Lower forecasts for corporate earnings -- and an analyst downgrade of investment banking shares --weighed on the market Tuesday
The market may be awaiting two big events in the coming days -- Friday's release of the November jobs report and the Federal Reserve's decison on interest rates next Wednesday -- but investors found a few other things to fret about Tuesday. Stocks closed lower amid continuing worries about corporate profits. Financial issues led the market lower after JP Morgan cut earnings estimates for big Wall Street firms.
On Tuesday, the Dow Jones industrial average finished lower by 65.84 points, or 0.49%, at 13,248.73. The broader S&P 500 index shed 9.63 points, or 0.65%, to 1,462.79. The tech-heavy Nasdaq composite index fell 17.30 points, or 0.66%, to 2,619.83.
Activity in the broader market was negative Tuesday. On the New York Stock Exchange, 21 shares declined in price for every 12 that advanced. Nasdaq breadth was 19-10 negative.
Investors stayed close to the sidelines ahead of Friday's November jobs data, which should shed more light on what to expect from next week's Federal Reserve policy meeting.
Most observers expect the Fed to cut interest rates to help spur economic growth. But this is not a given, says S&P MarketScope, and how much of a cut might occur is under debate.
On Tuesday, Goldman Sachs (GS) analysts lowered their 2008 earnings estimates for the S&P 500. Analysts are also slashing earnings estimates for the fourth quarter. A month ago, analysts were expecting a 10.1% rise in fourth-quarter profits, according to Reuters Estimates. This week, they expect earnings to inch up just 2.1%.
Meanwhile, JP Morgan (JPM) analysts cut estimates for earnings of big banks Goldman Sachs, Lehman Brothers (LEH), Morgan Stanley (MS), and Merrill Lynch (MER). The move, alongside a Punk Ziegel downgrade of Bear Stearns (BSC), Goldman, and Lehman to sell from market perform, kept financial stocks under pressure Tuesday.
Also Tuesday, mobile phone maker Nokia's (NOK) predictions for lower handset selling prices in 2008 disappointed investors, and H&R Block (HRB) ended a deal to sell its troubled mortgage subsidiary to a private equity firm.
In economic news Tuesday, the U.S. ICSC-UBS chain store sales index fell 2% last week, following a 0.1% decline the week before. On a year-over-year basis, sales are up 3.1%. The data may reflect problems with post-Thanksgiving seasonal adjustments, ICSC said. Also in the data: Only 22% of households say they have more than half of their holiday shopping complete, down from 25% at the same point last year.
In addition to the pace of holiday shopping, investors are closely watching employment data coming on Friday. Market participants are debating the next move on interest rates from the Federal Reserve, which meets on Dec. 11.
San Francisco Fed President Janet Yellen said Tuesday that worsening financial conditions and weaker-than-expected economic data have raised downside risks to the economic outlook. "These developments necessitate some rethinking of my growth forecast, and have highlighted the downside skew in the risks to that forecast," she said. Yellen said more economic data to be released ahead of the FOMC meeting on Dec. 11 would have to be incorporated into the central bank’s outlook.
More bad news continued to pour out of the housing sector. On Tuesday, Freddie Mac (FRE) said its Conventional Mortgage Home Price Index (CMHPI) Classic Series showed U.S. home values fell 1.3% in the third quarter on an annualized basis, the largest drop in 25 years. Year on year, home values appreciated 1.9% in the third quarter, which was down from 7.8% over the same period a year earlier. The number of home sales fell during the third quarter, and the inventory of existing single-family homes for sale rose to 10.5 months by October, the highest level since 1985.
S&P expected little market reaction to Wednesday’s reports: the November ADP jobs survey, October factory orders, and third-quarter nonfarm productivity.
January NYMEX crude oil futures fell 99 cents to $88.32 per barrel Tuesday amid uncertainty whether OPEC will increase output or leave it alone at Wednesday’s meeting in Abu Dhabi. There have been numerous, contradictory statements from ministers about
production plans, though the Saudis are likely to determine what happens, according to S&P. Also on Wednesday, the Energy Dept. will release its weekly inventory report. Oil researcher Platts (like BusinessWeek and Standard & Poor’s, a unit of The McGraw-Hill Companies) believes the report will show crude oil inventories fell 1.9 million barrels, gasoline stocks will rise 950,000 barrels and distillate inventories will be unchanged.
Among the stocks in the news on Tuesday, Nokia predicted profit margins should widen and its industry should grow 10% next year while Nokia's market share grows. However, earnings failed to meet high expectations, hurting its stock in European trading. Predictions of lower handset prices hurt stocks of suppliers and competitors.
H&R Block won't sell its Option One Mortgage unit to Cerberus Capital Management, and will shut down lending at the business. H&R Block will take a $75 million charge and lay off about 620 employees. A mortgage servicing business will be sold. After the summer's mortgage market meltdown, Cerberus and H&R Block had been trying to re-negotiate the terms of the sale.
Delta Air Lines (DAL) shares were lower after the carrier said in an 8-K filing that higher-than-expected fuel prices will dampen fourth quarter results. The company cut its 3%-5% fourth-quarter operating margin growth guidance to flat to down 2%.
AutoZone (AZO) shares surged after the retailer posted first quarter EPS of $2.02, vs. $1.73 one year earlier, on 1.3% higher domestic same-store sales and 4.5% higher total sales.
XM Satellite Radio (XMSR) shares fell after Goldman downgraded its rating on the shares to sell from neutral.
Merrill Lynch's (MER) new chief executive, John Thain, is hiring Nelson Chai as chief financial officer. Chai formerly worked for Thain at NYSE Euronext (NYX).
Merck & Co. (MRK) shares dropped Tuesday after the drug maker said it expects earnings of $1.45 to $1.51 per share this year, including charges for a Vioxx product liability settlement. It expects earnings of $3.96 to $4.06 per share in 2008.
Orbitz Worldwide (OWW) reached a deal to distribute the rental car inventory of Avis Budget Group (CAR) through its sites.
Transocean (RIG) will raise $8.5 billion through a variety of debt offerings.
European stocks finished lower Tuesday. In London, the FTSE 100 index was off 1.12% to 6,315.20. In Paris, the CAC 40 index fell 1.46% to 5,547.21. Germany's DAX index declined 0.36% to 7,808.94.
Major Asian markets were mixed. Japan's Nikkei 225 index lost 0.95% to 15,480.19. In Hong Kong, the Hang Seng index rose 0.77% to 28,879.59. The Shanghai composite index was up 0.97% to 4,915.89.
Treasury prices finished lower Tuesday as profit-taking eroded early gains. The 10-year note was down 05/32 at 103-04/32 for a yield of 3.872%, and the 30-year bond was off 08/32 at 110-31/32 for yield of 4.337%. Credit concerns continued to dominate trading , keeping equities on shaky footing, and maintaining an underlying bid in Treasuries.