The good cheer on Wall Street engendered by the Federal Reserve's half point rate cut -- which sent equity indexes soaring Tuesday afternoon -- persisted into Wednesday. But late in the session, the market's ebullience seemed to fade as major indexes gave back some of the day's gains.
Major U.S. stock indexes ended higher on Wednesday, helped by a dip in consumer prices for August. Investors appeared to shrug off shrug off record high energy prices, a weaker housing starts report, lower GDP forecasts from several economists, and feeble earnings from Morgan Stanley (MS).
On Wednesday, the Dow Jones industrial average rose 76.17 points, or 0.55%, to 13,815.56. The broader S&P 500 index climbed 9.25 points, or 0.61%, to 1,529.03. The tech-heavy Nasdaq composite index gained 14.82 points, or 0.56%, to reach 2,666.48.
Market sentiment remained positive, with 21 shares advancing in price on the NYSE for each 12 that declined. Trading breadth on the Nasdaq was 19-10 positive. Trading was active, notes Standard & Poor's MarketScope, with some market players positioning for Friday's Quadruple witching, when the monthly stock and index option expirations coincide with the quarterly expiration of stock and index futures contracts.
Although the Fed rate cut showed the markets how committed it is to minimizing the damage that the housing downturn wreaks on the broader economy, the chances of a recession in the months ahead haven't abated, economists said. While the size of the rate cut seemed to suggest the Fed was front-loading its medicine, the possibility of further cuts if slowing economic growth warrants it remain, analysts are saying.
Some financial pros were skeptical that the Fed's move would prove effective. Among the doubters Wednesday was Meyrick Chapman, a UBS Securities (UBS) bond strategist in London. "The world was not saved by Ben Bernanke yesterday," he wrote in a Sept. 19 report. "In our view, the sigh of relief from risk assets is premature." Chapman said the firm has "grave concerns about the sustainability of risky positions in the current environment and suggest there will be further bouts of risk aversion into the end of 2007".
Economist John Ryding of Bear Stearns (BSC) was also critical. "It is our judgment that this action will create the notion of a 'Bernanke Put' for the financial markets along the lines of the 'Greenspan Put' - promoting moral hazard and excessive risk-taking in financial markets", he wrote in a Sept. 19 note. In addition, Ryding says, the Fed is "willing to risk hard-won progress on inflation and inflation-fighting credibility".
Among industry groups Wednesday, the S&P Thrifts & Mortgage Finance index was one of the biggest winners on the session, gaining 1.8%. The Homebuilding index, after jumping nearly 5% earlier in the session, turned lower by 2.7% late in Wednesday's session as euphoria over the rate cut gave way to the cold reality of persistent weakness in the housing market, borne out by the August housing starts data.
On Wednesday, crude oil for October delivery in New York was higher by 42 cents at $81.93 per barrel, pulling back from a new record high of $82.30 reached earlier in the session. An Energy Dept. report showed crude oil stocks fell more than expected 3.8 million barrels a day to 318.8 million barrels. Some companies removed workers from the Gulf of Mexico as a precaution against possible storms.
In economic news, the overall CPI declined 0.1% to 2.1% in August, aided by a 3.2% drop in the energy component, while the core index rose 0.2%, in line with recent trends. The headline drop in the year-over-year rate to 2.0% marks the likely near-term trough, with surging energy prices and the winding down of easy year-over-year comparisons pointing to a pop to 2.8% in September and 3.8% by November, Action Economics said. The core year-over-year rate of 2.1% is slightly above the Fed's 2% "soft"
target, but upward pressure from hefty headline inflation is expected soon, Action Economics said.
Housing starts fell 2.6% to an annualized pace of 1.331 million in August from a downward-revised 1.367 million pace in July. A 7.1% drop in single-family starts was partially offset by a 12.8% bounce in construction of multi-family homes. Housing permits contracted 5.9% to an annualized rate of 1.307 million from an upward-adjusted 1.389 million in July, auguring a weaker September construction report.
The Office of Federal Housing Enterprise Oversight, the U.S. housing regulator, relaxed its government-sponsored enterprise rules, allowing housing agencies Fannie Mae and Freddie Mac to buy more mortgages, but not budging on the agencies' portfolio limits or jumbo loan caps. The adjusted rules will permit a 2% annual growth rate on Fannie Mae's loan portfolio and temporarily double its fourth-quarter growth limit to 1.0%. The changes will enable the agencies to buy and securitize up to $20 billion in subprime debt over the next six months.
Housing will remain in the spotlight on Thursday. Fed chairman Ben Bernanke will testify before the House Financial Services Committee's hearing on mortgage foreclosures. Bernanke will be offer his views on the subprime crisis - and possible solutions. "Now that Bernanke has done his bit to ameliorate the fallout from the mortgage crisis with yesterday's deeper than expected rate cuts, he shouldn't face much direct criticism on the Hill," according to Action Economics.
On the corporate earnings front Thursday, investors will be watching quarterly earnings releases from Goldman Sachs (GS) and Bear Stearns to gauge the impact of the subprime crisis and recent market volatility on those firms' bottom lines
The impact of the recent financial turmoil was evident in the results of another big Wall Street firm. On Wednesday, Morgan Stanley posted a third-quarter profit from continuing operations of $1.38 a share, vs. $1.50 a share a year ago, with higher net interest and other expenses offsetting a 13% rise in revenue. The results fell short of analysts' expectations of $1.54 a share. The investment bank said it took $940 million in sales and trading losses due to the lower market value of its loan portfolio, which cut its earnings by 33 cents a share. The bank reported another $480 million in losses from stock trading activity based on computer models.
Accredited Home Lenders Holding Co. (LEND) and private equity firm Lone Star amended their June 4 merger agreement to settle the pending lawsuit between the companies and reduce the price at which Lone Star agreed to acquire all of the common stock of Accredited to $11.75 a share.
Providing a sign that consumer spending may be holding up, Darden Restaurants (DRI) reported earnings of 73 cents a share for its first quarter, up from 62 cents a share a year earlier on 7.9% gain in total sales. That reflected U.S. same-store sales growth of 7% at Red Lobster and 4.8% at Olive Garden. The company still sees 10% to 12% earnings growth for fiscal 2008 and says it will no longer report same-restaurant sales on a monthly basis.
The Fed's aggressive move pushed most equity indexes around the world higher on Wednesday. In London, the FTSE 100 index surged 2.81% to 6,460. Germany's DAX index rose 2.32% to 7,750.84. In Paris, the CAC 40 index jumped 3.27% to 5,730.82.
In Japan, the Nikkei 225 index advanced 3.67% to 16,381.54. In Hong Kong, the Hang Seng index gained 3.98% to 25,554.64. The Shanghai composite index was down 0.55% to 5,395.26.
Treasuries fell as investors moved assets into equities, ahead of Bernanke's House testimony on the subprime crisis on Thursday. The benchmark 10-year Treasury note was lower in price at 101-19/32 for a yield of 4.552%, while the 30-year bond was lower at 102-15/32 for a yield of 4.845%.