Investors held their breath Thursday, awaiting further signs from the Fed that they can count on further easing of rates in the near future.
Major U.S. indexes ended modestly higher after a jittery session as the market struggled to find direction ahead of Federal Reserve Chairman Ben Bernanke's remarks about the national and regional economies at an awards ceremony in North Carolina Thursday night. Gains by oil stocks such as Exxon Mobil (XOM) were offset by pressure on retailers amid some tough earnings and outlook reports, while traders didn't seem to be paying much attention to a raft of new economic data.
The Dow Jones industrial average rose 22.28 points, or 0.17%, to 13,311.73. The broader S&P 500 index edged up 0.70 points, or 0.05%, to 1,469.72. The tech-heavy Nasdaq composite index was up 5.22 points, or 0.20%, at 2,668.13.
On the New York Stock Exchange, 18 stocks climbed higher for every 15 that ended lower, while Nasdaq breadth was 16-14 negative. Financial stocks and certain other issues that rebounded in the prior two sessions underwent some profit taking, but trading overall was sluggish with most investors staying on hold until hearing what Bernanke may say to get more clarity on the likelihood of further rate cuts.
Optimistic interpretations of Federal Reserve Vice Chairman Donald Kohn's comments on Wednesday, which suggest a Fed rate cut is nigh, continue to support equities markets. Some market observers believe Bernanke will be forced to put Kohn's remarks in context as they seem to contradict the messages the Fed has been sending the markets since its quarter-point rate cut on Halloween.
While Bernanke will probably be less specific in his remarks tonight than Kohn was on Wednesday, Ray Stone, an economist at Stone & McCarthy Research Associates in Princeton, N.J., said he believes Bernanke is essentially philosophically aligned with Kohn's view on the higher risks of economic distress from the credit crisis.
"I don’t think [his comments] will be dismissive of the prospect for Fed easing," he said. Stone doesn't think Bernanke "would do anything [in his Nov. 29 speech] that would necessarily handcuff the committee," adding that he expects the FOMC to cut rates on Dec. 11.
Given the likelihood of rising rates of delinquencies, defaults and ultimately foreclosures as more mortgages -- mostly subprime -- reset to higher rates early next year, the Fed would minimize the damage by front-loading any rate cuts it has in mind for the next year, since then these mortgages would reset to rates that not as high as they would have been, Stone said.
George Feiger, Chairman of Contango Capital Advisors in San Francisco, said he's bewildered by the euphoria that greeted the prospect of a quarter-point rate cut on Wednesday, given that the interest rates the government pays have much less impact on economic growth than the rates that companies and individuals pay. With junk-rated credit spreads up between 100 and 200 basis points over the past couple months, the Fed's easing rates by 25 or even 50 basis points won't do much to lower the rates that companies pay and that are used to determine what level of capital spending they can afford, he said.
"Credit spreads have widened much more than the Fed is capable of reducing interest rates by," he said. "As credit problems emerge in the coming year, these credit spreads will keep jumping up."
The average high-yield 10-year corporate bond is now paying 500 basis points over Treasury yields and was paying as little as 250 basis points over Treasurys a few months ago, he said. And that spread was as wide as 1,300 basis points in the 1990s, so junk spreads are capable of jumping much more than they have already, he added.
In economic news Thursday, initial jobless claims jumped 23,000 to 329,000 for the week ended Nov. 24. The early Thanksgiving holiday may have contributed to the unexpected increase, Action Economics said. November's initial claims averaged 338,000, compared with averages of 327,000 in October, 313,000 in September and 324,000 in August.
Third-quarter GDP growth was revised up to 4.9% from the 3.9% rate in the preliminary report. As expected, the bulk of the increase came from inventories, which were adjusted to a net gain of $27.1 billion from $9.9 billion, and net exports, which were revised to a net add of $40.5 billion from $27.7 billion. Consumption was lowered to 2.7% from 3.0% and government spending was revised to a gain of 3.9% from 3.7%. The GDP price index was raised to a 0.9% gain from 0.8%, while PCE-core inflator remained at a 1.8% gain.
Action Economics said it continues to expect GDP growth of 1.7% in the fourth quarter. The White House said on Thursday that it now sees real GDP growth of 2.7% for both 2007 and 2008.
New home sales rose 1.7% to an annualized rate of 728,000 in October but fell far short of the 750,000 rate that was anticipated. Making the report that much gloomier was the big downward revision in September to an annualized rate of 716,000 from the initial 770,000 rate and the adjustment in August's pace to 717,000 from 735,000. Gains during October were seen in three of the four regions, with only the West showing a decline. At the October selling pace, the supply of homes fell to 8.5 from a revised 9.0 months. The median selling price dropped 13% to $217,800 from a year ago.
This week's economic data, from durable goods orders to existing home sales to the Fed Beige Book, which surveyed October to mid-November, are pointing to significant economic slowing. In the logic of Wall Street, weaker data can be construed as positive for stocks, as signs of softness are expected to further convince the Fed of the need for rate cuts.
Oil prices soared by more than $4 to over $95 per barrel in overnight trading after an explosion at Enbridge's major Canada-to-U.S. export pipeline in Minnesota. January NYMEX crude was trading 45 cents higher at $91.07 per barrel on Thursday after two of the four pipelines that were shut down had been reopened. A third pipeline was expected to be back up by the end of the day and service on the fourth, which had been closed for maintenance before the explosion, is expected to be restored within two to three days. The U.S. said it was prepared to release oil from the Strategic Petroleum Reserve if supply was needed.
Among the stocks in the news Thursday, E*Trade Financial (ETFC) fell 8.7% despite news that it's getting a $2.55 billion cash infusion from hedge fund Citadel Investment. The discount brokerage will take a $2.2 billion charge as a result of selling its 3.0 billion asset-backed securities portfolio for $800 million to Citadel, whose purchase also includes $1.75 billion in 10-year bonds paying an annual interest rate of 12.5%. Mitch Caplan will step down as E*Trade's CEO and President Jarrett Lilien will serve as acting CEO until a new CEO is found.
Sears Holdings Corp. (SHLD) shares fell 10.5% after posting third-quarter earnings of one cent a share -- far below analyst's forecast of 50 cents a share -- vs. $1.27 (including 42 cents in gains) a year ago on a 4.2% drop in Sears Domestic's same-store sales, a 5.0% drop in Kmart's same-store sales and a 3.3% dip in total revenue. The retailer noted a $223 million decline in gross margin, reflecting both sales declines and an overall decline in its gross margin rate for the third quarter.
Cato Corp. (CTR) shares dropped 24.3% on a profit report of nine cents a share in the third quarter, down from 18 cents a share a year ago on a 5% drop in same-store sales and a total sales decline of 3.2%. The women's fashion specialty retailer expects to see breakeven to a net loss of eight cents a share for the fourth quarter, vs. net income of 40 cents in the prior-year period due to lower sales and additional markdowns. Cato's outlook for fiscal 2008 is earnings of 99 cents to $1.07 a share.
Regeneron Pharmaceuticals (REGN) shares shot up 23.1% on news that it has entered into a strategic collaboration agreement with Sanofi-Aventis SA (SNY) to discover, develop, and commercialize fully-human therapeutic antibodies utilizing Regeneron's proprietary VelociSuite of technologies (including VelocImmune). Sanofi-Aventis will also increase its ownership of Regeneron from about 4% to roughly 19% after buying 12 million newly issued Regeneron shares at $26 per share. Standard & Poor's raised its target price and reaffirmed its buy rating. Sanofi-Aventis shares were down 0.8%.
European stocks were trading higher Thursday. In London, the FTSE 100 index gained 0.68% to trade at 6,349.10. In Paris, the CAC 40 index rose 0.66% to 5,598.11. Germany's DAX index climbed 0.54% to 7,765.19.
Major Asian markets finished higher. Japan's Nikkei 225 index rose 2.38% to 15,513.74. In Hong Kong, the Hang Seng index jumped 4.06% to 28,482.54. The Shanghai composite index rose 4.16% to 5,003.33.
Treasury bonds rose sharply, suggesting that risk aversion has not disappeared from Wall Street, S&P MarketScope said. The 2-year Treasury note advanced 06/32 to 100-05/32 for yield of 3.04%, 10-year notes rose 26/32 to 102-17/32 for a yield of 3.94% and the 30-year bond jumped 1-14/32 to 110-25/32 for a yield of 4.35%.