Trading was volatile Wednesday as investors weighed news of a $9.4 billion loss at Morgan Stanley and more trouble for bond insurers
Stocks closed mostly lower Wednesday in a seesaw session, with trading influenced by a host of events, including S&P Ratings' downgrade of the outlook for bond insurers Ambac (ABK) and MBIA (MBI), a sharp drop in shares of Sallie Mae (SLM) after a conference call, and news that a Chinese investment fund is pumping $5 billion into Morgan Stanley (MS) after the Wall Street investment bank announced a $9.4 billion loss. Energy issues were rising in step with higher crude oil prices.
On Wednesday, the Dow Jones industrial average finished lower by 25.20 points, or 0.19%, at 13,207.27. The broader S&P 500 index was down 1.98 points, or 0.14%, to 1,453.0. The tech-heavy Nasdaq composite index added 4.98 points, or 0.19%, to 2,601.01.
Action in the broader market Wednesday was mixed, with 18 shares falling in price for every 14 that advanced on the New York Stock Exchange. Nasdaq breadth was even. Year-end portfolio adjusting, and position-squaring tied to the upcoming quadruple expiration of stocks, futures, indices and options were adding to the volatility, according to S&P MarketScope.
Thursday will bring the final Q3 GDP report, weekly jobless claims, November leading indicators, and the Philadelphia Fed's survey of regional economic conditions for December.
Standard & Poor's warned Wednesday of deteriorating credit at three large bond insurers, MBIA Inc. (MBI), ACA Capital Holdings (ACA) and Ambac Financial Group (ABK), citing expected losses on mortgage-backed securities and other toxic debt.
S&P, which like BusinessWeek is a unit of the McGraw-Hill Companies, lowered the credit outlook of MBIA and Ambac from stable to negative. It cut ACA's credit rating to CCC from A. Before that news was issued, the New York Times reported Bear Stearns and Merrill Lynch (MER) are among the major banks reportedly in talks to bail out ACA.
Morgan Stanley gave investors another view into the damage from the year's credit crisis when it took a $9.4 billion hit in the fourth quarter, with most of the writedowns from subprime-related mortgage exposure. While reporting a larger quarterly loss than many expected, Morgan Stanley said it will get $5 billion in capital, in the form of an investment by a Chinese government-controlled fund.
Many of Wall Street's top investment banks are reporting earnings this week. On Wednesday, Goldman Sachs' (GS) profit report showed little damage from the subprime crisis. Bear Stearns (BSC) is expected to report a loss on Thursday.
Another financial outfit saw its shares get hammered Wednesday. Investors apparently didn’t like what they heard in Sallie Mae’s conference call as CEO Albert Lord discussed the student loan company’s strategy following a failed buyout by J.C. Flowers. According to S&P, Lord provided little detail regarding the securitization environment, and mentioned a possible dividend cut to strengthen its balance sheet.
On Wednesday, the Federal Reserve reported results of its effort this week to ease some of the stress in the financial system. The Federal Reserve said 93 bidders sought a piece of $20 billion in liquidity the Fed provided on Monday. The Fed received $61.6 billion in bids. The Fed then announced plans to auction another $20 billion in liquidity on Thursday.
Five months after the start of the credit crisis, many banks are still reluctant to lend to each other, says Bill Larkin of Cabot Money Management. The Fed effort is the first of possibly many "creative solutions" to end-of-the-year liquidity issues, he says.
Before the Fed's news, market sources said results would be "extraordinarily difficult to assess, as a strong auction could be interpreted as a sign of distress, while a weak auction could indicate the new facility didn't work," Action Economics says. "The relatively neutral response would seem to be the optimal result." The liquidity was awarded at a rate of 4.65%, above the Fed funds rate but below the Fed's discount window rate.
The market was already nervous following reports the Fed's proposals Tuesday to remedy the subprime mortgage problems fell short of the more sweeping changes sought by consumer groups and senior Democrats, reports S&P MarketScope. Democratic leaders including Rep. Barney Frank and Senate Banking Committee Chairman Christopher Dodd, who said they plan to push ahead with their legislative plans to tighten regulation of the mortgage industry.
NYMEX February crude oil futures rose $1.16 to $91.24 per barrel Wednesday as the Energy Dept.’s weekly report showed crude oil stocks plunged, distillates fell and gasoline inventories edged up. Citigroup's Tim Evans said the sharp drop in crude stocks was apparently a function of last week's fog in the Houston Ship Channel.
Among other stocks in the news Wednesday, General Motors (GM) announced it will raise prices by an average of about 1.5% on most 2008 vehicles in response to rising steel and commodity costs.
Palm (PALM) reported a loss of 9 cents in its second quarter, vs. earnings of 12 cents a year ago. Revenue fell 11%. It expects a loss of 31 to 33 cents in the third quarter.
TD Ameritrade Holding Corp. (AMTD) expects earnings of about 39 cents per share in its first quarter, above the guidance of 27 to 33 cents given previously. The online broker reports a record 339,000 average client trades per day in November. At the end of the month, total client assets hit $301 billion.
Hovnanian Enterprises (HOV) reported a $7.42 per share loss, vs. a $1.88 loss a year ago, as the homebuilder continues to be hit by the housing slowdown. Sales fell 20%, and its contract cancellation rate was up 50%.
Union Pacific (UNP) cut its earnings predictions for the fourth quarter by 20 cents per share, reflecting higher fuel costs and softer-than-expected volumes due to bad weather.
General Mills (GIS) reported earnings of $1.14 per share, vs. $1.08 a year ago. Costs associated with the recall of frozen pepperoni pizzas lowered results by 4 cents. Revenue was up 7% to $3.7 billion.
European stocks finished mixed Wednesday. In London, the FTSE 100 index was up 0.08% to 6,284.50. Paris' CAC 40 index fell 0.22% to 5,497.42, and in Germany the DAX index moved 0.17% lower to 7,837.32.
In Asia, Tokyo's benchmark index, the Nikkei 225, was off 1.17% to 15,030.51. In Hong Kong, the Hang Seng index rose 1.11% to 27,029.26, while on the Chinese mainland, the Shanghai Composite was up 2.18% to 4,941.78.
Treasury prices soared Wednesday as downgrades by S&P Ratings of some bond insurers reignited fears of tighter liquidity amid less willingness by banks to lend, and lower risk appetite among investors. The 10-year note rallied 22/32 to 101-24/32 for a yield of 4.03%, while the 30-year bond surged 43/32 to 108-28/32 for a yield of 4.45%.