Stocks End Higher On Falling Oil Prices - U.S. Commentary

Thu. June 19, 2008; Posted: 04:32 PM

(RTTNews) - After seeing earlier weakness, stocks ended Thursday's session with moderate gains. While investors were digesting some mixed economic data, lower oil prices contributed to the buying interest.

Activity in the Philadelphia-area manufacturing sector contracted at an accelerated pace in June, according to a report released earlier in the day by the Federal Reserve Bank of Philadelphia, with the index of activity in the sector showing an unexpected decline.

The report showed that the diffusion index of current activity fell to a negative 17.1 in June from a negative 15.6 in May, with a negative reading indicating a contraction in the sector. Economists had been expecting the index to narrow to a negative 10.0.

Nonetheless, investors seemed encouraged by a substantial drop in the price of oil. Oil plunged on reports that China will boost prices of retail gasoline and diesel prices, raising concerns about reduced demand.

That news overshadowed reports of further violence in Nigeria. According to reports, a deepwater field off the coast in Nigeria was shut down because of a militant attack. Light sweet crude for July delivery ended the day at $131.93 a barrel, down $4.75 on the day.

The major averages saw additional buying interest in late day trading, although they moved off of their intraday highs in the final hour of the session. The Dow closed up 34.03 points or 0.3 percent at 12,063.09, the Nasdaq closed up 32.36 points or 1.3 percent at 2,462.07 and the S&P 500 closed up 5.02 points or 0.4 percent at 1,342.83.

Sector News

Airline stocks turned in some of the best performances, boosted by the sharp drop in the price of oil. The Amex Airline Index ended the session 10.3 percent higher, more than offsetting a modest decline seen in the previous session. With the gain, the index set a two-week closing high.

Within the airline sector, UAL Corp. (UAUA | Quote | Chart | News | PowerRating) and Continental Airlines (CAL | Quote | Chart | News | PowerRating) were two of the biggest gainers. UAL closed up 23.8 percent, while Continental ended the session 16 percent higher to close at its best level in a month. Earlier in the session, Continental announced that it would work together with UAL's United Airlines with the hope of boosting revenue to offset rising fuel costs.

Semiconductor stocks also posted notable gains, with the Philadelphia Semiconductor Index climbing 2.6 percent. With the gain, the index reversed the sharp loss posted in the previous session.

Additionally, Apria Healthcare Group (AHG | Quote | Chart | News | PowerRating) led the healthcare provider sector higher after the company said it is going to be bought out by Blackstone Group for $21 a share. Shares of Apria closed up 26.4 percent, contributing to a 2.2 percent gain by the Morgan Stanley Healthcare Provider Index.

Other stocks that saw notable gains include retail, internet and defense stocks. The S&P Retail Index closed up 2.1 percent, the Amex Internet Index closed up 1.8 percent and the Philadelphia Defense Index closed up 1.6 percent.

On the other hand, health insurance stocks saw some of the worst declines, hurt by a substantial loss by Coventry Health Care (CVH | Quote | Chart | News | PowerRating). The Morgan Stanley Healthcare Payor Index fell 8.2 percent, to set a three-year closing low.

The loss by Coventry Health Care came after the company lowered its second quarter and full year earnings forecasts due to higher costs. The lowered guidance prompted a Wachovia analyst to downgrade the stock to a Market Perform rating and a Goldman Sachs analyst to cut his price target. The stock closed down 21.8 percent, at its worst closing level in three years.

Resource stocks also saw notable declines, as commodity prices fell sharply. Within the resource sector, natural gas, oil and oil service stocks were the biggest losers. The Amex Natural Gas Index closed down 2.2 percent, the Amex Oil Index closed down 2.2 percent and the Philadelphia Oil Service Index closed down 1.5 percent.

Dow Components

The Dow components moved to the upside in afternoon trading, sending the blue chip index into positive territory. Of the 30 stocks that make up the Dow, only 11 ended the day lower.

AIG (AIG | Quote | Chart | News | PowerRating) was one of the biggest gainers in the Dow, ending its recent trend lower. Shares of the insurer closed up 4.9 percent, reversing most of the loss posted in the previous session. The stock has been under pressure since the start of May, setting an eleven-year closing low in the previous session.

Investors bought up AIG stock after a Citi Investment Research analyst upgraded the stock to a Buy rating from a Hold rating and increased his price target to $42 a share. The analyst stated that even if the insurer posts weak earnings and records a $20 billion loss from credit default swaps and bad investments, the stock should still edge up from its current levels.

Adding to a gain posted in the previous session, Boeing (BA | Quote | Chart | News | PowerRating) also closed sharply higher. On Wednesday, the Government Accountability Office agreed with the airline manufacture's protest of a $35 billion contract that was awarded to Northrop Grumman and European Aeronautic Defense and Space Co. The stock climbed 3.1 percent to set a two-week closing high.

Merck (MRK | Quote | Chart | News | PowerRating) also posted a substantial gain. Shares of the drug maker rose 2.1 percent, adding to a slight gain posted in the previous session. The stock had been in a sharp downtrend for the last two weeks, setting a two-year closing low on Tuesday.

Taking its cue from the semiconductor sector, Intel (INTC | Quote | Chart | News | PowerRating) showed considerable strength as well. Shares of the chipmaker closed up 2.6 percent, reversing most of the losses posted in the previous two sessions.

Citigroup (C) also showed considerable weakness after its CFO warned that the bank would suffer more "substantial" write-downs in the second quarter due to debt investments and leveraged loans. Shares of Citigroup fell 1.1 percent, reversing a modest gain posted in the previous session.

Other Markets

In overseas trading, Asian stocks came under pressure after trending higher in recent sessions, with the overnight weakness on Wall Street generating some negative sentiment. Japan's Nikkei 225 index ended the session down 2.2 percent.

Most of the major European markets also closed lower after showing some strength earlier in the session. The French CAC 40 index and the German DAX index closed down 0.6 percent and 0.1 percent, respectively, while the U.K.'s FTSE 100 index ended the session 0.8 percent lower.

Meanwhile, treasuries ended Thursday's session with moderate losses. The benchmark ten-year note saw some choppy trading at the start of the day but moved sharply lower in the late morning. Subsequently, the yield on the ten-year note closed up 4.5 basis points at 4.199 percent.

Looking Ahead

Looking ahead to Friday, there is little in the way of economic or corporate news to sway the markets. The light economic calendar should give investors time to digest the information that was released on Thursday.

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