Stocks finished mostly lower on Tuesday, as economic concerns deepened despite a retreat in oil prices on a stronger dollar and news that Saudi Arabia was calling for a meeting to discuss oil prices. The Republicans also blocked a Senate vote on a bill that would have taxed oil profits and implemented other measures to protect consumers.
On Tuesday, the blue-chip Dow Jones industrial average closed 9.44 points, or 0.08%, higher at 12,289.76. The broader Standard & Poor's 500-stock index shed 3.32 points, or 0.24%, to end at 1,358.44. The tech-heavy Nasdaq composite index fell 10.52 points, or 0.43%, to 2,448.94.
On the New York Stock Exchange, 21 stocks were falling for every 11 that were on the rise, while on the Nasdaq the ratio was 16-12 negative.
The widening of the U.S. trade deficit in April on higher oil imports was weighing on stocks, as were interest rate concerns. Federal Reserve Chairman Ben Bernanke late on Monday signalled the central bank was finished cutting rates and would act to strongly resist rising inflation, a topic the Fed chief will address in another speech Tuesday night. Dallas Fed President Richard Fisher said the central bank should be deliberate about changing rates.
With central banks around the world sounding off recently about their intentions to fight inflation, Diane Dercher, chief economist at Waddell & Reed Financial in Overland Park, Kan., says she expects more hawkish talk about higher interest rates from Fed governors in the days ahead.
"From the Fed's perspective, they’re in a tough situation here. It’s a food and energy problem [but] raising interest rates here doesn't solve that problem," she says. "To me, it only hurts the economy more."
Bond prices were lower on the prospect of higher rates. The dollar index was up amid intervention rumors. Gold futures were skidding, but oil futures were rising. Fears of more carnage in the banking sector remain in focus after Lehman Brothers Holdings' (LEH) pre-earnings confessional Monday, reports Action Economics.
Lehman Brothers' disclosure prompted Credit Suisse to downgrade the stock to neutral from outperform. On Monday, the company forecast a second-quarter net loss of about $2.8 billion, or $5.14 per share.
The prospect of the European Central Bank raising interest rates as soon as July is forcing Bernanke & Co. to take a tougher stance on defending the value of the dollar, say strategists. If the ECB does raise rates, that would require a coordinated effort from the Fed, which has "the potential to damage the nascent economic recovery we think we’re seeing here," says Phil Orlando, chief equity market strategist at Federated Investors in New York. But leaving rates where they are would push the value of the dollar lower and send crude prices higher, he adds.
The U.S. trade deficit widened 7.8% to $60.9 billion in April, from $56.5 billion in March, which was revised from an earlier reading of $58.2 billion. The April reading was wider than the $59.6 billion deficit that markets had expected. Both imports and exports rebounded sharply, with imports surging 4.5% on energy-related products after a 3.3% drop in March. Exports were up 3.3% after falling 1.9% in March. The deficit with OPEC rose to $15.6 billion from $14.1 billion.
Oil prices were trading lower, reversing initial gains, after the Saudi Arabian Oil Ministry told CNBC Business News that the country's oil production rose by almost 500,000 barrels a day to 9.54 million barrels in the second quarter. Saudi Arabia is also calling for a meeting on prices, calling the current levels unreasonable and unacceptable.
WTI crude oil futures for July delivery settled $3.04 lower at $131.31 a barrel. The U.S. Department of Energy said that the average price of regular unleaded gasoline rose to a record $4.039 a gallon during the last week, the eighth consecutive weekly increase.
But oil supply concerns continue to outweigh worries about demand destruction due to elevated prices.
Citigroup raised its 2008 oil price forecast to $117 from $95 a barrel, and boosted its estimate for 2009 to $122 from $88 a barrel, citing fundamental reasons for the upward trend, driven by continued erosion of non-OPEC supply estimates, and the fact that demand, while softening, is by no means falling low enough to materially offset tightening supply.
The International Energy Agency said world oil demand will rise by 800,000 barrels per day this year, 230,000 bpd less than its previous forecast. That is the slowest pace in six years as a raft of fuel subsidy cuts in Asia erodes consumption. But the IEA also sharply lowered its projection for supply outside the OPEC, increasing consumers' reliance on the exporter group. The report adds to evidence that high oil prices, which hit a record $139.12 on Friday, are slowing oil consumption, S&P MarketScope said.
Natural gas producer XTO Energy Inc. (XTO) agreed to acquire Hunt Petroleum Corp. for $4.19 billion in cash and stock, and says it's looking for additional acquisitions as well.
There's been a seasonal correction in stock values, which could shed another couple of percentage points, says Orlando at Federated. But he sees the possibility of a pullback in crude prices to between $100 and $110 a barrel, which would provide a catalyst to get stocks moving higher again. Until that occurs, however, he recommends large-cap consumer staples and technology stocks as fairly safe bets because of the volume of their exports to foreign markets.
Among other stocks in the news on Tuesday, Texas Instruments (TXN) shares took a hit after the company narrowed its projected earnings and revenue ranges for the second quarter, lowering the upper end of its outlook. The semiconductor manufacturer now sees earnings of 43 to 47 cents per share, vs. a prior forecast of 42 to 48 cents, and revenue of $3.33 billion to $3.46 billion, vs. an earlier estimate of $3.24 billion to $3.50 billion. The company reportedly said that wireless handset sales were "unseasonably weak." Standard & Poor's maintained its hold rating on the stock.
American Superconductor (AMSC) shares soared after the company announced that it has received a $450 million order from Beijing-based Sinovel Wind Corp. Limited for core electrical components for 1.5 megawatt wind turbines. The contract calls for shipments to begin in January 2009 and increase in amount year-over-year through the contract's completion in December 2011.
CMGI Inc. (CMGI) shares plunged after the company reported a GAAP loss of five cents per share for its third quarter, vs. a profit of 19 cents per share a year ago, on a 15% revenue decline. The supply management services provider now expects fiscal 2008 revenue of about $1.05 billion to $1.10 billion, down from its previous range of $1.10 billion to $1.15 billion, and operating income, before any restructuring expenses, to be at the low end of its previous guidance of 2.0%-2.5% of revenue.
United Rentals’ (URI) shares rose after the Board approved a "modified Dutch auction" tender offer in which the company plans to offer to buy up to 27.16 million shares of its common stock at a price not less than $22.00 nor greater than $25.00 per share.
Major European indexes were lower Tuesday. In London, the FTSE 100 index fell 0.86% to 5,827.30. In Paris, the CAC 40 slipped 0.80% to 4,761.08, while Germany's DAX index shed 0.65% to trade at 6,771.10.
In Asia, Japan's Nikkei 225 ended 1.13% lower at 14,021.17, while Hong Kong's Hang Seng index dropped 4.21% to 23,375.52.
Treasuries were trading lower on Tuesday after Fed Chairman Bernanke pledged to fight inflation and signalled the Fed would not cut rates again this year. The 10-year note moved down in price to 98-12/32 for a yield of 4.07%, and the 30-year bond fell to 94-26/32 for a yield of 4.70%.