A Goldman downgrade of the financial giant’s shares sparked a sell-off Monday. And there's little relief in sight
Call it the quintuple whammy. An already reeling stock market faced another nasty bout of selling Monday thanks to the five-member tag team that has pummeled Wall Street into submission thus far in November. The fearsome lineup in the other corner includes (1) fears of a possible housing-led recession, (2) a deepening credit crunch, (3) the fallout from the subprime crisis on financial institutions, (4) a weak U.S. dollar, and (5) high oil prices.
Oh well, at least Thursday is an off day.
On Monday, the Dow Jones industrial average tumbled 218.35 points, or 1.66%, to finish at 12,958.44, closing below the psychologically significant 13,000 level. The broader S&P 500 index fell 25.47 points, or 1.75%, to 1,433.27. The tech-heavy Nasdaq composite index shed 43.86 points, or 1.66%, to 2,593.38.
Activity in the broader market was resoundingly negative. On the New York Stock Exchange, 27 stocks declined in price for every six that advanced. NASDAQ breadth was 24-6 negative. The CBOE volatility index, widely regarded as a stock market "fear gauge", was up 2.2% at 26.06. Trading was active amid growing talk of a recession, says S&P MarketScope.
Market players can anticipate a slow week with the Thanksgiving holiday Thursday, says S&P MarketScope. Wall Street will be watching the October housing starts report on Tuesday, and the Reuters/University of Michigan consumer sentiment index and the index of leading economic indicators slated for Wednesday.
Of the troublesome quintet mentioned at the beginning of this story, it was (3) who took the hardest shot at stocks on Monday. Already shaky market sentiment was hurt as Goldman Sachs (GS) downgraded Citigroup (C) shares to a "sell" and said the company may have to write off $15 billion for debt losses over the next two quarters.
Goldman analyst William Tanona said in a Nov. 19 note that he feels Citi will face many industry- and firm-specific challenges in the next six months that will cause it to underperform its industry peers. Tanona sees a laundry list of negatives for Citi, including additional write-offs on its remaining $43 billion of collateralized debt obligation exposure; pressure on the company to shore up its Tier-1 capital ratios; and deteriorating consumer credit trends that will lead to higher loan-loss provisions and charge-offs. Citi shares fell 5.9% Monday.
But Tanona didn't stop there. The analyst also cut Goldman's target prices on E*Trade Financial (ETFC; -13%), Merrill Lynch (MER; -4%), JPMorgan Chase (JPM; -4%), Bear Stearns (BSC; -5.1%), Morgan Stanley (MS; -3.4%), and Lehman Brothers (LEH; -2.9%). Writing on prospects for the large-cap investment banking group, Tanona said he sees limited near-term relief in credit markets, based on his forecast that housing prices will significantly deteriorate well into 2008, resulting in higher write-offs of mortgage-related assets. He also expects higher unemployment rates and deteriorating consumer credit trends.
It was no surprise, then, that financial issues led the way lower for the broader market on Monday. Among the worst performing groups in the sector: The S&P Thrifts & Mortgage Finance index, which fell more than 5% after a Credit Suisse report said that Freddie Mac (FRE) may recognize a loss of between $1 billion to $5 billion on its subprime AAA portfolio. Separately, Fannie Mae (FNM) was downgraded by Friedman Billings to market perform from outperform. Freddie slumped 7.9%, while Fannie was lower by 7.6%.
In addition to (3), Wall Street is consumed with worry over (1) as debate rages over whether the woes of the housing sector, and their potential to rein in consumer spending, will tip the economy into recession. U.S. Treasury Secretary Henry Paulson sought to assuage concerns about the U.S. economy in remarks following the conclusion of this weekend's G20 meeting of finance ministers and central bankers. Paulson insisted the U.S. economy remains "healthy and diversified" and that it will continue to grow. But Paulson conceded the housing market in the country in the wake of the subprime crisis represents the biggest risk to the outlook of the world's largest economy.
On Monday, the National Association for Business Economics quarterly survey of 50 economists said the Federal Reserve is unlikely to cut rates further because the economy, which is slowing markedly, will skirt a recession. NABE members expect gross domestic product will expand at only a 1.5% annualized pace in the fourth quarter and 2.1% in the 2008 first quarter.
But other observers are growing increasingly nervous. Take Edward Yardeni of Yardeni Research. The veteran economist said in a Nov. 19 note that while he raised his subjective odds of a U.S. recession from 15% to 30% on Nov. 12, he left open the possibility at the time that he might raise it to 50% or higher if the FOMC doesn't cut the Fed funds rate again at its next meeting on Dec. 11.
"I have my finger on the trigger, but will wait until they meet again," wrote Yardeni on Nov. 19. "Maybe they'll come to their senses by then." His damning verdict on the Fed: "They seem to have lost touch with the reality of the credit crisis."
Amid the rising recession fears, financial markets may force the Fed's hand in December, according to Action Economics. Implied interest rates based on trading in Fed funds futures show that market players have fully priced in a 25 basis point rate cut in December, while at least 50 basis points in cuts are expected by the middle of the 2008 first quarter.
The beleaguered housing market remained in focus Monday. The National Association of Homebuilders reported that its homebuilder index held at 19 in November vs. a revised 19 in October, the lowest point since the series began in January, 1985. The index has been declining steadily since February. There was one bright spot: The report's index of prospective buyer traffic rose 2 points to 17 from 15.
The NAHB release is just an appetizer for Tuesday’s eagerly awaited report on October housing starts. Action economic expects the report to reveal a 1.8% drop in starts to a 1.170 million unit annual pace in October as the effects of the credit crunch continue to ripple through the housing sector.
Crude oil was also on the Street's radar Monday. January West Texas Intermediate crude oil futures rose 80 cents to $94.64 per barrel amid indications OPEC won't raise output at its December meeting.
December gold futures, which slipped 30 cents Friday, rose $1.60 to $788.60 per ounce Monday on short covering.
Among stocks in the news Monday, results from a major U.S. retailer indicated that the housing slump continues to take a toll on consumer spending. Lowe's Companies (LOW) posted third quarter earnings per share of 43 cents, vs. 46 cents one year earlier, on 4.3% lower same-store sales and 3.2% higher total sales. For the fourth quarter, the company sees EPS of 25-29 cents on 3%-5% lower same-store sales and about 3% higher total sales. For fiscal 2008, the retailer sees $1.83-$1.87 EPS on about 4% lower same-store sales and 3%-4% higher total sales. Lowe's shares fell by 7.6% Monday.
Shares of another retailing name took a beating Monday. Tween Brands (TWB) dropped 13% after the company posted third quarter EPS of 46 cents, vs. 58 cents, as higher costs offset 13% higher total sales. The company cut its fourth quarter EPS guidance to a range of 98 cents to $1.03, 4%-5% below previous guidance.
Xerox Corp. (XRX) declared a quarterly cash dividend of 4.25 cents per common share, which is its first payout in more than six years. Shares rose 1.6% Monday.
Quanex Corp. (NX) shares soared 33% Monday after the steel and aluminum fabricator announced plan to spin off its Building Products business to shareholders as a stand-alone company called Quanex Building Products (QBP). Immediately after the spin-off, the remainder of Quanex, consisting principally of its Vehicular Products business, would merge with a wholly-owned unit of Gerdau S.A. for $39.20 per share in cash.
EchoStar Communications (DISH) shares shot higher by 19% after Barron's reported that AT&T (T) is trying to put together a bid for the company before year-end that will entice the company's CEO, Charles Ergen.
Pharmion Corp. (PHRM) shares surged 32% after the company agreed to be acquired by Celgene Corp. (CELG) for for $25 in cash and shares of Celgene per Pharmion share in a deal valued at $2.9 billion. Celgene shares fell 1.4%.
European indexes slumped Monday. In London, the FTSE 100 index fell 2.71% to 6,120.8. In Paris, the CAC 40 index was lower by 1.65% at 5,432.57. Germany’s DAX index shed 1.32% to 7,511.97.
Major Asian indexes lost ground Monday. Japan's Nikkei 225 index dropped 0.74% to 15,042.56. In Hong Kong, the Hang Seng index lost 0.56% to 27,460.17. Shanghai's benchmark index fell 0.87%.
Treasury prices rose sharply on the back of a flight to safety and away from equities, amid ongoing concerns over losses at major banks highlighted by the Goldman downgrade of Citigroup. The 10-year Treasury note rallied 28/32 to 101-17/32 for a yield of 4.06%. The 30-year bond surged 38/32 to 108-22/32 for a yield of 4.47%.