Investor jitters resurfaced after management shakeups at Wachovia and Washington Mutual, and an S&P debt downgrade of three Wall Street firms
Stocks kicked off June with a broad sell-off Monday after one of the U.S.'s largest banks, Wachovia (WB), forced out its chief executive after the billions of dollars in losses from credit trouble at the company. Wachovia chief executive Ken Thompson was forced to retire, and chairman Lanty Smith will take over as interim CEO.
Also, Washington Mutual's (WM) chief executive Kerry Killinger will step down as chairman. He will keep his CEO job.
The market was also roiled by news that Standard & Poor's Ratings Services had lowered its debt ratings
on Wall Street giants Morgan Stanley (MS), Merrill Lynch (MER), and Lehman Brothers (LEH), having updated its assessment of the major investment banks and brokers. Morgan Stanley's rating was cut to A+ from AA-, while Merrill Lynch and Lehman were each downgraded to A from A+.
New economic data Monday was better than expected but still weak. So, says Richard Sparks of Schaeffer's Investment Research, "There was nothing positive out there to help the market."
The negative headlines put pressure on financial stocks, with the S&P Investment Banking & Brokerage index falling 3.25%. Lehman shares were the worst performers in the S&P 500 on Monday, dropping 8.1%. The S&P Specialized Finance index lost 3.34% after a trading volume report at the CME Group (CME) disappointed investors. The stock market’s sell-off was broad-based, however. "You pretty much saw weakness across the board," Sparks says.
Bond prices were up on a flight to safety. The dollar and gold were higher as well. Oil prices rebounded higher after initial declines.
On Monday, the blue-chip Dow Jones industrial average fell 134.5 points, or 1.06%, to 12,503.82. The broader S&P 500 index shed 14.71 points, or 1.05%, to 1,385.67. The tech-heavy Nasdaq composite index was lower by 31.13 points, or 1.23%, at 2,491.53.
Activity in the broader market was negative. On the New York Stock Exchange, 22 stocks declined in price for every nine that gained. The ratio on the Nasdaq was 21-7 negative.
Monday was the first trading session in June. In May, the S&P 500 was up just 1.05%, and the Dow dropped 1.42%. The Nasdaq had a better month, posting a 4.55% gain.
More evidence of turmoil in the banking industry came from the United Kingdom, where Bradford & Bingley (BB.L) was forced to seek emergency capital after large losses. With a $355 million investment, U.S. private equity firm TPG took a 23% position in the lender.
Atlanta Federal Reserve President Dennis Lockhart said it is too soon to declare turmoil in financial markets over. "Although conditions have improved on some fronts, I don't feel we can yet 'breathe easy,'" he said. "The path of the economy is still enveloped in considerable uncertainty, and serious risks remain."
"On balance," he told the Jacksonville Chamber of Commerce, "I'm expecting a weak first half followed by some improvement in the second half as the drags on growth I mentioned earlier gradually diminish."
In economic data Monday, U.S. construction spending fell 0.4% in April, after a 0.6% drop in March. Residential construction, down 21% in the past year, was off 2.1% in April. Non-residential spending, however, rose 0.7% and is up 11.6% from a year ago.
The U.S. ISM manufacturing index rose to 49.6 in May, from 48.6 in April, a "little better than expected" according to Action Economics. It's one of many data points suggesting "manufacturing seems to have stabilized."
Today's U.S. ISM and construction spending reports both beat expectations to further diminish recession risks, and the upside surprise in the nonresidential construction figures through April has boosted our Q2 GDP estimate to 1.6%, wrote Action Economics in a posting on its Web site Monday.
July West Texas Intermediate crude oil futures, which skidded at the start of Monday’s session, rose 41 cents per barrel to $127.76. The volatility that dominated last week's market persisted on Monday, reports S&P MarketScope.
Among stocks in the news Monday, Marriott International (MAR) expects revenue per available room in North America to rise just 2% in the second quarter, vs. previous estimates of 3 to 5%. Also, the hotel chain said it would be surprised if the revenue measure strengthened in the second half of the year. S&P's Hotels, Resorts & Cruise Lines index fell 2.57% Monday.
Harris Corp. (HRS) says it has been approached by other companies interested in buying the company and other transactions, but it is not pursuing a merger or sale.
Intrepid Potash (IPI) posted earnings of 27 cents per share, vs. earnings of 5 cents a year ago, as sales rose 75%.
China Netcom Group (CN) agreed to be acquired by China Unicom in a $56.3 billion stock-swap deal.
Marsh & McLennan Companies (MMC) announced that its chief financial officer, Matthew B. Bartley, will leave the firm.
Major European stock indexes slumped Monday. In London, the FTSE 100 index declined 0.76% to 6,007.60. In Paris, the CAC 40 index lost 1.58% to 4,935.21. Germany's DAX index dropped 1.24% to 7,008.77.
Major Asian indexes finished higher. Japan's Nikkei 225 index added 0.71% to 14,440.14. In Hong Kong, the Hang Seng index was higher by 1.22% at 24,831.36.
Treasuries rallied Monday. The ten-year note rose 24/32 to 99-18/32 for a yield of 3.96%, while the 30-year bond climbed 21/32 to 95-06/32 for a yield of 4.67%.