Investors booked profits from the market's recent advance on Thursday after the Fed chief signaled sluggish growth ahead
It was an unhappy Valentine's Day on Wall Street, with market players showing little love for Federal Reserve chairman Ben Bernanke. Investors' ardor for stocks was also chilled by more negative headlines from the financial sector and a fresh spike in oil prices.
Stocks finished lower on profit taking Thursday after three straight sessions of gains in the Dow industrials and S&P 500. The selling followed comments from Bernanke's testimony before a Senate panel, in which the Fed chief said he sees the economy growing at a sluggish pace before recovering later in the year.
Worries about bond insurers also weighed on the market, with New York Governor Eliot Spitzer forecasting a "financial tsunami" unless the bond insurer problem gets fixed. And Moody's cut its rating on FGIC.
Other excuses to sell included a fourth-quarter loss at banking giant UBS and unfavorable brokerage reports on Intel (INTC) and NVIDIA (NVDA).
Reports that initial jobless claims and the December trade deficit fell did little to confirm or refute recent Fed arguments the economy is slowing down but will avoid recession.
On Thursday, the Dow Jones industrial average fell 175.26 points, or 1.4%, to finish at 12,376.98. The broader S&P 500 index was off 18.35 points, or 1.34%, to end at 1,348.86.
The tech-heavy Nasdaq composite index was the weakest performer among the major market benchmarks, falling 1.74%, or 41.39 points, to close Thursday's session at 2,332.54.
Activity in the broader market was resoundingly negative. On the New York Stock Exchange, 25 shares declined in price for every seven that advanced. Breadth on the Nasdaq was 21-8 negative. Trading volumes were moderate.
Thursday’s losses came after a three-session winning streak for major averages. However, there is a "major caveat" to the market's recent show of strength, said Richard Dickson of Lowry's Reports -- volume has been relatively light. "Light volume rallies typically represent short-term rebounds rather than sustainable moves higher," he said, but added, "There is probably still time for the quality of the rally to improve."
Investors weighed Thursday’s Congressional testimony from Bernanke, Treasury Secretary Henry Paulson, and Securities and Exchange Commission Chairman Christopher Cox.
Wall Street didn't seem to care for Bernanke's indication that the Fed will revise its growth forecasts lower when it releases its new quarterly estimates next Wednesday. Bernanke kept the door open to further interest-rate reductions. He told the Senate panel the downside risks to economic growth remain from housing, employment, and credit markets. But he appeared more upbeat on the economy's prospects for later this year and next when the combination of monetary policy fiscal stimulus kicks in.
Bernanke also said the Fed will act in a "timely manner" in regard with "adequate insurance against downside risks." The Fed chief noted downside risks are greater amid financial stresses, while labor markets have softened.
"We judge this testimony to be very dovish, and think that it cements in place a further 50-basis-point rate cut at the March 18 FOMC meeting,” wrote Bear Stearns economists in a note Thursday. The economists note the potential of a 2% Fed funds rate by the June FOMC meeting. “Given the discussion of policy lags and inflation expectations, further cuts would likely require (i) contained inflation expectations; (ii) continued financial market problems; and (iii) weaker economic data."
Treasury Secretary Paulson said he was "finalizing the FHA modernization bill [that] will provide additional tools to help homeowners." He said enactment of GSE regulatory reform is also a very high priority for Treasury and the Administration." He believes the "economy will continue to grow, although its pace in coming quarters will be slower
than what we have seen in recent years."
Moody's downgraded its rating on bond insurer FGIC to A3 from Aaa on Thursday, down six levels. Moody's said the action reflects its assessment that FGIC's "meaningfully weakened capitalization and business profile resulting, in part, from its exposure to the U.S. residential mortgage market," according to an Action Economics report.
MBIA (MBI) executives expected to tell Congress that the troubled bond insurers don't need a federal rescue. "A bailout of highly credit-worthy companies who, at most, are at risk of losing the very highest ratings available, is misplaced," MBIA chief financial officer Charles Chaplin was expected to say in prepared testimony to the House Financial Services subcommittee.
Meanwhile, Cerberus Capital Management said its newly acquired GMAC LLC, may run into "substantial difficulty" if the credit markets don't improve.
Anxious about a slowing economy, investors are closely watching the job market. But traders mostly shrugged at a report that U.S. initial jobless claims fell 9,000 last week to 348,000.
In other economic news Thursday, the U.S. trade deficit shrunk to $58 billion in December, from $63.1 billion in November as exports surged 1.5% from month to month. Imports fell 1.1% and, excluding oil dropped 2.8%. Action Economics says the greater-than-expected decline in the trade gap "could be a manifestation of the slowdown in the economy and the weaker dollar."
March NYMEX crude oil climbed $2.05 to $95.46 per barrel Thursday, after ranging between $93.94 and $95.60. Better U.S. economic data over the past few days lowered recession concerns, says Action Economics, while the usual geopolitical issues, namely Nigeria, Iran, and Venezuela lent support as well.
Among stocks in the news Thursday, Yahoo (YHOO) and News Corp. (NWS) may be considering a combination of the Internet operations, an effort to fight off Microsoft's (MSFT) bid for Yahoo. But Standard & Poor's analysts say the combination may require outsourcing that regulators would not allow. And S&P is skeptical that a deal with News Corp. would value Yahoo higher than Microsoft's $44 billion offer.
UBS (UBS) saw $13.7 billion in hits from subprime-related investments last quarter. The giant Swiss bank reported a loss of about $11.3 billion in the fourth quarter, triggering the bank's first full-year loss since its formation ten years ago.
Charles Schwab (SCHW) reported total client assets were up 10% in January from the year before, but down 3% from the previous month as the weak stock market took its toll.
Marriott International (MAR) reported earnings of 46 cents per share, vs. 52 cents a year ago, as higher costs offset a 7.7% increase in revenue.
Goodyear Tire & Rubber (GT) reported earnings of 27 cents last quarter, vs. a loss of $1.74 a year ago. Revenue rose 11%.
Liz Claiborne (LIZ) expects earnings in 2008 of $1.50 to $1.70, below estimates. Also, the firm reached a deal with investors to sell its Ellen Tracy brand.
European stock indexes finished mixed on Thursday. In London, the FTSE 100 index was down 0.01% to 5,879.30. In Paris, the CAC 40 index added 0.07% to 4,858.65. Germany's DAX index fell 0.16% to 6,962.28.
In Japan, the Nikkei 225 index surged 4.27% to 13,626.45, while in Hong Kong, the Hang Seng index rose 3.68%, to 24,021.68.
Treasuries fell sharply Thursday on back of a shift in sentiment to speculation that economic recession fears may have been overblown. The 10-year note sank 31/32 to 97-04/32 for a yield of 3.85%. The 30-year bond tumbled 71/32 to 95-05/32 for a yield of 4.68%.