Greenspan Warns Aftermath of Low Interest Rates

123jump.com Staff
26 Aug, 2005
New York City

Fed Chairman expressed caution and warning on the persistent trade and fiscal imbalances and worries that protectionist measures discussed in Congress may not prepare America for the upcoming global challenges. Greenspan also expressed his concerns for the recent housing boom and as he stated 'asset prices' are increasing driving Fed's decision making. Natural gas remains above $10 price level.

U.S. AVERAGES

Lower read on consumer Sentiment and Fed Chairman’s cautious remarks put market in the sell-off mood this morning. Oil traders remain focused on the Florida hurricane. Broader averages are down half a percentage point at 1:00 PM.

Fed Chairman Greenspan made his 17th appearance, and for the last time, at Fed’s Annual Symposium organized by Federal Reserve Bank of Kansas with prepared remarks on the health of the economy. The comments highlighted long term economic imbalances in the economy generated primarily by the persistent trade and fiscal deficit and recent housing boom.

The chairman said that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.

Oil near record highs and weaker dollar fueled selloff ahead of the weekend and at mid-day the major averages have resumed the downward movement from the first half hour of trading, approaching fresh lows for the day.

The housing sector is still among one of the day's worst performers, down 1.5%, after comments by Fed Chairman Greenspan, who called the housing boom an economic """"""""imbalance"""""""" and warned about the possible consequences of low risk premiums-like those evidenced by low treasury yields and low mortgage rates.

Very few sectors are to the upside. The gold segment remains slightly above the flat line at present.

Precision Castparts ((PCP)) hit a fresh 52-week high after announcement that it has agreed to buy Special Metals Corp. in a $540 million accretive transaction. Liberty Corp. ((LC)) has also reached a new high with its own 26% acquisition-related rise.

Verizon ((VZ)) has declined to new 52-week low it hit yesterday. PETCO ((PETC)) has extended its low with an earnings-related 14% decline.

Home Depot Inc. ((HD)), the world's biggest home improvement retailer, dropped 1.1% and is among the Dow's biggest percentage losers. Rival home improvement chain Lowe's Companies Inc. ((LOW)) slid 1.7%.

DOV Pharmaceutical is down $2.70 to $15.27 after the drug-maker said Thursday that it has suspended a clinical trial of its experimental anti-anxiety drug. Pixar slipped $0.83 to $42.17 on news that the SEC has started an informal probe into the company.

Omnivision Technologies climbed nearly 13% after the chipmaker announced that 2Q earnings and revenue are likely to beat forecasts.



ECONOMIC NEWS

The consumer sentiment index of the University of Michigan declined to 89.1 in late August from 96.5 in July and 92.7 in early August. It's the first drop since May and the lowest level since May. Economists were expecting the index to fall to 92.6.

INTERNATIONAL MARKET NEWS

European markets ended lower Friday after oil held above $67 a barrel and U.S. markets dipped into the negative territory. The German DAX 30 shed 1.5% at 4,783, the French CAC 40 dropped 0.8% to 4,342 and the U.K.'s FTSE 100 index declined 0.5% to 5,2282.

Asian markets closed higher on Friday benefiting from modest gains on U.S. market and firm crude-oil prices. Tokyo's Nikkei Average closed up 0.28%, at 12,439.48 on interest in steel and auto shares. Elsewhere in the region, Hong Kong's Hang Seng index gained 0.63% to 14,983.89, Australia's All Ordinaries index added 0.35% to 4,419.10 and in Singapore, the Straits Times index rose 0.09% to 2,286.55. Seoul's Kospi index went against the upward trend shedding 0.98% to 1.086.55 on broad foreign selling of financial stocks and surging oil fears.

The Chinese Yuan reached its highest level since a July 21 revaluation, closing at 8.0965 Yuan per $1. It finished at 8.1002 per $1 Thursday.

GDP in the U.K. in the second quarter climbed 0.5% vs. the previous quarter, revised up from the previous estimate of 0.4%, the Office of National Statistics announced. Year-on-year, the Office said the U.K. economy grew 1.8%, up vs. the previous estimate of 1.7%.

ENERGY, METALS AND CURRENCIES MARKETS

Oil prices were slightly lower as Hurricane Katrina took a course that would probably miss most of the oil platforms in the region. Light, sweet crude for October delivery climbed 16 cents to $67.65 a barrel on the Nymex by afternoon in Europe.

Gasoline lost nearly half a cent to $1.883 a gallon while heating oil slid to $1.9010. In London, October Brent crude oil futures on the International Petroleum Exchange added 3 cents at $66.30 a barrel.

Major currencies were higher against the dollar on surging oil and expectations for higher U.S. interest rates. The euro added 0.1% vs. the greenback to $1.2303. Against the Japanese yen, the dollar dropped 0.5% to 109.62. The greenback also declined vs. the British pound after UK reports showing the economy grew 0.5% in 2Q vs. the previous quarter, revised up from the previous estimate of 0.4%. Last, the British pound was up 0.3% at $1.8040.

Bonds dropped, with the yield on the 10-year Treasury note rising to 4.18% vs. 4.16% Thursday.

Gold futures retreated from early morning gains, with the benchmark December contract up 60 cents at $440.60 an ounce.

EARNINGS NEWS

Chico's FAS, specialty clothing retailer, reported 2Q net income increased to 27 cents per share from 20 cents per share in the year-ago period. The company’s profit advanced 38 %, supported by considerable sales growth, but warned on 3Q results. Sales rose 35% to $343 million from $255 million last year. Same-store sales for the quarter increased 15.7% compared with the year-ago period.

Results matched analysts’ earnings forecasts and topped the consensus revenue estimate of $339.8 million. Chico's announced it is poised to open between 105 and 120 new Chico's and White House Black Market stores in fiscal 2006. It also plans to open 20 new Soma by Chico's stores during fiscal 2006. The stock is trading 9% lower at mid-day.


CORPORATE NEWS

Hewlett-Packard Co. ((HPQ)) announced that the company’s board authorized an additional $4 billion to repurchase its common stock. Through the repurchase, the company plans to offset the dilution of shares issued under employee benefit plans, and return cash to its shareholders. Hewlett-Packard said it repurchased $2.1 billion in stock in the three fiscal quarters ended July 31, and has about $800 million left under its $3 billion repurchase program approved last September. According to reports, HP plans to invest $150 million over the next 5 years to boost its capabilities in radio frequency identification technology, to compete with Sun Microsystems and Symbol Technologies.

Brazil's Companhia Vale do Rio Doce, the world’s largest iron ore mining company, is in talks to acquire French metals and mining company Eramet SA for more than $2 billion, according to reports Friday. The French state has a 28% holding in Eramet and the company's largest shareholder is the Duval family with a 37.2% stake. Paris-based Eramet with a market value of about $2.8 billion, has large nickel, manganese and alloy businesses. The companies didn’t issue any comments on the matter.

UAL Corp., the parent of United Airlines, could receive $3 billion in debt financing, to emerge from bankruptcy by late 2005 or early 2006, according to Friday reports. The exit financing amount is $500 million more than airline’s expectations. The group of lenders includes Citigroup, Deutsche Bank, GE and J.P. Morgan Chase. United is reported to be still working on the financing terms.