The world's best tennis players have been serving up some sizzling volleys at this week's U.S. Open at Flushing Meadows. But for the real head-turning, back-and-forth action on Friday, investors could focus their attention just a few miles away: Wall Street.
Major U.S. equity indexes finished mostly higher on Friday, staging an impressive comeback from early lows after extending a sell-off in the previous session that saw each of the major market benchmarks lose at least 3%. The market's suspicions of accelerating weakness in the U.S. labor market, a big factor in Thursday's declines, were confirmed by the release Friday of the U.S. employment report for August, which showed a surprising jump in the U.S. jobless rate to 6.1% from 5.7% in the previous month.
Bonds reversed to the downside as the U.S. dollar index bounced back in a surge of strength despite earlier worries that the negative jobs data could place the Fed under pressure to ease credit. Gold futures were higher in a flight to safety. Oil futures were lower.
On Friday, the Dow Jones industrial average rose 32.73 points, or 0.29%, to close at 11,220.96. The broader S&P 500 index gained 5.48 points, or 0.14%, to end at 1,242.31. And the tech-heavy Nasdaq composite index edged down 3.16 points, or 0.14%, to 2,255.88.
On the New York Stock Exchange, 16 stocks traded higher for every 15 that posted losses, while on the Nasdaq the ratio was 15-13 negative, with financials among the day's best performers. Market players spoke of hedge fund unwindings and some technical selling, but short covering was helping to pare earlier losses, according to S&P MarketScope.
Traders were also watching a developing story that hit the newswires after the closing bell Friday. According to a Wall Street Journal report, the Treasury Dept. is close to finalizing a plan to help shore up mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), according to people familiar with the matter. The plan is expected to involve a creative use of Treasury's new authority to make a capital injection into the beleaguered giants, according to the Journal, and includes changes to senior management at both companies.
Given how bereft Friday's jobs report was of anything hopeful, and considering that the slide in stocks started on Tuesday, "the fact that the slide continued, in my mind, was appropriate," says Phil Orlando, chief equity market strategist at Federated Investors in New York. "What caused this change in psychology? Did the market pull back to the point where everything was discounted? Not in my mind."
A weak payrolls report for August weighed on U.S. equity market sentiment following losses in global equities overnight. The unemployment rate jumped 0.4 to 6.1% in August, as payrolls fell another 84,000. The drop in payrolls was roughly in line with the consensus estimate of 71,000, but the consensus estimate was for a flat unemployment rate at 5.7%. Manufacturing lost 61,000 jobs in August (44,700 in transportation equipment). Construction fell 8,000. Services employment fell 27,000, with a 61,600 drop in administrative and support services. The rise in the unemployment rate was entirely in adults - the teenage rate dropped sharply as teens returned to school. Average hourly earnings rose 7 cents (0.4%), a slight acceleration from recent 0.3% trend, and is up 3.6% from a year earlier, compared with 3.4% in July.
"The data are more confirmation that this is a recession. The wage acceleration, although slight, could also cause some nervousness at the Fed," wrote S&P Economics in a note Friday.
"[T]he persistent weakness in job growth and the continued rise in the unemployment rate will clearly cap talk of Fed tightening at the two pre-election FOMC meetings," wrote Action Economics analysts in a website posting Friday.
While the market initially struggled with "unemployment data getting close to recessionary levels"
initially, stocks probably began to firm up on technical factors as the major indexes approached the mid-July lows, says Peter Cardillo, chief market economist at Avalon Partners in New York.
"The market is not not overly expensive in terms of [price-to-earnings multiples]," he says. "The market starts to discount an economic recovery six to eight months in advance. I think we’re headed for an economic recovery in the first half of 2009."
Orlando at Federated says he believes the range between 1,160-1,200 will eventually prove to be a bottom for the S&P 500 Index. But he thinks it makes more sense for stocks to start to rally from lower levels toward the end of this year, after some of the uncertainty around the November elections has been put to rest.
Avalon's Cardillo concedes that the dollar's sustained burst of strength in recent weeks brings "into question what happens to the bright spot of the economy, which has been exports" if the dollar continues to strengthen.
And the next big question for the market to chew on is what the Organization of Petroleum Exporting Countries, or OPEC, decides to do next week. "If they drastically cut production, the cost of oil could creep back up," Cardillo says, adding that a drastic cut would be on the order of 10%.
U.S. Mortgage Bankers Association said that loans entering foreclosure hit a record 1.19% in the second quarter, vs. 0.99% in the first quarter and 0.65% a year ago. Actual foreclosures reached a record 2.75% in the second quarter, up from 2.47% in the prior quarter and 1.4% a year earlier, while the second-quarter delinquency rate, which measures loans whose payments are at least three months in arrears, hit 6.41% -- the highest level since 1979 -- compared with 6.35% in the first quarter and 5.12% a year ago.
It's not surprising that mortgage delinquencies accelerated in the June quarter but the increase in delinquencies and foreclosures until now is most likely predominantly due to poor underwriting standards. From here on out, "we have to overlay the weak economy and labor market picture as this more traditional driver of delinquencies will probably become more of a factor," John Ryding of RDQ Economics wrote in an email note.
The White House, in response to calls for a second fiscal stimulus package to buoy the economy, said it was too early for that with the beneficial effects of the tax rebates still working their way through the economy.
But Orlando at Federated believes the benefits of the first stimulus package have come and gone, as evidenced by "dreadful" consumer spending data for the past three months.
The fact that some key retailers are saying that August sales were terrible is important because August is when back-to-school spending should occur and if that's bad, it doesn't bode well for Christmas sales, says Orlando.
"If back-to-school sales are that dismal, then we’re looking at the worst Christmas in five to 10 years, and Christmas is a critical component of fourth quarter GDP," he says. "For a lot of companies, Christmas represents a third of their sales for the year and maybe half of their profits for the year. I don’t think that's in share prices."
October NYMEX crude futures settled $1.66 lower at $106.23 on a surge in the dollar, making commodities plays as a hedge less alluring. The drop in oil prices is also a reaction to weakness in the global economy that is believed to be destroying some demand for fuel, Bloomberg News reported.
Among stocks in the news Friday, UST (UST) shares were higher after a New York Times report that Altria (MO) is in advanced talks to buy UST, the maker of the popular Skoal and Copenhagen smokeless tobacco brands, for more than $10 billion.
Goldman Sachs (GS) downgraded its investment opinion on Merrill Lynch & Co. (MER) to sell and added the stock to its conviction sell list.
Nokia (NOK) expects its mobile device market share in the third quarter to be lower than previously expected due to multiple factors.
Zimmer Holdings (ZMH) agreed to acquire Abbott Laboratories' (ABT) Spine business for about $360 million in cash. Zimmer expects to fund the purchase price from cash on hand and borrowings under existing credit facilities.
Cooper Companies (COO) posted thirt-quarter adjusted EPS of 67 cents, vs. 71 cents one year earlier, as narrowed gross and operating margins offset a 14% revenue rise. The company sees fourth-quarter revenue of $285-$295 million, and 58 cents to 64 cents EPS. It sees fiscal 2008 non-GAAP EPS guidance of $2.18-$2.24, vs. its previous view of $2.10-$2.35.
In response to media reports, SanDisk (SNDK) said it periodically has conversations with multiple parties, including Samsung, regarding a variety of potential business opportunities. SanDisk said it evaluates all of these opportunities, but maintains a policy of not commenting on market rumors or speculation.
ABM Industries Inc. (ABM) reported lower-than-expected earnings of 32 cents a share for the third quarter, vs. 24 cents a share a year ago, on a 35% sales gain. Analysts were looking for 39 cents a share. Acknowledging a general decline in discretionary spending in some customer sectors and regions, the provider of janitorial, parking, security, engineering, and lighting services for commercial and other facilities narrowed its forecast for earnings from continuing operations for fiscal 2008 to $1.00 to $1.05, and said it expects adjusted earnings of $1.10 to $1.15 a share, below the Street view was $1.25.
Take-Two Interactive Software (TTWO) reported third-quarter GAAP EPS of 67 cents (93 cents non-GAAP), vs. an 81-cent loss per share one year earlier, on a sharp revenue rise. The company said third-quarter revenues were led by Grand Theft Auto IV, as well as Top Spin 3 and Sid Meier's Civilization Revolution. Wall Street was looking for EPS of 54 cents. The company sees lower-than-expected fourth-quarter non-GAAP EPS of 1 cent to 5 cents on revenue of $285-$335 million, but raised its fiscal 2008 EPS forecast to $2.08-$2.12 on revenue of $1.5-$1.55 billion.
Major European stock indexes were trading lower Friday. In London, the FTSE 100 index fell 2.26% to 5,240.70. In Paris, the CAC 40 index dropped 2.49% to 4,196.66. Germany's DAX index slid 2.42% to 6,127.44.
Asian stock indexes tumbled Friday. In Japan, the Nikkei 225 index fell 2.75% to 12,212.23. Hong Kong's Hang Seng index sank 2.24% to 19,933.28.
Bonds surrendered their early gains and traded lower as equities mostly bounced back from their early lows on the worse-than-expected August jobs report. The 2-year note was down 09/32 to 100-03/32 for a yield of 2.32%, the 10-year note dropped 22/32 to 102-12/32 for a yield of 3.71%, and the 30-year bond lost 24/32 to trade at 103-08/32 for a yield of 4.30%.