Blue chips rose despite big losses at Freddie Mac and the Fed's more downbeat view on the economy. The broader market was mixed
Stocks closed mixed Tuesday as late bouts of bargain hunting and short covering lifted the Dow Jones industrial average and other major indexes but left the broader market flat to lower. Blue chips and oil issues were among the best performers on the session, with the latter group advancing in step with a jump in crude prices.
Indexes’ gains came even as financial stocks extended their recent weakness. The culprit this time: Freddie Mac (CFC). The mortgage finance giant’s shares got walloped Tuesday after it posted a big third-quarter loss and said it may cut its dividend.
Minutes from the Federal Reserve’s October policy meeting – and a new set of forecasts on economic growth and inflation from the central bank -- sent mixed messages to the market.
Major indexes were able to pull out of a four-day skid Tuesday, though the session was quite volatile, as equities started strong, slipped into the red near midsession, and then clawed their way back into the green in the final hour of trading. The Dow Jones industrial average closed higher by 51.7 points, or 0.4%, to 13,010.14, moving back above the psychologically significant 13,000 level. The broader S&P 500 index gained 6.43 points, or 0.45%, to 1,439.7. The tech-heavy Nasdaq composite index added 3.43 points, or 0.13%, to 2,596.81.
Traders Tuesday eyed a report showing a surprising rise in housing starts in October, but a plunge in building permits. Wall Street also weighed strong results from tech titan Hewlett-Packard (HPQ). Market rumors of an emergency FOMC meeting were greeted with skepticism, notes S&P MarketScope.
Outside of the major indexes, action in the broader market was not as positive. On the New York Stock Exchange, 17 shares declined in price for every 16 that advanced. NASDAQ breadth was 18-12 negative.
Phil Roth, a technical analyst for Miller Tabak in New York, notes that that this is a holiday week, when the market is usually up in the days that bracket Thanksgiving. "So the market will probably rebound and again abort its decline temporarily," he wrote in a Nov. 20 note. But Roth expects to see "a deep short term oversold condition and a medium term oversold condition before the next broad, sustained advance".
Financial stocks took it on the chin again Tuesday. The S&P Thrifts & Mortgage Finance index sank 15% in a very rough trading session, led by losses in Freddie Mac. The government-sponsored enterprise (GSE) posted a third quarter loss of $3.29 per share vs. a $1.17 loss one year earlier, noting that the loss reflects a higher provision for credit losses and on mark-to-market items, and a significant deterioration of mortgage credit as a result of continued weakness in the housing market.
Freddie Mac said that in order to manage to the 30% mandatory target capital surplus, and respond to regulatory concerns, it plans to take several actions, including engaging Goldman Sachs and Lehman Brothers as financial advisors. It is also seriously considering reducing its fourth quarter dividend by 50%. Fitch Ratings put Freddie Mac on negative watch following the news, saying that it may cut the firm's preferred stock rating by one notch.
Freddie Mac shares plunged 29% Tuesday, while fellow GSE Fannie Mae (FNM) tumbled 25%.
Also weighing on the sector: Market rumors that mortgage lender Countrywide Financial (CFC) is set to file for bankruptcy, which the company dismissed as "absolutely false" on Tuesday, according to press reports. Countrywide shares ended lower by 2.7% after being down as much as 15% in Tuesday’s session.
On Tuesday, the Federal Reserve released the first installment of its quarterly projections for growth, jobs, and inflation over the coming three years that will be released alongside the minutes
from the Oct. 30-31 FOMC meeting.
The minutes displayed a more downbeat slant on the Fed’s growth outlook, says Action Economics. Though the Fed indicated its decision to cut rates on Halloween was a "close call", the central bank also highlighted the usual concerns about inflation risks. This suggests that the Fed's "balanced" risk assessment may be tipping toward slower growth and, therefore, a more relaxed policy stance, says Action Economics.
The Fed’s forecasts call for gross domestic product growth of between 1.8% and 2.5% next year, which marks a downgrade to a previous projection released in the summer. The Fed cited “ tightened terms and reduced availability of subprime and jumbo
mortgages, weaker-than-expected housing data and rising oil prices."
In other economic news Tuesday, U.S. housing starts rebounded 3% to a 1.229 million annual pace in October from a 1.193 million rate in September, which was revised from 1.191 million. On a year-over-year basis, starts are down 16.4%, compared to a -30.8% pace in September. Alongside the upside surprise in start came a gloomier development: Building permits fell 6.6% to a 1.178 million pace last month, from 1.261 million in September, which was revised from 1.226 million.
Despite the 3% increase in starts, the report contains no evidence of housing market stabilization, according to Bear Stearns economist John Ryding. New York. He pointed out in a Nov. 20 note that single-family starts fell sharply in October and the three-month declines in both starts and permits are running well ahead of the pace seen over the last 12 months. "Housing is likely to be a drag of close to 1% point [to GDP] in the fourth quarter, similar to the average drag seen over the last year and a half," he wrote.
In the energy market Tuesday, January West Texas Intermediate crude oil futures rose $3.46 to a near-record $98.03 per barrel as fog blocked the crucial Houston Shipping channel and fire tied up Royal Dutch Shell's (RDSa) Alberta oil-sands production plant, potentially cutting shipments to U.S. refineries. The market’s direction could be influenced by Wednesday’s Dept. of Energy inventory report. Energy researcher Platt’s believes the report will show decreases in crude oil and distillate supplies and an increase in gasoline.
Among Tuesday's stocks in the news, Hewlett-Packard posted non-GAAP fourth quarter operating EPS of 86 cents, vs. 68 cents one year earlier, on 15% higher net revenue. The company sees first quarter non-GAAP EPS of 80 cents on revenue of $27.4-$27.5 billion; and $3.32-$3.37 fiscal 2008 (ending October) non-GAAP EPS on revenue of $111.5 billion. The company said its board authorized an $8 billion additional share buyback program.
Among major retailers posting results Tuesday, Target Corp. (TGT) reported third quarter EPS of 56 cents, vs. 59 cents one year earlier, despite a 3.7% same-store sales rise and a 9.3% total revenue rise. The company chalked up the disappointing results to soft sales in its higher-margin categories, leading to lower-than-expected gross margin in core retail operations. Target set a new $10 billion share buyback, replacing a previous authorization.
BJ's Wholesale Club (BJ) reported third quarter EPS of 35 cents vs. 28 cents on a 3.4% same-store sales rise and a 8% total sales rise. The company set preliminary fiscal 2009 (ending January) EPS guidance of $1.85-$1.95, and announced an additional $250 million share buyback.
Nordstrom (JWN) reported third quarter non-GAAP EPS of 59 cents, vs. 52 cents, on 2.2% higher same-store sales and 5.3% higher total sales. The company sees EPS of 88 to 92 cents in the fourth quarter and $2.87-$2.91 for 2008 (including items). It also set a $1 billion share buyback.
Barnes & Noble (BKS) reported a third-quarter loss of 3 cents per share vs. a 4-cent loss on 5.7% higher total sales. For the fourth quarter and all of fiscal 2008, the company expects comparable-store sales at Barnes & Noble stores to increase in the low-single digits, vs. previously expected full-year comp-store sales range of flat to slightly positive.
Medical-device maker Medtronic (MDT) reported better-than-expected second quarter EPS of 58 cents, vs. 59 cents, as higher costs and expenses offset a 1.6% revenue rise. The company noted that the voluntary suspension of its Fidelis ICD leads significantly impacted its latest results.
European indexes finished higher Tuesday. In London, the FTSE 100 index gained 1.73% to 6,226.5. In Paris, the CAC 40 index rose 1.36% to 5,506.68. Germany's DAX index climbed 1.58% to 7,630.31.
Asian markets also finished Tuesday's session with gains. Japan's Nikkei 225 index advanced 1.12% to 15,211.52. In Hong Kong, the Hang Seng index rose 1.13% to 27,771.21.