-50 chance of a rate hike at the central bank’s policy meeting. Janet Yellen, president of the San Francisco Federal Reserve Bank, forecast that the economy will grow at a slower pace in coming quarters, which should ease inflation pressures. She also cautioned that it was important that the central bank be careful not to raise borrowing costs so much so that it hurts the economy. Fed funds futures on the Chicago Board of Trade are now pricing in a 32% probability of a hike.

On the data front, factory activity in the Chicago region accelerated in July, with the Chicago purchasing managers index rising to 57.9% from 56.5% in June. Economists had been expecting the index to fall to 55.8%. This stronger than expected read added to concerns that the Fed’s two year old rate hiking campaign is not yet done.

Shares of Apple Computer Inc. closed up $2.37 or 3.5% to $67.96, after it was upgraded to “buy” from “neutral” at Bank of America. It also raised its price target to $79 from $68, citing strong demand for MacBooks and iPod digital music players. The broker stated that it sees upside potential to earnings from iPods of 8 cents to 12 cents a share.

J.P. Morgan Chase upgraded oil giant Exxon Mobil Corp. to overweight from neutral, citing an improved outlook for production growth and the stock’s defensive characteristics in the face of downside risks surrounding crude prices. This lead to the shares of Exxon Mobil closing up $0.74 or 1% to $67.74. At the same time, J.P. Morgan downgraded Chevron Corp. to neutral from overweight due to concerns over relative valuation, “disappointing” earnings over the last few quarters and continued production decline. Shares of Chevron dipped 0. 1% to $65.78.

Shares of Scottish RE closed down $12.01 or 75% to $3.99, after the re-insurer said its CEO quit and it expects a loss in the second quarter. It also forecast sluggish results for the second half. Additionally, the company also said it was suspending its dividend and has hired Goldman Sachs and Bear Stearns to help it look at “strategic alternatives.”

Stock of Bristol-Myers Squibb closed down $0.50 or 2% to $23.97, after being dealt a regulatory setback in its efforts to block a generic version of its biggest drug. A group of state attorneys general rejected a deal that the drug maker had made with generic drug maker Apotex that would have seen the competitor holding off on selling a cheaper version of Bristol’s anti-clotting drug Plavix in exchange for a payment.

Shares of SanDisk closed down $0.48 to $46.66, after announcing that it is buying Israeli competitor M-Systems Flash Disk Pioneers for around $1.35 billion in stock. Shares of M-Systems closed up $4.21 or 13% to $36.00. This is the bid by SanDisk to accelerate its push in the market for NAND flash, a fast-growing memory-chip technology used in portable electronics. The deal values the company at $36 a share and is a 26% premium over the average close for M-Systems shares over the last 30 days. The CFO Judy Bruner said the deal will also boost SanDisk’s earnings by the end of next year.

U.S. light crude oil for September delivery gained $1.21 to $74.45 a barrel on the New York Mercantile Exchange after Israel’s prime minister said that a cease-fire was not going to happen in the next few days between the nation and Hezbollah militants in Lebanon. Additionally, a leak on Russia’s largest oil pipeline to Europe and ongoing concerns about Iran and Syria’s nuclear capability also had an adverse effect. The natural-gas contract closed up $1.03 at $8.211 BTU. On the month, crude dipped 0.5% but natural gas futures chalked up a 35% gain.

All the best,
Manuel Jesus-Backus
The Portfolio Crafter
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