The S&P 500 and Nasdaq each shed over 2% Monday amid more negative news about the financial sector and worries about consumer spending
Well, that didn't last long. Friday's post-holiday rally looked like it would extend into Monday's session. But with the emergence of new concerns about the financial sector, any post-Thanksgiving optimism about the stock market and the economy was cast aside like a leftover mince pie.
On Monday, stocks took another pounding amid growing fears about the economic fallout of the subprime crisis. Some are describing the widespread selling, combined with ongoing dollar weakness and declining interest rates, as a crisis of confidence in the U.S. financial system.
Major U.S. stock indexes erased initial modest gains and traded lower on Monday, once again led by weak financial stocks as investors reacted to news that Goldman Sachs had downgraded HSBC Holdings PLC (HBC) and that Citigroup (C) is planning a second round of layoffs. Keeping to the recent trend in volatile trading sessions, selling accelerated in the final hour leading to the market close.
On Monday, the Dow Jones industrial average ended 237.44 points, or 1.83%, lower at 12,743.44. The broader S&P 500 index skidded 33.48 points, or 2.32%, to 1,407.22. The tech-heavy Nasdaq composite index lost 55.61 points, or 2.14%, to close at 2,540.99. The Dow and S&P indexes are now down 10% from their all-time highs in early October, while the Nasdaq is 11.1% below its 52-week high.
Activity in the broader market was negative on Monday. On the New York Stock Exchange, 25 stocks traded lower for every eight that were gaining ground, while Nasdaq breadth was 22-9 negative. Well-fed investors had earlier appeared to take some encouragement from a reported resurgence of mergers and acquisition activity in Europe and Asia, S&P MarketScope said.
In addition to financial stocks, homebuilders and retailers got hammered. The reports on Black Friday sales have been mixed and concern is mounting about how retailers will fare this holiday season. Despite the fact that this was "Cyber Monday," when many employees return to work after Thanksgiving and kick-off their holiday shopping with online purchases, even online retailers such as Amazon (AMZN) and EBay (EBAY) came under pressure. Online sales on Monday were expected to total more than $700 million, ComScore said.
Homebuilder stocks dropped, led by Standard Pacific (SPF)and KB Home (KBH), after a Citigroup analyst downgraded his short-term outlook on the sector, citing "unprecedented" price/book valuation and volatility levels and the difficulty of calling a market bottom.
Besides second and third helpings of turkey, stuffing and pie, investors were still digesting last week's estimate by the Organization for Economic Cooperation and Development that total losses caused by the subprime crisis could reach $300 billion and that the broader credit crunch could inflict more damage on equity markets. The $300 billion is double the Fed's estimate from earlier this year. Asset writedowns by investment banks and brokerages so far come to roughly $50 billion, while Goldman Sachs predicts the large banks will likely need to write off an additional $48 billion over the next five quarters, according to Ed Yardeni's Morning Briefing.
HSBC Holdings said Monday it will move two of its structured investment vehicles onto its balance sheet to prevent a forced liquidation of "high-quality assets" and provide up to $35 billion in funding. The biggest bank in the United Kingdom by market value said it doesn't expect a near-term resolution of the funding problems faced by the vehicles that it and other banks hold, the Wall Street Journal reported.
Goldman Sachs downgraded HSBC shares to sell from neutral, saying that an additional $12 billion in bad loan provisions is likely needed for the bank's mortgage-related businesses.
HSBC's move "sets a real precedent and I'm sure it has the boards asking the management of other banks, i.e. Citigroup, are we accounting for these things correctly, should we be taking these back onto our balance sheet, and if not, why not?" says Jeff Arricale, lead manager of the T. Rowe Price Financial Services Fund. "What we're seeing in the market today is a lot of those concerns being expressed."
Any time a high-profile, well-respected bank such as HSBC does something like this, when other banks are all saying there's no reason to consolidate off-balance sheet obligations, "it should raise questions among a variety of fiduciaries -- boards, [money] managers, owners," Arricale says.
HSBC's move is an effort to avoid having to sell the loans from these portfolios at a loss, since "the appetite for high-risk securities, especially structured notes, is falling off a cliff," says Bill Larkin, a portfolio manager for fixed income at Cabot Money Management.
In Larkin's view, the liquidity aspect of the asset-backed portfolios is much worse than the credit problem at the moment.
"The banks are trying to stabilize the liquidity risk part of it because they're hoping that [restraining] short-term rates will solve a lot of the credit issues," he said, but he sees it as only a partial solution.
Another sign that there's more trauma ahead for the credit markets came from the New York Federal Reserve Bank's Open Market Desk, which on Monday announced a series of term repos through year-end, "in response to heightened pressures in money markets for funding" over that time frame, beginning with an $8 billion cash injection for Wednesday, Nov. 28, that matures Jan. 10, 2008, Action Economics said.
All of this has market observers saying the Fed is once again behind the curve and needs to lower interest rates by at least 25 basis points at or before its next policy meeting on Dec. 11. Whether there will be ample liquidity for banks to continue to make loans so that this doesn't become a broader economic event is one of the harder questions floating around, said Don Quigley, portfolio manager of the Julius Baer Total Return Bond Fund.
The decline of the yield on 10-year Treasury notes below 4.0% is making bond managers such as Larkin nervous. With the consumer price index running at 3.5%, after taxes are accounted for, returns are breakeven or negative on the 10-year bond, which is causing his investment risk to soar, he said.
With the Fed funds rate still at 4.5%, people are hesitant to buy Treasury bonds that are paying even less than that, said Don Quigley, portfolio manager of the Julius Baer Total Return Bond Fund. "If you don't think the Fed is going [to cut rates] in December, then it becomes a realy difficult purchase at 3.83%," he said. "If you think the Fed is way behind curve and will have to [cut] multiple times, then 3.83% is probably still a good buy."
Widening fears of recession will put an even brighter spotlight on this week’s economic data. On Tuesday, investors will focus on the Conference Board's consumer confidence report and the Standard & Poor's/Case-Schiller home price index on Tuesday. Durable goods orders and existing home sales will be watched on Wednesday, while the final third-quarter GDP, PCE deflator, Chicago PMI and construction spending reports will attract attention later this week.
January NYMEX crude oil futures settled $1.36 lower at $96.82 per barrel on Monday on news that Saudi Arabia is raising its production volumes ahead of next week's OPEC summit. Sources told CNBC that Saudi Arabia had already boosted output to over 9 million barrels per day. A modest recovery in the dollar ahead of the open had attracted sellers earlier, despite forecasts for colder U.S. weather later in the week, which had been expected to contain further losses, Action Economics said.
Among stocks in the news Monday, a CNBC Business News report said Citigroup (C) is planning "massive layoffs" in the coming months, which would be the company's second round of workforce reductions this year. Shares fell 3.2% to just above the lower end of their 52-week range low, after bouncing from their first drop below $30 in more than five years.
Genlyte Group (GLYT) shares vaulted 50.7% after the manufacturer and marketer of lighting fixtures and controls said it had agreed to be acquired by Royal Philips Electronics (PHG) in a deal valued at $2.7 billion, with Genlyte shareholders to receive $95.50 in cash per share.
Novagold Resources (NG shares plummeted 53.2% after the mining company and Teck Cominco Ltd. said they will suspend construction activities at the Galore Creek copper-gold-silver project in northwestern British Columbia. Novagold said that a recent review and completion of the first season of construction indicate substantially higher capital costs and a longer construction schedule for the project.
U.S. Shipping Partners LP (USS) shares rose 11.8% after it said it expects to pay the fourth-quarter 45-cent distribution on its common units in full. And to enhance liquidity for the Partnership's working capital requirements and payment of future minimum quarterly distributions on its common units, the holder of the Partnership's subordinated units has agreed that, if necessary, it will either reinvest or ask the General Partner to suspend any distributions payable on the subordinated units throiugh 2008.
European equity indexes were trading lower on Monday. In London, the FTSE 100 index fell 1.30% to 6,180.50. Germany's DAX index slid 0.55% to 7,567.36. In Paris, the CAC 40 dropped 1.14% to 5,458.39.
Asian markets finished mostly higher Monday. In Japan, the Nikkei 225 index rose 1.66% to 15,135.21. In Hong Kong, the Hang Seng index jumped 4.09% to 27,626.62. The Shanghai composite fell 1.46% to 4,958.85.
Treasury prices rose Monday as more traders sought refuge from weaker equity markets. The two-year notes climbed 11/32 to 101-12/32 for a yield of 2.88%; 10-year notes jumped 1-10/32 to 103-11/32 for a yield of 3.84%; and the 30-year bond leaped 2-13/32 to 111-25/32 for a yield of 4.29%.