Major U.S. stock indexes finished mixed Tuesday in another turbulent session wherein selling fueled by economic worries was at least partially offset by bargain hunting and short-covering. During late trading, talk of a forthcoming bailout for bond insurer Ambac Financial (ABK) helped the market pare some earlier losses. However, Citigroup (C) fell amid worries that the giant bank may need more outside capital due to mortgage losses. Investors also weighed a disappointing update from Intel (INTC).
Speeches from top officials from the Federal Reserve also occupied the Street’s attention. Fed chairman Ben Bernanke said the housing crisis needs a “vigorous” response, and urged banks to forgive some of the principal amount for troubled mortgage loans. The central bank’s vice chairman, Donald Kohn, noted challenges for the banking industry. Dallas Fed president Richard Fisher says fighting inflation trumps growth.
On Tuesday, the Dow Jones industrial average finished lower by 45.10 points, or 0.37%, at 12,213.80. The broader S&P 500 index fell 4.59 points, or 0.35%, to close at 1,326.75. The tech-heavy Nasdaq composite index gained 1.68 points, or 0.07%, to end the session at 2,260.28.
Activity in the broader market was negative, with 21 stocks declining in price for every 10 that gained. Nasdaq breadth was 18-11 negative.
Bonds fell as stock recovered some strength in late trading, while the dollar was lower on growing expectations for Fed rate cuts. Oil stocks fell as crude oil futures sank before Wednesday’s U.S. inventory data. Mining stocks were off as gold plunged on profit taking from record levels.
Financial stocks were in focus Tuesday. The Wall Street Journal reports that Citigroup executives are confident with its capital levels, and aren't looking to raise additional funds from outside investors, according to people familiar with the
matter. CNBC reports that Citi will cut up to 30,000 jobs, and says that the company declined comment on the job cut report. Earlier Tuesday, Sameer Al Ansari, CEO of Dubai International Capital reportedly said it will take more money to save the company. Citi shares lost 4.3% Tuesday.
Following an earlier report in the Financial Times that Ambac has decided against splitting in two as part of a recapitalization, new speculation that a bailout of the No. 2 bond insurer was imminent drove the shares even higher Tuesday. Ambac shares gained 7.9%.
Merrill Lynch cut its profit estimates on Wachovia (WB) and Bank of America (BAC). Merrill reaffirmed its sell rating on Wachovia shares, and its neutral opinion on BofA. Wachovia shares fell 3.1%, while BofA declined 1.0%
Intel lowered its first-quarter gross margin forecast to 54%, plus or minus a point, as compared to its previous forecast of 56%, plus or minus a couple of points, due to lower-than-expected prices for NAND flash memory chips. Intel shares finished virtually unchanged.
Bernanke did not touch on discuss policy or the economy in his speech on "Reducing Preventable Mortgage Foreclosures," reports Action Economics. Bernanke said the current turmoil in the housing market "calls for a vigorous response." "Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done."
Though most loan modifications by lenders have focused on reducing the interest rate on a borrower's loan, Bernanke said a reduction in the principal might be more appropriate. Specifically, with many borrowers owing more on their home than the value of their mortgage, "a reduction in principal may increase the expected payoff by reducing the risk of default."
Bernanke also suggested a number of policy options that could help the current situation, according to a Wall Street Journal report.
Reforming the Federal Housing Administration, including giving the agency more latitude to set underwriting standards, could help reduce foreclosures. Additionally, Fannie Mae and Freddie Mac could have a bigger role in dealing with the current problems if both companies raise more capital, Bernanke said.
"New capital raising by [Fannie and Freddie], together with congressional action to
strengthen the supervision of these companies, would allow Fannie and Freddie to expand significantly the number of new mortgages that they securitize," Bernanke said.
Kohn said the banking system remains sound overall, though it faces challenges and some banks have not managed their exposures well. He noted that 50 of the largest bank holding companies had fourth-quarter losses of $9 billion and $31 billion in asset write-downs, but their capital ratios are above regulatory minimums and they have raised $50 billion in capital. Kohn said that more mark-downs are likely.
Meanwhile, commercial real estate refinancing has been challenged by caution and liquidity, requiring greater Fed scrutiny. The Fed also continues to closely monitor consumer loans and credit card securitization for risks, though commercial and industrial loans are performing fairly well despite some weakness.
Fisher warned inflation data was not encouraging and that the Fed cannot assume that weaker economic growth will curb prices. The Dallas Fed president said that it’s worth the price of temporarily slower growth to keep inflation in check, as global demand-pull pressures are registering on U.S. domestic inflation.
Fisher warned that further rate cuts and commodity gains could destabilize the markets, while not ruling out financial market turmoil leading to economic contraction (recession). On balance he expects growth to "sputter, but not stall."
In a speech Tuesday, Fed Governor Frederic Mishkin said he sees "significant downside risks" to growth. He noted the outlook has deteriorated significantly and declining home prices post the major risk to the economy. He added that the labor market has probably softened as well in February. Mishkin still believes inflation expectations are "reasonably well contained."
NYMEX April WTI crude futures, which surged to record heights in heavy speculative buying recently, fell $2.93 to $99.52 per barrel Tuesday on profit taking before Wednesday’s Energy Dept. report that Platts believes will show crude oil inventories rising 2.1 million barrels. OPEC is expected to leave production quotas unchanged at Wednesday’s meeting in Vienna.
Comex April gold futures fell $17.90 to $966.30 per ounce on profit taking as rally toward $1,000 level ran out of steam.
Among Tuesday's stocks in the news, Staples (SPLS) posted fourth-quarter earnings per share of 47 cents, vs. 46 cents one year earlier, on a slight sales rise. The office products retailer expects the weak economic climate to continue throughout fiscal 2009, and sees mid single-digit percentage sales growth for fiscal 2009, and high single-digit EPS growth, excluding fiscal 2008's $38 million pre-tax charge related to settlement of California wage and hour class action litigation. The company raised its annual dividend 14%. The shares were lower by 1.2% Tuesday.
Shares of tax-preparation outfit Jackson Hewitt (JTX) tumbled 33% after the company posted lower than expected third-quarter earnings per share of 61 cents, vs. 83 cents one year earlier, on 15% lower revenue. The company expects to report $1.48-$1.60 fiscal 2008 (April) EPS on $282-$292 million in revenue.
Applied Materials (AMAT) shares gained 7.6% after the company said it had entered into sales agreements with a privately-held corporation based outside U.S., under which AMAT will supply equipment and installation/warranty services for multiple solar factories to be constructed by the unidentified company. The aggregates purchase price for equipment, related services to be provided by AMAT is about $1.9 billion.
Barr Pharmaceutical (BRL) shares gained 8.3% after it said the U.S. District Court for the District of New Jersey has ruled in favor of its subsidiary, Barr Laboratories, Inc., in the challenge of the patent listed by Bayer Schering Pharma, AG in connection with Bayer Schering's Yasmin oral contraceptive.
Barnes & Noble (BKS) shares declined 4.6% after the book retailer said it sees fiscal 2009 EPS of $1.70-$1.90, noting recessionary pressures. The company posted a slight decline in fourth quarter fiscal 2008 same-store sales and a 2.8% rise in total sales, excluding the impact of the extra week during fiscal 2007. Excluding non-operating items, the company expects fourth-quarter EPS to be in the middle of the previously issued guidance range of $1.57-$1.76.
European indexes finished solidly lower Tuesday. In London, the FTSE 100 index fell 0.87% to 5,767.70. In Paris, the CAC 40 index declined 1.41% to 4,675.91. Germany's DAX index shed 2.17% to 6,545.04.
Asian markets finished mixed. Japan's Nikkei 225 index gained 0.1 point to 12,992.28. In Hong Kong, the Hang Seng index fell 1.97% to 23,119.87.
Treasuries were trading mixed Tuesday afternoon as earlier price gains evaporated. The 10-year note was higher in price at 99-28/32 for a yield of 3.522%, while the 30-year bond was flat at 99-01/32 for a yield of 4.437%.