The Dow gave up a triple-digit gain to finish nearly flat amid debate about Goldman Sachs' hedge-fund bailout
Stocks reversed to the downside in the final minutes of trading Monday, offering a whiff if not a full blast of the volatility seen over the past few weeks. The market's earlier sigh of relief at strong July retail sales data and a $3 billion cash infusion by Goldman Sachs (GS) into one of its troubled hedge funds dissipated as concerns about lingering damage from a credit squeeze resurfaced.
The Dow Jones industrial average surrendered nearly a gain of nearly 100 points to finish 3.01 points, or 0.02%, lower at 13,236.53 on Monday. The broader S&P 500 lost 0.72 points, or 0.05%, to end at 1,452.92. The tech-heavy Nasdaq composite index was off 2.65 points, or 0.10%, to 2,542.24.
Goldman Sachs injected $2 billion of its own money, plus another $1 billion raised from outside investors into a credit-exposed hedge fund, saying it viewed the fund's 30% loss in asset value last week as a statistical anomaly that offered an attractive buying opportunity. The news initially sparked some optimism among investors. But Goldman shares reversed early gains and ended the session lower amid debate on the Street about whether the move reflected a vote of confidence in its computer models or an attempt at damage-control against further losses.
Pessimists say it's inevitable the bank will be forced to write down the value of those assets and take a charge in the future, and conclude that the fallout from the subprime mess isn't over. One analyst on CNBC Business News said the watchword for the rest of this week will be "redemptions," and another said he saw Goldman's action as an effort to ensure there was enough liquidity in the fund to cover redemptions and avoid the embarrassment that Bear Stearns (BSC) underwent when it halted investor withdrawals from one of its hedge funds last week.
And, after providing $38 billion to the U.S. banking system on Friday, the Federal Reserve's injection of an additional $2 billion on Monday, rather than being disappointing, was taken as a sign that there is enough liquidity to avoid a credit crunch, analysts said.
In the wake of widespread intervention by central banks to stave off a full-blown credit crunch, the markets are trying to stabilize, which should establish a trading range for the major indices over the next couple of weeks, said Peter Cardillo, chief market economist at Avalon Partners in New York. The winding down of earnings season will also lead to fewer gyrations, allowing the market to return to a more rational look at economic data coming out, he predicted.
He said he sees the bias toward selling as exaggerated as he expects the Fed's moves to provide sufficient liquidity to the banking system will help avoid a full-blown credit crunch.
U.S. retail sales were up 0.3% in July, and rose 0.4% excluding vehicle sales. On a year-over-year basis, sales are up 3.1%. The data are a little stronger than expected, according to Action Economics.
Bear Stearns economist John Ryding wrote Monday the data show the U.S. consumer is "on a solid trajectory." That makes a rate cut from the Federal Reserve less likely.
Data on Tuesday and Wednesday, including the producer and consumer price indexes, could clarify the inflation picture. Preliminary consumer sentiment data from the University of Michigan is due on Friday. Throughout the week, markets will closely watch the Fed for more moves to ease the credit crisis.
A report from Reuters Estimates projected an 8.6% rise in second-quarter earnings for companies in the Standard & Poor's 500 index, up from a 7.8% forecast last week and 6% when the second quarter started on April 1. The biggest year-over-year gains were expected in the healthcare and technology sectors, up 14% and 13%, respectively, according to the weekly compilation of forecasts from Wall Street strategists and industry analysts.
Despite the sense that the liquidity crunch is no longer just a subprime problem, as long as corporate earnings are strong, there's no reason for stocks not to end the year higher than their current levels, said Brian Gendreau, investment strategist at ING Investment Management in New York.
"That's not to say there won't be more [temporary] downturns," he said. "When you add it all together, it seems more like a buying opportunity than a time to head for the exits."
World markets seemed to be recovering from their sell-off last week. In London, the FTSE 100 index surged 2.99% to 6,219.00. Germany's DAX index jumped 1.78% to 7,474.33. In Paris, the CAC 40 index vaulted 2.21% to 5,569.28.
In Japan, the Nikkei index edged up 0.21%, at 16,800.05. In Hong Kong, the Hang Seng index rose 0.45% to 21,891.1.
On Monday, oil prices enjoyed an early recovery from last week's sell-off on bets that lower economic growth would hurt demand. But as volatility amid storm forecasts for the Caribbean battled the calming effect of the central banks' liquidity infusion, September West Texas Intermediate crude oil futures slipped lower before bouncing 15 cents to $71.62 per barrel.
Among stocks in the news on Monday, Goldman Sachs was trading 0.8% lower as its announced $3 billion bail-out of a quantitative hedge fund, Goldman's Global Equity Opportunities fund, stirred debate about whether the move reflected a vote of confidence in its computer models or an attempt at damage-control against further losses.
Goldman's reversal to the downside took other financial stocks, which had been on the rebound, with it, with Lehman Brothers (LEH), Citigroup (C) and JPMorgan Chase & Co. (JPM) also coming under pressure.
JPMorgan Chase had gotten a boost earlier in the day on an upgrade by Deutsche Bank Securities a buy rating, saying the bank's exposure to subprime loans and to leveraged lending is a small part of its overall business and that disruptions in the credit market were opportunities for JPMorgan to gain market share.
Private equity giant Blackstone Group (BX) was up 3.3% after reporting profits of $774.4 million in the second quarter, vs. net income of $224.1 million a year ago, on sharply higher revenues.
Fannie Mae (FNM) fell 4.0% on news late Friday from the Office of Federal Housing Enterprise Oversight that it won't be allowed to increase its portfolio of mortgages beyond the $727 billion limit created in May 2006.
Sears Holdings (SHLD) was up 4.7% despite posting 3.8% lower same-store sales at Kmart in the second quarter, and 4.3% lower same-store sales at Sears. The company expects net income of $170 to $185 million, vs. the $160 to 200 million it previously expected for the second quarter.
Homebuilder stocks came under pressure, with Beazer Homes USA (BZH) dropping 10.8% on news it has delayed filing its quarterly report. It cited possible problems with how an executive was recording reserves and other accrued liabilities related to land and home-building costs. Hovnanian Enterprises (HOV) was off 3.5% after announcing that it expects to take a charge of $90 million to $110 million related to land impairments and write-offs.
Ruddick Corp. (RDK) fell 10% after being downgraded to market perform by Friedman Billings Ramsey, citing limited upside to shares in next six to nine months, with stock reaching FBR's $35 target price after 30% appreciation since December. FBR advised investors with a longer term horizon not to take profits, given stronger longer-term prospects for Ruddick's regional supermarkets unit, Harris Teeter.
Treasuries spent the session recovering from opening losses, almost in lockstep with equities, where gains faded leading toward the close. Even though the markets seemed more stable Monday after the weekend break, with spreads narrowing and liquidity apparently improving, concerns remain about skeletons in the quantitative funds' closets, Action Economics said. The continued trend toward flight to safety is also being seen in a return of steepening in the yield curve.
The ten-year note rose 11/32 to 99-28/32 for a yield of 4.76%, and the 30-year note climbed 17/32 to 100-00/32 for a yield of 5.00%.