PortfolioCrafter - Market Commentary 8/24/06
Thursday, August 24th, 2006
Stocks closed with slender gains as the latest reports on the economy eased concerns about higher interest rates but also raised questions about slowing growth. The weaker than expected new home sales report implies accelerating pace of the economic slowdown.
Today, the Dow Jones industrial average closed up 6.56 to 11,304.46, the Standard & Poor’s 500 index closed up 3.07 or 0.2% to 1,296.06, and the Nasdaq composite index closed up 2.45 to 2,137.11.
Market breadth was positive, after alternating throughout the session. On the New York Stock Exchange, winners topped losers 6 to 5 on volume of 1.25 billion shares. On the Nasdaq, advancers narrowly edged decliners on volume of 1.42 billion shares.
Federal Reserve Chairman Ben Bernanke is due to speak tomorrow at the annual Fed symposium for global central bankers. His speech will likely set the tone for morning trading. Investors continue to worries about how the slowing housing market will hurt consumer spending. Overall, economic data point to a slowdown in economic growth, but there appear to be mixed opinion as to what the trend of growth will be heading into 2007.
New home sales fell to an annual pace of 1.07 million in July, against the expected 1.13 million. New home sales are down 21.6% in the past year, the biggest drop since late 1994. The housing data shows that the slump is getting worse, and it’s raising questions for investors about what the Federal Reserve will do next. A separate report showed a bigger than expected dip in durable goods orders. New orders fell a 2.4% percent in July, much larger than the expected 0.7% decline. However, excluding the 9.6% drop in transportation goods, durable-goods orders rose 0.5%. This has actually boosted prospects for the economy and we are now looking at a 10%.
Shares of Rite Aid Corp. closed down $0.32 or 6.8% to $4.36, after announcing that it is buying the Eckerd and Brooks drugstore chains for $3.4 billion in cash and stock. The deal is to acquire 1,858 drugstores from Canada’s Jean Coutu Group which will give it a 32% stake in Rite Aid. Rite Aid, will also assume $850 million of Jean Coutu long-term debt. This deal will raise Rite’s ownership to 5,000 stores and will significantly expand its presence on the East Coast with estimated sales of nearly $27 billion. Goldman Sachs feels that this will make Rite Aid an underperforming and highly leveraged company. Analyst opine that the increased financial risk and challenges of integrating the acquired stores could result in a lower credit rating.
Shares of Ford Motor Co. closed unchanged at $7.76, on reports that the founding family is considering taking the company private. The Ford family controls nearly 40% through a separate class of stock and the attempt is to pave the way for Bill Ford and his inner circle to retool the struggling automaker without further meddling by shareholders. This move would presumably cost about $13.7 billion and is being termed as ‘mere speculation’ by the company spokesman.
Stock of McDonald’s Corp. closed up 29 cents at $35.88 after its president and CEO, Mike Roberts resigned after nearly three decades with the company. He’s being replaced by Ralph Alvarez, head of its North American operations. This news comes in the wake of its slowest U.S. monthly sales gain, and amid persistent speculation that there was acrimony in the executive suite over succession plans.
Shares of Apple Computer Inc rose less than 1% after it said that it is recalling 1.8 million laptop batteries made by Sony amid a risk of overheating. Stock of Sony closed down $1.16 or 2.6% to $43.26. These Sony lithium-ion battery packs were used in Book G4 and PowerBook G4 laptop computers. Apple, said an additional 700,000 of the battery packs were sold outside the U.S. and will also be recalled.
Stock of EBay Inc. closed down $1.22 or 4.7% to $25.78, on a Piper Jaffray downgrade to underperform from market perform. The brokerage said it sees a worsening picture for the company, with costs likely to increase and with prospects for growth picking back up in the core eBay business seen as highly unlikely. Hundreds of eBay Inc. merchandisers have closed their online storefronts, and some took their listings elsewhere, in the wake of a controversial fee increase eBay began charging earlier in the week. eBay took this step since there is about four times the number of items listed for sale in stores than in auctions on eBay. The imbalance has hit eBay hard with profit dropping 14% from a year earlier.
U.S. light crude oil for October delivery added 60 cents to settle at $72.36 a barrel on the New York Mercantile Exchange. Crude futures found some support from strength in natural gas, and a news report that BP’s output from its key oilfield in Alaska’s Prudhoe Bay has been further reduced due to a problem with a compressor.
All the best,
Manuel Jesus-Backus
The Portfolio Crafter
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