A drop in fourth-quarter GDP and more weak data on manufacturing and consumer sentiment hurt the market. Next week, investors will focus on the January jobs report
U.S. stocks closed lower Friday as bleak economic and corporate earnings reports continued to drive investors out of equities and into Treasuries, gold, and other "safe-haven" investments. The Dow industrials suffered a second-straight triple-digit loss, with the blue chip benchmark left hanging on to the psychologically significant 8,000 level by its fingernails.
On Friday, the 30-stock Dow Jones industrial average was lower by 148.15 points, or 1.82%, at 8,000.86. The broad S&P 500 index was off 19.26 points, or 2.28%, to 825.88. And the tech-heavy Nasdaq composite index lost 31.42 points, or 2.08%, to 1,476.42, as tech names like Juniper Networks (JNPR) and Broadcom (BRCM) were among companies posting weak earnings Friday.
Treasuries were higher on safe haven buying, with the yield on the 10-year note finishing at 2.86%. The U.S. dollar index was higher. Gold futures were sharply higher on a flight to safety bid. Crude oil futures were also higher in New York trading.
Indexes moved lower following a report that showed the U.S. economy fell by a less than expected 3.8% in the fourth quarter; however, gross domestic product was down 5.1% excluding inventories. Also, the fourth-quarter employment cost index rose 0.5%, a bit less than expected.
Other economic reports were weaker. The Michigan Consumer Sentiment Index eased to 61.2 in January from a 61.9 preliminary reading, but rose from 60.1 in December. And the January Chicago PMI unexpectedly fell to 33.3 from 35.1 in December. The data suggest the recession will last most of year, according to S&P MarketScope.
Market sentiment may have also been hurt Friday by a CNBC report that the so-called "Bad Bank" proposal floated earlier this week to create a government-sponsored entity to soak up toxic debt is on hold.
Next week's economic calendar offers the first round of major January indicators that will set the tone for what to expect. The Institute for Supply Management’s reports on both manufacturing and nonmanufacturing activity will be key benchmarks, but the Labor Dept.’s employment report of Friday is sure to attract the most attention.
U.S. GDP fell at a 3.8% annual rate in the fourth quarter, the largest decline since 1982, but not nearly as bad as the -5.6% consensus estimate. The surprises came from three categories: foreign trade, inventories, and government spending. The data on consumer spending came in near expectations (down 3.5%). Business fixed investment fell 19.1%, near expectations, while residential construction dropped 23.6%, not as bad as anticipated. The biggest surprise was federal spending, which surged 5.8%, mostly because of nondefense spending. Inventories were up $6.2 billion, which added 1.3 percentage points to real GDP growth. Trade was better than expected, with exports dropping 19.7% and imports 15.7%; the import decline was larger than expected, but this could get revised when we get the December trade data.
Without the contributions from government and inventories, real GDP would have dropped 5.5%, as expected by the market.
"The impact on the market will be muted both because the surprise was in elements not likely to be sustained and because its last year's data; they are now worrying about 2009, not 2008," says S&P Economics.
The U.S. employment cost index rose just 0.5% in the fourth quarter, below the 0.7% in third quarter and the 0.7% expected by markets. Wages and salaries were up 0.5%, decelerating from the 0.7% pace previously. Benefit costs increased only 0.4%, below a 0.6% increase in the third quarter. On a year-over-year basis, compensation was up 2.6% in the fourth quarter from 2.9% in the third. Wages and salaries compensation rose 2.7%, decelerating from 3.1% previously. Benefits compensation was up 2.2% year-over-year from 2.6% the quarter before.
The reading was much tamer than expected, as the sharp contraction in fourth-quarter economic activity slowed employment costs, according to S&P Economics.
Former presidential rival John McCain expressed disappointment that President Obama has not negotiated with Republicans over a huge economic stimulus plan and said he is working on an alternative package. Speaking to Reuters, Arizona Sen. McCain said the alternative plan would include what he described as "more effective tax cuts, such as a payroll tax cut" and spending on projects aimed at immediately creating jobs.
The nation's top economic officials are discussing a new way to stabilize the financial system by buying a portion of banks' bad assets and offering guarantees against future losses on some of the remainder, in an effort to help banks while trying to mitigate the cost to taxpayers. This approach, which merges two competing ideas, was discussed this week at a meeting that included Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair, according to people briefed on the meeting. The latest bank-aid discussions represent one idea of several being contemplated by officials.
New York City Mayor Michael Bloomberg, presenting his plan to address the city's growing budget problems as the economic picture worsens, said Wall Street firms are expected to lose a total of $47.2 billion for 2008, and even more in 2009. Bloomberg said the devastating news will affect the city for years. The city is now projected to lose nearly 300,000 jobs through 2010. Some 46,000 will come from the financial sector. The city government gap for fiscal 2010 is at $4 billion and growing.
The Wall Street Journal reports Morgan Stanley (MS) and Goldman Sachs (GS) are considering further cuts in staff. The Journal said Morgan Stanley is considering laying off up to 5% of its 47,000 employees, while Goldman Sachs is also contemplating further cuts in staff after letting go about 10% of its employees late last year.
According to The New York Times, Sens. Carl Levin, Democrat of Michigan, and Charles E. Grassley, Republican of Iowa, introduced legislation to impose government oversight of hedge funds. The legislation was filed as the Obama administration was preparing a broader legislative overhaul of the regulatory system, including an effort to more tightly regulate hedge funds. State regulators and a panel created by Congress to oversee the $700 billion Troubled Asset Relief Program issued separate but similar regulatory proposals.
The Journal reports Fannie Mae reached an agreement to work with one of its former critics, Neighborhood Assistance Corp of America, to prevent foreclosures by reworking home mortgages to make them easier to afford. The agreement is one of several measures the government-backed mortgage company and its main rival, Freddie Mac, are working on to avoid a further jump in foreclosures, the WSJ said. The agreement with Fannie has not been announced, the paper said, but added that it was confirmed by the company and by Bruce Marks, chief executive of the NACA, a Boston non-profit group. Fannie Mae could not be immediately reached for comment by Reuters.
Roche Holdings (RHBBY) announced it intends to commence a cash tender offer for all outstanding publicly-held shares of Genentech (DNA) at $86.50 per share. Roche currently owns 55.8% of Genentech's outstanding shares. The offer replaces the public proposal made by Roche on July 21, 2008, to acquire all of the publicly-held shares of Genentech at $89 per share in cash by means of a negotiated merger.
In earnings news, Exxon Mobil (XOM) posted better-than-expected $1.55, vs. $2.13 a year ago, fourth quarter EPS on 27% lower total revenue and other income.
Amazon.com (AMZN) posted $0.52 vs. $0.48 fourth-quarter EPS on an 18% revenue rise (including foreign currency translation). Wall Street was looking for $0.39. The online retailer sees first-quarter operating income of $125 million-$210 million and revenue of $4.53 billion-$4.93 billion. Stifel Nicolaus reiterated its buy rating on Amazon and raised its target price to $65.
Procter & Gamble (PG) posted $1.58 vs. $0.98 second-quarter EPS despite a 3.2% sales drop. The company noted that second-quarter fiscal 2009 EPS include a $0.63 gain from the Folgers transaction completed during the quarter. P&G sees third-quarter organic sales growth of 2%-5%, and $0.78-$0.86 EPS, including incremental Folgers-related restructuring charges. It sees fiscal 2009 organic sales growth of 2%-5%, and is comfortable with the current consensus EPS estimate of $4.29.
Honeywell International (HON) posted $0.97 vs. $0.91 fourth-quarter EPS as lower costs and expenses offset a 6.5% revenue decline. Honeywell reaffirmed its $3.20-$3.55 2009 EPS forecast.
Chubb Corp. (CB) posted $1.58 vs. $1.60 fourth-quarter operating EPS on 4% lower net written premiums, with about half the decline attributable to currency fluctuation. Wall Street was looking for EPS of $1.52. Premiums were down 2% in the U.S. and -8% outside the U.S. (up 1% in local currencies). Chubb expects 2009 operating EPS of $4.80-$5.20. Net written premiums for the insurance business are expected to decline 1%-4% in 2009.
Honda Motor Co. (HMC) posted 90% lower third-quarter consolidated net income on a 17% revenue drop. The company noted decreased revenue in the automobile business and currency translation effects, although unit sales in its motorcycle business increased. Honda Motor sees fiscal 2009 revenue down 16% and operating income down 85%.