Major U.S. stock indexes closed mixed Monday as investors turned cautious ahead of the Federal Reserve's two-day policy meeting starting Tuesday. Many expect the meeting to wrap up with the Fed cutting rates one more time, but then putting its easing cycle on hold.
Investors also weighed mixed earnings reports and deal news involving two high-profile companies -- Ford Motor (F) and Wrigley (WWY).
Bonds rose. The dollar index fell. Gold and crude oil futures finished firmer.
On Monday, the Dow Jones industrial average fell 20.11 points, or 0.16%, to finish at 12,871.75. The broader S&P 500 declined 1.47 points, or 0.11%, to close at 1,396.37. The tech-heavy Nasdaq composite index added 1.47 points, or 0.06%, to end the session at 2,424.40.
On the New York Stock Exchange, 18 stocks advanced in price for every 13 that declined. The ratio on the Nasdaq was 15-13 positive.
Financial sector stocks were down Monday. A Reuters dispatch says Morgan Stanley analyst Betsy Graseck believes U.S. banks' earnings may fall 26% or $17 billion this year and a further 15% or $13 billion in 2009 as credit continues to deteriorate and trim profits. She said lenders will probably cut dividends and raise capital to offset the losses. "We are only in the 3rd inning of the credit cycle and expect it will be worse than 1990-91," Graseck wrote.
Morgan said investors should "underweight" banks with greater exposure to mortgages -- Wells Fargo (WFC) and Wachovia (WB). -- and those that operate in harder hit sections of the United States -- Fifth Third Bancorp (FITB) and KeyCorp (KEY).
Morgan also called for underweighting Citigroup (C)., citing its exposure to risky assets relative to common equity. Morgan's top "long" picks have less credit sensitivity or better capital structures: Bank of New York (BNY), JPMorgan Chase (JPM), and PNC Financial (PNC).
The market's tone has improved in recent days. "A few months ago many feared the credit crunch would put an end to the financial system as we know it, and knock the world into recession. But those fears have not been borne out," writes Action Economics economist Kim Rupert. "Indeed, it now looks as though it's Fed rate cuts that are nearing an end, while there's increased optimism that the dollar and stocks have hit bottom."
"In our opinion, the combination of some extension of the advances for uptrending cyclically sensitive issues and rebounding previously out-of-favor financials and consumer discretionary stocks should buoy the averages," writes Miller Tabak strategist Phil Roth.
There were no significant economic reports scheduled for release Monday. Friday's nonfarm payroll report for April is expected to show a 50,000 decrease. The advance fist-quarter gross domestic product report on Wednesday will likely post a 0.5% rise, helped by inventory strength. A much weaker than expected figure could increase recession concerns and the likelihood of further Fed cuts.
But the main focus this week will be on the Fed. “Although some may push [the FOMC] to stand pat, we continue to think that the most likely outcome, by a fair margin, is a 25bp rate cut coupled with a statement indicating an inclination to pause for a while unless conditions worsen,” writes Goldman Sachs economist Jan Hatzius.
June NYMEX crude oil futures last traded up 25 cents per barrel at $118.77, reports Action Economics, after ranging between $118.16 and $119.23 durinmg the New York session.
A Reuters dispatch says OPEC President Chakib Khelil does not rule out oil prices reaching $200 a barrel, even though supply is adequate, because the market is driven by the dollar's slide, Algerian government newspaper El Moudjahid reported.
Among Monday's stocks in the news, Tracinda Corp., controlled by billionaire investor Kirk Kerkorian, says it intends to make a cash tender offer for up to 20 million shares of Ford at a price of $8.50 per share. Upon completion of the bid, Tracinda would beneficially own 120 million Ford shares, or about 5.6% of the outstanding shares. Ford shares gained 9% Monday.
Wrigley shares gained 23% Monday after the candy and gum concern agreed to be acquired by privately held candy giant Mars Inc. in a deal valued at about $23 billion. Financing of the deal will be provided by Berkshire Hathaway (BRKA), Goldman Sachs (GS), and JP Morgan Chase. Wrigley shareholders will get $80 in cash for each share of stock held. At the closing of the acquisition, Berkshire will make a minority equity investment in Wrigley.
Merck (MRK) and Schering-Plough (SGP) confirmed that they received a not-approvable letter from the FDA for a proposed fixed combination of loratadine and montelukast for the treatment of allergic rhinitis symptoms in patients who want relief from nasal congestion.
Deal news continued to swirl in the airline industry. The Associated Press reported Monday that UAL Corp. (UAUA) and US Airways (LCC) are in very advanced talks with the expectation of announcing within two weeks that they are combining.
In a message to employees, Continental Airlines (CAL) CEO Larry Kellner and president Jeff Smisek said that the company's board of directors met and has unanimously supported management's recommendation that, in the current industry environment, the best course for Continental is to not merge with another airline at this time.
Verizon Communications (VZ) posted first-quarter non-GAAP earnings per share of 61 cents, vs. 54 cents one year earlier, on a 5.5% revenue rise.
RadioShack (RSH) reported first-quarter EPS of 30 cents, vs. 31 cents one year earlier, on 4% lower same-store sales and 4.4% lower total sales.
Treasuries rose modestly Monday on the back of short-covering by those who sold into recent weakness and wanted to square positions ahead of the FOMC policy statement Wednesday, says S&P MarketScope. The 10-year note rose 09/32 in price to 97-10/32 for a yield of 3.83%. The 30-year bond climbed 16/32 to 96-16/32 for a yield of 4.56%.