The Fed's Beige Book data, like the stronger July factory orders, did little to allay market fears about further economic turmoil
U.S. equities closed mostly lower on Wednesday but well off their worst levels of the session as market concerns about ongoing economic pressures and political uncertainties eclipsed lower oil prices and better than expected July factory orders data, which showed the manufacturing sector holding up surprisingly well in spite of general economic weakness.
Anecdotal evidence of more widespread economic deterioration in the Federal Reserve's Beige Book helped to confirmed investors' concerns about the economy. Business contacts in a few districts said high energy and other input costs were prompting them to raise their selling prices, while wage pressures were moderate.
On Wednesday, the Dow Jones industrial average finished 15.96 points, or 0.14%, higher at 11,532.88. The broader S&P 500 index was down 2.59 points, or 0.20%, at 1,274.98. And the tech-heavy Nasdaq composite index slid 15.51 points, or 0.66%, to finish at 2,333.73.
Strength in such blue-chip stocks as Bank of America (BAC) and JPMorgan Chase & Co. (JPM), as well as retailers like Home Depot (HD) and Wal-Mart Stores (WMT) offset weakness in commodities-related and technology names such as Intel (INTC) and Qualcomm Inc. (QCOM), S&P MarketScope said.
Bond prices moved higher, while a stronger dollar index continued to put pressure on commodity prices.
One fact underlined by the Beige Book was the apparent intransigence of the credit crisis. Most Fed districts reported easing demand for loans, especially for residential and consumer loans, while lending to businesses was mixed over the past six weeks. For the first time, all districts reported that loan standards had tightened, with four districts citing deterioration in credit quality and a fifth district saying it expected it to decline.
That message was reinforced by remarks that Boston Fed President Eric Rosengren made before the Chamber of Commerce in Manchester, N.H. on Wednesday, in which he criticized the rationale of other Fed officials who have called the 2% Fed funds rate too inflationary. Rosengren urged businesses and consumers to prepare for a period of time when credit wouldn't be available at an attractive price as banks refrain from lending while they repair their balance sheets. He also said that on a national scale the headwinds pushing against the economy seem to be stronger than those experiences in the early 1990s.
The latest Beige Book information suggests "we’re currently scraping along the bottom" of the credit crisis, but that it will be a prolonged period before the economy rebounds, says Doug Roberts, chief investment strategist at ChannelCapitalResearch.com, based in Shrewsbury, N.J.
The reason this appears to be so painful for a lot of people if that for many on Wall Street this is the first time they have experienced such a serious downturn, he says. "They're using the wrong frame of reference for an expected recovery," looking to the rapid rebounds in 1998 and 2001 as precedents instead of the drawn-out real estate slump of the late 1980s and early 1990s, he says.
"The Fed easing has actually helped us and attenuated the downside, but we’re still in a negative situation economically that will take some time to resolve," he predicts.
The closing of hedge fund manager Ospraie Management's flagship fund, which plummeted 27% in August on losses in energy, mining and natural resources stock holdings, is another blow to the commodities markets, as it's the one of the biggest closures ever of a commodities-focused hedge fund. The fund, which had an estimated $2.8 billion invested as of early August, had lost 38.59% of its value year-to-date as of Sept. 2.
The fund closing, announced by the firm's founder Dwight Anderson in a letter to investors on Tuesday, could spell more bad news for Lehman Brothers Holdings (LEH) , which has owned a 20% stake in the hedge fund manager since 2005.
Despite worries that the strength in the dollar will end up hurting U.S. exports, Ed Yardeni, president of Yardeni Research, said in a research note that he believes "U.S. companies will continue to expand their overseas sales even if overall global economic growth continues to slow." He cited 15 countries for U.S. exports, most of which are holding up, while the U.K. and Germany seem to be the most troubled currently. The Institute for Supply Management's Exports Index showed ongoing growth in exports, while the ISM's Imports Index revealed a seventh consecutive month of contraction in U.S. imports, he said.
Among stocks moving Wednesday, the Coca-Cola Co. (KO) said it has offered to buy China Huiyuan Juice Group Ltd., a Hong Kong listed company that owns the Huiyuan juice business throughout China, for $2.4 billion. The purchase, which is subject to preconditions relating to Chinese regulatory approvals, is expected to reduce Coca-Cola's earnings by three to four cents a share in the first full year after completion of the deal, and would boost profitability in the third year after completion. Standard & Poor's maintained its strong buy rating on the stock.
On the economic data front, July factory orders unexpectedly rose 1.3%, above the median estimate of a 0.4% gain and after an upward-revised 2.1% increase in June. Excluding transportation, factory orders were up 1.0% in July.
The U.S. factory data continue to defy recession fears, as the support from the booming commodity-sensitive and aerospace industries is offsetting weakness in other sectors, such as autos, Action Economics said.
U.S. vehicle sales rebounded by a stronger-than-expected 9% to 13.6 million in August from the 16-year lows seen in July, instead of the forecast bounce to 13 million. Ford Motor Co.'s (F) disappointing 26% sales decline from a year ago was more than made up by stronger than expected results at General Motors (GM), Nissan, and Honda. Auto sales have fallen rapidly from around 16 million units in the five months ending in December and the 2008 sales rate now looks to be under 14 million units, Action Economics said.
The Mortgage Bankers Association released its weekly mortgage applications survey for the week ending Aug. 29, showing a 7.5% increase in the Market Composite Index, a measure of mortgage loan application volume, on a seasonally adjusted basis. On an unadjusted basis, the Index rose 5.8% from the prior week and was down 27% from a year ago. The Refinance Index increased 2.1% percent and the seasonally adjusted Purchase Index increased 10.5% from one week earlier.
Oil prices bounced back nearly all the way from earlier lower, paring losses as the dollar came off highs, though it was still trading higher. While estimates of hurricane damage to energy installations in the Gulf of Mexico are minimal, production had been shut down completely and will be slow to return to normal. There's also an element of technical chart weakness dogging oil prices after the breech of the 200-day moving average on Tuesday for the first time since May, 2007.
Crude oil for October delivery settled 36 cents lower at $109.35 a barrel.
Among other stocks in the news on Wednesday, First Horizon National Corp. (FHN) said it expects that as a result of persisting market weakness and ongoing efforts to aggressively address problem loans, 2008 net charge-offs are likely to exceed the previously expected range of $385 million to $485 million by about $100 million.
Forest Laboratories (FRX) and Laboratorios Almirall announced results from two global Phase III studies of aclidinium bromide, a novel long-acting inhaled anticholinergic for treatment of chronic obstructive pulmonary disease. The companies say studies confirm the bronchodilatory effect of aclidinium at the dose tested, although the magnitude was lower than seen in previous studies.
Corning Inc. (GLW) lowered its third-quarter earnings forecast before special items to 43 to 45 cents a share from previous guidance of 48 to 51 cents. The company said sales are now expected to be between $1.58 billion and $1.62 billion, vs. prior guidance of $1.65 billion to $1.72 billion, with the lower outlook primarily related to lower-than-expected shipments of LCD glass in its wholly-owned display business. S&P downgraded the stock to buy from strong buy.
Medivation Inc. (MDVN) and Pfizer (PFE) agreed to develop and commercialize Dimebon, Medivation's investigational drug for treatment of Alzheimer's disease and Huntington's disease. Medivation will receive an up-front cash payment of $225 million and is also eligible to receive payments of up to $500 million as development and regulatory milestones are reached, plus additional undisclosed commercial milestone payments.
MEMC Electronic Materials (WFR) said weaker demand from its semiconductor applications customers, primarily due to their inventory reduction initiatives, plus continued potential for "unanticipated" events affecting its polysilicon production output, warrant continued caution in its third quarter outlook. As a result, the company maintained its prior third quarter targets, including revenue of $560 million to $620 million and gross margin of 54% to 55%. MEMC also sees higher-than-expected operating expenses. S&P and Citigroup reiterated their buy ratings, while Friedman Billings Ramsey maintained its outperform rating.
Major European indexes traded lower Wednesday. In London, the FTSE 100 index fell 2.15% to 5,499.70. In Paris, the CAC 40 shed 2.03% to trade at 4,447.13, while Germany's DAX index was down 0.78% at 6,467.49.
In Asia, Japan's Nikkei 225 gained 0.64% to close at 12,689.59, while Hong Kong's Hang Seng index lost 2.17% to end at 20,585.06.
Treasury bonds gained ground on trepidation in the equities market. The 10-year note moved up to 102-16/32 for a yield of 3.70% and the 30-year bond climbed 21/32 to 103-01/32 for a yield of 4.32%.