Wait -- was the market's August swoon just a bad dream? You would have thought so from the new highs major U.S. stock indexes were hitting Monday, as investors put a positive spin on gloomy earnings warnings from Citigroup (C) and UBS AG (UBS).
On Monday, the Dow Jones industrial average swept through the previous 14,000 record threshold, and through 14,100 before slipping back to finish higher by 191.92 points, or 1.38%, at 14,087.55, a new closing high. The broader S&P 500 index rose 20.29 points, or 1.33%, to 1,547.04. The tech-heavy Nasdaq composite index gained 39.49 points, or 1.46%, to 2,740.99, a six-and-a-half-year high.
On the New York Stock Exchange, 25 stocks were up for every eight that traded lower, while on the Nasdaq stock market, 21 stocks gained for every nine that were down, Standard & Poor's MarketScope said. Leading the broad-based rally were financials, with technology and retail names also doing well and homebuilders jumping after a sector upgrade by Citigroup, which has previously failed to call a bottom in the housing market.
The start of a new quarter after putting to bed the third-quarter's financial roller coaster seemed to be giving investors a fresh perspective on the markets.
Optimism was stoked by Citigroup's saying that it sees continued growth in consumer loans and doesn't expect a consumer-led recession to result from the upheaval in the credit markets. Also, former Fed chief Alan Greenspan, in his capacity as a paid consultant by PIMCO and Deutsche Bank, said the financial crisis may be nearly finished, noting positive signs such as lenders showing interest in longer term, lower quality assets in recent days, according to Action Economics. PIMCO bond fund manager Bill Gross's prediction that the Fed funds rate will be lowered by another percentage point to 3.75% within the next six to 12 months aded fuel to the bulls' fire.
Citigroup projected a 60% decline in third-quarter profits from a year ago, due to dislocations in the mortgage-backed securities and credit markets, and deterioration in the consumer credit environment. There was a sigh of relief once investors realized the bulk of the combined $3.3 billion in asset writedowns Citigroup plans to take for the third-quarter is for possible losses in the future.
The nation's largest investment bank said that, while it couldn't predict what market conditions would be, it expected earnings to return to more normalized levels in the fourth quarter, suggesting it now had a firm grasp on the extent of the asset write-offs that resulted from the credit crisis, said Richard Sparks, senior equities analyst at Schaeffer's Investment Research in Cincinnati, Ohio.
"The market may be extrapolating that to others [in the financial industry] as well," he said. "The credit problems are known, they're serious, but they're seen as a one-time event."
But Sparks said he suspected the news from Citigroup and UBS would have had a similar effect on Friday, before the new quarter had been ushered in.
Another important factor in Monday's rally, he said, was that after the Fed rate cut on Sept. 18, the stock market took a breather last week with some help from the Jewish holidays. It was very constructive that stock prices didn't pull back very much during last week's low-volume lull, he added.
Douglas Peta, market strategist at J. & W. Seligman in New York, cited eight bits of anecdotal evidence over the past few weeks, including a report that Goldman Sachs has raised $1.5 billion for a distressed debt fund, that tell him the market has already priced in all possible bad news from the subprime debacle.
"All these things suggest to me that there’s a growing drum beat of opportunistic investors who think there’s opportunity in the space that’s at the heart of the summer’s turmoil," he said.
In economic data, the Institute for Supply Management reported a September index of 52, slightly below the 53 reading that was expected, and down from 52.9 in August.
Although the index is down from the mid-fifties seen in June, any reading above 50 shows growth in the economy. New orders and production were down a bit, and prices paid were modestly lower.
The big news this week will be the September nonfarm payrolls number that comes out Friday. People will be watching to see if it confirms August's sharp move lower, which helped convince the Federal Reserve to ease interest rates by a half-percentage point. Another negative report will boost investors' confidence that another rate cut from the Fed can be counted on, said Sparks. He predicted stocks would continue to move higher unless the jobs data was so disastrous as to suggest an all-out recession was imminent.
Peta said he saw any big move in the stock indexes, whether up or down, as premature ahead of seeing the September nonfarm payrolls data, which will give a clearer picture of the economy's direction.
Crude oil for November delivery in New York fell $1.42 to $80.24 a barrel, as continued profit-taking from new record highs last week and a modest rally in the U.S. dollar put some pressure on oil prices, Action Economics said. The price probably won't drop below $78 a barrel given persistent tightness in the supply-and-demand balance.
Among the stocks in the news Monday, Citigroup shares added 2.3% despite its dark third-quarter forecast.
UBS AG (UBS) shares were up 3.2% after it warned about a larger-than-expected net loss of up to $690 million for the third quarter and plans to write down as much as $3.45 billion in fixed-income assets, including securities tied to subprime mortgages. The Swiss investment bank also said it would cut 1,500 jobs and announced some executive shake-ups, including the demotion of the investment banking chief.
Another M&A deal fell victim to the credit crisis. Acxiom Corp. (ACXM) shares plunged 19.7% after it said it had reached an agreement with private equity sponsors to cancel a $2.25 billion acquisition by Axio Holding LLC, which is controlled by Silver Lake and ValueAct Partners. The unique feature here is that the sponsors and banks will pay $65 million in breakup fees to terminate the deal.
Walgreen (WAG) fell 15.0% after it posted a 4% drop in its fourth-quarter earnings to $396.5 million, or 40 cents a share, from $412.3 million, or 41 cents a share, a year ago, on lower reimbursements for some popular generic drugs, as well as higher store and staff costs. Revenue rose more than 10% to $13.4 billion from $12.2 billion. Analysts had expected a profit of 47 cents a share and revenue of $13.5 billion.
Nokia Corp. (NOK) said it will buy U.S. navigation-software maker Navteq Corp. for around $8.1 billion, or $78 per share, including outstanding options. The acquisition will allow Nokia to, the world's largest mobile phone maker, to continues to expand services and content, going up against Apple (AAPL). Nokia shares rose 0.1%.
Furniture Brands International (FBN) shares jumped 34.9% on an unconfirmed Reuters report that Samson Holding Limited has approached the company about a possible merger. Even though the report said FBN turned down Samson's offer, Standard & Poor's raised its 12-month target price by $3 to $13 on the buyout potential but kept its hold rating.
World equity indexes were higher on Monday. In London, the FTSE 100 index rose 0.61% to 6,506.20. Germany's DAX index gained 0.77% to trade at 7,922.42. In Paris, the CAC 40 reversed from earlier losses to climb 1.01% to 5,773.26.
In Japan, the Nikkei 225 index climbed 0.36% to 16,845.96. In Hong Kong, the Hang Seng index advanced 0.29% to 27,142.47. The Shanghai composite index gained 2.64% to 5,552.30.
Treasury yields slipped lower but rebounded after the weaker September manufacturing index numbers was released. Bond gurus said it may be premature to be think that the worst of the housing downturn and subprime contagion are behind us, Action Economics said.
The benchmark 10-year Treasury note climbed 10/32 to 101-19/32 for a yield of 4.55%, while the 2-year bond was down 01/32 to 99-31/32 for a yield of 4.00% and the 30-year bond jumped 24/32 to 103-11/32 for a yield of 4.79%.