Major U.S. stock indexes closed mostly lower on Thursday, with the Nasdaq getting a modest bounce into positive territory from a gain in Yahoo (YHOO) ahead of Google's (GOOG) earnings report after the closing bell. An increase in initial jobless claims and weaker manufacturing data boosted investors' wariness of slowing U.S. economic growth.
On Thursday, the Dow Jones industrial average ended lower by 3.58 points, or 0.03%, at 13,888.96. The broader S&P 500 index edged down 1.16 points, or 0.08%, to 1,540.08. The tech-heavy Nasdaq index rose 6.64 points, or 0.24%, to 2,799.31.
On the New York Stock Exchange, breadth was flat, while on the Nasdaq market it was 15 to 14 negative.
Financial stocks continue to be the main drag on the equity markets, with the common theme resonating through banks' earnings reports being increases in loan loss provisions. That's showing the market that the fallout from the subprime mess is still not over.
Profits from some of the biggest pharmaceutical firms came in higher, but that was overshadowed by news that Pfizer (PFE) plans to stop producing Exubera, the innovative inhalable insulin it rolled out just in the past year. Novartis AG (NVS) said it plans to lay off 1,260 employees in the U.S. for a projected savings of $230 million a year.
The resilience of the equities market was surprising to Bill Larkin, a portfolio manager of fixed income at Cabot Money Management, given the size of Bank of America's earnings hit and a fresh spike in oil prices, which compounds the headwinds that consumers are facing from the housing slump and higher food costs.
Larkin said he doesn't believe the problems with asset-backed securities are over, but said it it was positive that investment banks were starting to put controls in place that will allow them to better evaluate the details of new loans, in addition to their credit quality. But he added that nobody will touch any asset-backed securities that are related to housing for a while.
In economic data, the Philadelphia Fed Index fell to 6.8 in October, lower than the anticipated 7.5 reading, and below the 10.9 reading in September. Prices paid shot up to 40.3 from 23.1 in September, a red flag for rising inflation, while the new orders index dropped to 2.7 from September's 15.1. Responding to a special question, 24% of the firms surveyed said that recent financial conditions had caused them to reduce their capital spending plans for the next six to 12 months, while just 8.2% said conditions caused them to raise their spending target for the same time period.
The future general activity index, which measures expectations for manufacturing growth over the next six months, rose six points to 41.5 and was the highest level since November 2004.
Still, this report contradicts surprising strength seen in the Empire State Manufacturing Index, which surged 14 points to 28.8 in October, CNBC Business News said.
Initial jobless claims surged 28,000 to 337,000 for the week ended Oct. 13, after a 12,000 decline to 309,000 in the first week of the month. The latest data, made more volatile by inclusion of the Columbus Day holiday, will get more attention because it coincides with the week that the Bureau of Labor Statistics gather data for the month's employment report, Action Economics said.
With the increase, jobless claims rose to their highest level since late August, when credit market turmoil peaked due, presumably, to layoffs in the mortgage industry, Action Economics said. Large portions of the layoffs are believed to have been in the construction and manufacturing industries.
"The market's trying to assess the next Fed move and looking at future data points, like existing home sales," Larkin said. With the jump in initial jobless claims, the market is now anticipating the Fed will be inclined toward further easing of interest rates.
leading economic indicators index rebounded 0.3% in September after falling 0.6% in August, with seven of the 10 components contributing positively, including a 0.13% gain in ISM supplier deliveries, a 0.11% rise in the S&P 500 index and a 0.09% increase in real non-defense capital goods orders. Declines were seen in building permits, down 0.20%, and the 10-year minus the Fed funds rate, down 0.04%. The factory workweek was unchanged on the month.
The data left the six-month annualized growth rate flat with the downwardly-revised 0.6% reading in August.
Crude oil for November delivery in New York shot up $2.07 to a new closing high of $89.47 a barrel, after touching $89.55 earlier in the session. The price was buoyed by new lows in the U.S. dollar against some key foreign currencies and persistent concerns about tight supplies. Worries about a possible Turkish military attack against Kurdish rebels in northern Iraq that could disrupt exports is helping to maintain a geopolitical risk premium in the price.
Among stocks in the news Thursday, Bank of America shares fell 2.4% after it posted a third-quarter profit of 82 cents a share, far short of analysts' forecast of $1.05 a share, and down more than 30% from $1.18 a share a year ago. The investment bank pointed to a 12% drop in revenue net of interest expense and cited a $1.33 billion decline in earnings in its Global Corporate and Investment Banking units from disruption in financial markets. That included a $527 million loss on structured products such as collateralized debt obligations, or CDOs, which has the market thinking there's more trouble to be seen in structured investment vehicles.
Washington Mutual (WM) shares dropped 7.7% after it reported a 70% plunge in earnings to 23 cents from 77 cents a share in the third quarter of 2006 as a $967 million provision for loan losses offset a 3.4% rise in net interest income. The bank cited a weaker housing market and disruptions in the capital markets. Standard & Poor's downgraded the stock to sell from hold and Friedman Billings Ramsey cut its rating to underperform from market perform.
Rimage Corp. (RIMG) shares surged 17.1% higher on a third-quarter profit of 59 cents ar share, vs. 43 cents a share in the year-ago period, on a 36% jump in revenue to $33.7 million. The maker of CD and DVD production and duplication equipment also set a plan to buy back 500,000 of its outstanding shares.
Pfizer's earnings fell 77% to 11 cents from 46 cents a share in the third quarter on a 2.4% drop in revenue and a $2.8 billion, or 31-cents-a-share, pretax charge to exit its inhalable insulin business. The company pushed up its 2007 revenue outlook to $47.5 billion to 48.0 billion and boosted its adjustable earnings view to between $2.10 and $2.15 a share from the $2.08-$2.15 range. Shares were essentially unchanged.
Pfizer's decision to stop investing in Exubera pulled Nektar Therapeutics (NKTR) shares down 17.5%, as Pfizer had been developing the insulin product in partnership with Nektar. BMO Nesbitt downgraded the stock to market perform fro outperform.
EBay Inc. (EBAY) shares fell 6.2% despite the company's posting a higher profit of 69 cents a share in the third quarter, vs. 20 cents a share (GAAP) in the prior-year period as a goodwill impairment charge related to its Skype acquisition offset a 30% jump in revenue. S&P upheld its buy rating, but Deutsche Bank reportedly downgraded the stock to sell. Investors are paying attention to reports that EBay cut its listing fees to boost volume and that higher profits were driven by acquisitions and foreign exchange gains.
E*Trade Financial Corp. (ETFC) shares fell 8.0% after it said it reported a net loss of 14 cents a share in the third quarter, better than a 35-cent loss a year ago, on a 45% decline in revenue, $187 million in loan loss provisions and a securities writedown of $197 million. E*Trade cut its 2007 profit forecast to between 75 and 90 cents a share.
European equity indexes were trading lower Thursday. In London, the FTSE 100 index dropped 1.02% to 6,609.40. Germany's DAX fell 0.80% to 7,921.40. In Paris, the CAC 40 slid 0.89% to 5,767.24.
Asian markets ended mostly higher. In Japan, the Nikkei 225 index climbed 0.89% to 17,106.09. In Hong Kong, the Hang Seng index gained 0.57% to trade at 29,465.05. The Shanghai composite index dropped 3.50% to 5,825.28.
Treasury bonds rose in price amid a flight to safety from weakness in equities and after new lows in the U.S. dollar, reflecting the growing perception that the Fed will have to cut rates at its Oct. 31 policy committee meeting, S&P MarketScope said.
The yield on the 5-year Treasury bond dipping to the low 4.0% area, below the current Fed funds rate of 4.75%, sounded an alarm for recession to Cabot's Larkin.
"In this market, if you're willing to lock up yields [that low] for three to five years, that means it's [a desire for] safety at any cost," he said.
The 10-year note rose 16/32 in price to 102-00/32 for a yield of 4.49%, and the 2-year note gained 04/32 to trade at 100-06/32 for a yield of 3.90%. The 30-year bond climbed 28/32 to 103-19/32 for a yield of 4.77%.