Worries about credit contagion in Canada, troubles at a U.S. fund, and gloomy news from big retailers prompted selling
That globe-trotting Mr. Credit Crunch is at it again. After dashing from his home base in the U.S. to make surprise stops in places like France and Australia, the shadowy figure has been spotted in Canada. And his latest appearance sparked a big sell-off in U.S. equity indexes Tuesday.
Negative earnings outlooks from Wal-Mart (WMT) and Home Depot (HD) -- widely regarded as bellwethers for U.S. consumer spending -- also added to Wall Street's gloom.
On Tuesday, the Dow Jones industrial average tumbled 207.61 points, or 1.57%, to 13,028.92. The broader S&P 500 fell 26.38 points, or 1.82%, to 1,426.54. The tech-heavy Nasdaq composite index shed 43.12 points, or 1.7%, to 2,499.12.
The VIX index, a measure of volatility widely regarded as a stock-market fear gauge, was higher on Tuesday, up 5.2% to 27.96. The VIX has remained near its 52-week high amid the recent gyrations in equity markets.
The rising VIX is a bearish sign, notes S&P technical analyst Chris Burba, because price
tends to fall faster than it rises, so increased volatility generally accompanies a declining market.
Investors Tuesday looked anxiously at developments in The Great White North. Canadian ratings agency Dominion Bond Rating Services said 17 issuers have requested funding from their liquidity providers, reports S&P MarketScope. This followed a report that Canadian investment firm Coventree (COF.TO) has been unable to place asset-backed paper on Tuesday. Coventree shares tumbled 64% on top of a 34% slide Monday.
The Bank of Canada declined to comment on asset-backed commercial paper problems hitting the credit markets, according to Reuters.
The Canadian stock market benchmark, the S&P/TSX composite index, fell 1.4% Tuesday.
Meanwhile, U.S. investors had their own worries. Sentinel Management Group, a small Illinois firm that manages short-term cash for commodity trading firms and hedge funds, stopped allowing its clients to withdraw funds. The company asked the Commodity Futures Trading Commission for permission to halt redemptions, but the regulator said does not have the authority to grant the request.
In an Aug. 13 letter to regulators, Sentinel said it was worried it would not be able to meet any significant redemption requests. "We do not see an alternative and we don't believe it is anyone's best interest if a run on Sentinel took place and we were in a forced liquidation mode," Sentinel's management said.
Lehman Brothers analysts said Tuesday that the "market has become concerned about a more significant liquidity drain".
Traders are still waiting for the next subprime loan problem to emerge, watching as the European Central Bank injected more funds into the banking system while Asian banks held back and the Federal Reserve considers its next move, said Standard & Poor's.
Retailers were in the spotlight Tuesday. Wal-Mart posted a 49% leap in profits for the second quarter to 76 cents a share from 50 cents a share a year ago on $93.01 billion in revenue. But world's largest retailer trimmed its outlook for earnings from continuing operations for the full year to between $3.05 and $3.13 a share from its earlier forecast range of $3.15-$3.23 per share amid signs U.S. consumers are tightening their purse strings. The stock slid 5.1%, helping send the S&P hypermarket & supermarket industry index lower by 4.8%.
Home Depot reported earnings from continuing operations of 77 cents a share for the second quarter, down from 82 cents a share a year ago on a 5.2% drop in same-store sales and 1.8% lower total sales. The company reaffirmed its fiscal 2008 forecast for earnings from continuing operations to fall by 12% to 15%. The shares slid 4.9% Tuesday.
Shares of mortgage outfits were under pressure Tuesday, with the S&P industry index down 2.4%. Countrywide Financial (CFC) reported that July mortgage funding volume fell 14% on sequential basis, which reflects tighter lending guidelines that have curtailed total loan production. In addition, shares of residential mortgage company Thornburg (TMA) tumbled amid concerns the secondary market for mortgage loans and related securities remains illiquid. Trading in the stock was halted on the NYSE Tuesday afternoon pending news.
Shares of homebuilders were also lower, with the S&P industry index faling 4.2% amid news Moody's Investor Services placed all ratings on Beazer Homes (BZH) under review for downgrade. Also, Fitch Ratings placed Beazer's rating on Rating Watch Negative.
Investment banking shares were lower, with the S&P industry index posting a 3.6% decline. Investors remained nervous as liquidity concerns continued on reports credit crunch spread to Canada and elsewhere.
The credit concerns overshadowed a fresh batch of U.S. economic data. The July producer price index, a gauge of wholesale inflation, rose 0.6%, while the core PPI, which excludes food and energy prices, edged up 0.1%. The core index was restrained by a 3.3% drop in computer prices, partially offset by a hefty 1.1% gain in truck prices, according to Action Economics. The gains follow a 0.2% decline in the June PPI and 0.3% rise in the June core PPI.
The U.S. trade deficit fell by 1.7% to $58.1 billion in June from $59.0 billion in May on stronger exports.
Meanwhile, the U.S. dollar index has been up for the past few days, with the greenback strengthening against the euro, yen and other key currencies on anxiety about a potential global liquidity crisis in the credit markets, according to CNBC Business News.
European markets erased earlier gains after losses on Wall Street accelerated. In London, the FTSE 100 index fell 1.21% to 6,143.5. Germany's DAX index shed 0.66% to 7,425.07. In Paris, the CAC 40 index tumbled 1.63% to 5,478.66.
Asian markets finished higher. In Japan, the Nikkei index edged up 0.27%, at 16,844.61. In Hong Kong, the Hang Seng index rose 0.53% to 22,007.32. The Shanghai composite index climbed 1.09% to 4,872.78.
On Tuesday, oil prices regained some of their recent losses. September West Texas Intermediate crude futures rose 76 cents to $72.38 per barrel, while September natural gas futures rose 14.6 cents to $6.94 per million cubic feet on speculation a storm forming in the South Atlantic could move into the Gulf of Mexico, were scores of wells and natural gas pipelines are located. Traders were also taking positions before Wednesday's inventory report, which is expected to show crude oil supplies fell in the past week.
Among stocks in the news on Tuesday, shares of VMware surged 76% in their first day of public trading in a rare bright spot for the market. The EMC (EMC) unit priced its IPO at $29 a share.
Sanford C. Bernstein maintained its outperform rating on Citigroup (C), saying it expects the bank to have between $2 billion and $3 billion in damage to its assets from fallout from the subprime debacle.
Mattel Inc. (MAT) is close to announcing a second major recall of toys made in China, just two weeks after pulling $1.5 million worth of pre-school toys from retailers' shelves, according to the Wall Street Journal.
American Railcar Industries (ARII) reported lower-than-expected earnings for the second quarter of 52 cents a share, vs. 51 cents a share in the year-ago period on a 38% rise in revenue.
Treasuries recovered from early weakness to close higher, as ongoing concerns over tightening liquidity as a result of the fallout in the subprime lending industry drove a flight to safety.
The 10-year note rose 06/32 in price to 100-04/32 for a yield of 4.06%. The 30-year bond edged up 03/32 to 100-03/32 for a yield of 4.99%.