U.S. News

Market Intelligence: Oil and Subprime Still Worry Traders

Jim Kingsland

Earnings remain the focus of traders going into the weekend, but analysts say the potential impact of rising crude oil and subprime troubles will also be on the minds of traders.  Today is also an options expiration Friday.

Michael Metz, chief investment strategist at Oppenheimer says as crude continues to rally there will come a point when investors "will have to factor in reality of higher food and energy prices and its impact on the consumer."

West Texas Intermediate has traded above $76, supported by concern rising demand will strain supplies already thinned by U.S. refinery glitches and output disruptions in Africa. The Schork Report editor Stephen Schork writes, "this market wants to go to $80". and that "it doesn't matter" if the "domestic "supply-side disposition of crude oil is well positioned to accomodate pending apparent demand".

Oppenheimer's Metz says the issue of subprime exposure remains a "big unknown". The  question he says remains one of "who is leveraged and exposed to the sector." Metz adds that "one indication was Bear Stearns, we don't know what else is out there." Bear Stearns earlier in the week announced two of its subprime related hedge funds are worthless following soured bets on securities tied to subprime loans.

New ABX indexes gauging subprime loan risk made in the first half of this year began trading Thursday and immediately plunged, finishing at just above 50-cents a dollar for the lowest quality BBB- series.

Credit market worries have kept a bid under Treasurys, sending yields on the 10 year Treasury to the 5% mark.

Sounding a further warning on the housing industry, the chief executive of KB Homes says he does not expect the overall U.S. home market to bottom out until the end of next year and that prices will not increase until well into 2009.

Front month stock and index options are set to expire today, as they do every third Friday of the month.  McMillan Analysis president Larry McMillan says there is potential for arbitrage related buy programs to be triggered if the S&P 100 index, or OEX , can cross above 720.

It's been a mixed bag on the earnings front Friday morning following Google's worse than expected earnings release late Thursday. Citigroup beat EPS street estimates by 11-cents a share, while Caterpillar came in below estimates by 24-cents on weak North American performance.

For only the second time in its history as a public company, Googleposted earnings that missed analysts expecations. It was a 3-cent a share miss, but enough for the stock ti be hammered.

Analysts are cutting price targets on Google following its earnings miss of 3-cents a share. Bear Stearns has reduced its target on from $600 to $550. Jeffries is saying buy on the pullback, but cut its target to $595 from $610. Cantor calls the quarter "mixed" but is telling investors to buy on weakness.  Needham & Co., says the Google earnings miss doesn't change its view on Google and says the stock could rise to $650 in the next 18 months.

Microsoftalso disappointed some traders who bid shares down after it released earnings that matched estimates. Soleil Securities is defending the stock raising its price target from $33 to $36 a share liking Microsoft's product offerings and global expansion expansion effort.

Piper Jaffray raises its target on Applefrom $160 to $205, stating the Apple stands to receive extra revenue from iPhone sales and revenue sharing with AT&T.

BB&T has downgraded the supermarkets and foodservice stocks to Hold from Buy saying margins will be stung by higher food cost inflation. Downgraded names include Safeway, Sysco, Kroger and Performance Food Group.

Downgraded Food Sellers

Bank of America reiterates Qualcomm as top large cap pick.  The firm as a $50 target and says investors have over-reacted to a recent licensing agreement between Broadcom and Verizon.

Disk drive makers Seagate and Western Digital were both upgraded by Hambrechtto Buy from Hold on a forecast for stronger 2nd half business.

Bear Stearns has downgraded Hershey Foods to peer perform from outperform following weak quarterly results that were released Thursday.

The United Auto Workers union will begin tough negotiations for a new labor contract with the U.S. auto industry. Talks begin with Chrysler today and General Motorsand Fordon Monday. The automakers say they need sweeping concessions. The UAW says it will fight to protect wages and benefits.