Worries about Fannie and Freddie overshadowed testimony from Bernanke, Paulson, and Cox, a plunge in crude, and GM's big cost-cutting plan
In a jagged, see-saw session, major U.S. stock indexes ended mostly lower, with only the Nasdaq composite index able to eke out a small gain. It was certainly a busy day, replete with congressional testimony from Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, and Securities and Exchange Commission Chairman Christopher Cox; news of another cost-cutting plan by General Motors (GM); a plunge in the price of crude oil; data on inflation and retail sales; and a spate of major earnings releases.
But in the end, the continued worries about the health of mortgage-finance giants Freddie Mac (FRE) and Fannie Mae (FNM) trumped all other concerns. Shares of the two government-sponsored enterprises lost nearly one-quarter of their already greatly diminished value on Tuesday.
However, certain other financials, including Lehman Brothers (LEH), Washington Mutual (WM), and First Horizon National (FHN) rallied, aided by bargain hunters and investors covering short positions.
Bonds were mixed, while the dollar index moved lower. Gold futures were higher.
On Tuesday, the Dow Jones industrial average fell 92.65 points, or 0.84%, to end at 10,962.54, failing to hold above the psychologically significant 11,000 level. The broader S&P 500 index fell 13.39 points, or 1.09%, to finish at 1,214.91. The tech-heavy Nasdaq composite index gained 2.84 points, or 0.13%, to close at 2,215.71.
Trading volume was moderate. On the New York Stock Exchange, 24 stocks fell in price for every eight that gained. The ratio on the Nasdaq was 17-12 negative.
In testimony before the Senate Banking Committee Tuesday, noted that inflation risk intensified, but also
emphasized downside risks to growth. He said that officials expect the economy to improve "gradually" over the next two years, thanks to a "slow" housing recovery and gradual improvement in credit conditions. But he warned that "considerable uncertainty" surrounded that outlook. He said that the U.S. economy faces "numerous difficulties," suggesting those risks remain his top priority. He noted an "unusually uncertain" inflation outlook, and said that the Fed is watching for signs that higher commodity prices are becoming embedded in wages and expectations.
The Fed chief noted that "accurately assessing and appropriately balancing the risks to the outlook for growth and inflation is a significant challenge for monetary policy makers."
The central issue which Congress should tackle is the housing market, said Bernanke in a Q&A with lawmakers. He said the continued uncertainty over housing prices and housing activity is largely behind the financial market stresses, as well as stress in the economy. He expects some stabilization in construction this year, but is not sure where home prices will bottom. He is still trying to assess the impact of the current fiscal stimulus package.
On the GSEs, Bernanke said the Fed's goals are to protect the financial system, as well as taxpayers, and that a strong bank-like regulator for the GSEs is need, one that can restore confidence in the system.
The Fed chief was joined later by Treasury Secretary Henry Paulson to discuss the government’s rescue plan for mortgage giants Freddie Mac (FRE) and Fannie Mae (FNM). Paulson told the committee that Fannie and Freddie have the potential to pose systemic risks to the financial system and need a stronger regulator. He also urged Congress to pass legislation to reform oversight of the two government-sponsored enterprises, with modifications that provide them temporary government backstops for liquidity and equity capital.
SEC Chairman Christopher Cox also testified Tuesday, saying his organization is working to combat rumors and their impact on the markets by employing technology which can trace a rumor to its origin, according to press reports. Those found guilty of starting rumors will face penalties, Cox said, as part of the SEC's revamped approach to enforcement, including a series of investigations into shady subprime activity, the prosecution of those who violated securities laws, and reforming credit rating agencies. Cox said the agency is pursuing more than four dozen cases into the subprime-mortgage crisis, focusing on whether lenders and investment banks misled investors. The
SEC also announced July 13 that it is examining whether securities firms and hedge funds have adequate safeguards to prevent employees from intentionally spreading false rumors.
Also, the Wall Street Journal reported that the SEC announced an emergency action aimed at reducing short-selling aimed at Wall Street
brokerage firms, Fannie Mae and Freddie Mac, and will immediately begin considering new rules to extend new requirements to the rest of the market. Cox said the SEC would institute an emergency order requiring any traders to pre-borrow stock before shorting Fannie Mae and Freddie Mac.
General Motors says it will suspend its quarterly dividend immediately and take other steps, including job cuts, to generate $10 billion in cash by the end of 2009. Another $4 billion to $7 billion is expected to come from asset sales and financing.
In June, U.S. retail sales rose just 0.1%, while sales excluding autos increased 0.8%. Meanwhile, an inflation gauge, the U.S. Producer Price Index, jumped 1.8% in June, while the core rate (excluding food and energy) rose 0.2%.
U.S. business inventories edged up 0.3% in May, while shipments rose 0.8%. April's shipments were revised a bit higher to a 1.5% pace, from 1.4% previously. April's inventory gain of 0.5% was not revised.
In other economic news Tuesday, the U.S. Empire State manufacturing index rose to -4.92 in July from -8.68 in June.
Oil prices plunged Tuesday after posting gains earlier in the session, with August WTI futures off $6.57 to $138.61 per barrel in the afternoon. Sources cited by S&P MarketScope theorize the selloff might have started with Bernanke’s testimony, which painted a grim picture of the economy, which could reduce the demand for crude. Dealers said electronic sell programs were a major factor in the selloff from near record highs.
In earnings news, Johnson & Johnson (JNJ) posted better-than-expected earnings of $1.17 per share, vs. $1.05 a year ago, as sales rose 8.7%. The firm raised earnings guidance for 2008.
Dun & Bradstreet (DNB) posted better-than-forecast EPS of $1.15, vs. $0.96 before non-core gains and charges one year earlier, on 10% higher core and total revenue, before foreign exchange effects. The company confirmed its 2008 guidance of 8%-10% core revenue growth and EPS of $5.19-$5.29, before non-core gains and charges.
J.B. Hunt Transport Services (JBHT) also beat expectations with earnings of 39 cents per share, vs. 45 cents a year ago. The absence of a year-earlier tax benefit offset a 14% jump in revenue. Revenue excluding fuel surcharges rose 3%.
State Street Corp. (STT) posted earnings of $1.40 per share, vs. $1.07 a year ago, as revenue rose 39%. The financial firm expects 2008 earnings to grow by the high end of the 10% to 15% range.
Genentech (DNA) posted earnings of 82 cents, vs. 78 cents a year ago, as revenue rose 8%. U.S. product sales were up 9%. The firm raised 2008 earnings guidance by 5 cents per share.
U.S. Bancorp (USB) posted earnings of 53 cents per share, vs. 65 cents a year ago, as total interest income fell 6.8%.
Novellus Systems (NVLS) posted earnings of 6 cents per share, vs. 45 cents a year ago, as sales dropped 38%. The earnings figure beat analysts' estimates.
In other corporate news Tuesday, Federated Investors (FII) agreed to acquire certain assets of David W. Tice & Associates LLC related to the management of the $1.2 billion Prudent Bear Fund and the $507 million Prudent Global Income Fund.
Lehman Brothers (LEH) shares moved higher after a New York Post report that LEH's CEO Dick Fuld is seriously mulling a way to take the company private and out of the public eye.
Major European indexes were lower Tuesday. In London, the FTSE 100 index fell 2% to 5,194.20. In Paris, the CAC 40 fell 1.46% to 4,081.86, while Germany's DAX index lost 1.72% to 6,093.71.
In Asia, Japan's Nikkei 225 moved 1.96% lower to 12,754.56, while Hong Kong's Hang Seng Index fell 3.81% to 21,174.77.
Long-dated Treasuries were mixed in afternoon trading Tuesday, reflecting a lack of consensus over the likely direction from current levels. The 10-year note edged up 04/32 to 100-08/32 for a yield of 3.84%. The 30-year bond fell 12/32 to 98-12/32 for a yield of 4.47%.