U.S. stocks closed higher Wednesday, led by gains in commodities-related issues as crude oil and gold futures rallied. Market observers cited by S&P MarketScope said a number of investors shifted funds out of financials and into energy and materials stocks. This rotation came as investors weighed various sectors' near-term prospects for gains against the uncertain economic outlook.
Trading, however, was choppy for much of Wednesday's session, with the market seesawing amid the lingering debate in Washington over the proposed $15 billion bailout of Detroit automakers Chrysler LLC, General Motors (GM), and Ford Motor Co. (F). The fate of the proposed bailout remained unclear at the end of Wednesday's session.
Traders weighed reports that showed U.S. wholesale inventories falling 1.1% and wholesale sales down by 4.1% in October, both worse than expected by the market; and that the government posted a $164.4 billion November budget deficit.
Bonds were mixed. The dollar index was lower. Gold futures soared on a technical breakout. Oil futures were up despite inventory data showing a rise in crude stockpiles.
On Wednesday, the Dow Jones industrial average finished higher by 70.09 points, or 0.81%, at 8,761.42. The broad S&P 500 index was up 10.57 points, or 1.19%, at 899.24. The tech-heavy Nasdaq composite index added 18.14 points, or 1.17%, to 1,565.48.
On the New York Stock Exchange, 20 stocks were higher in price for every 11 that fell. The ratio on the Nasdaq was 15-12 positive.
European equities ended mixed Wednesday, with London stocks falling 0.32%, Paris up 0.68%, and Frankfurt gaining 0.54%. Asian markets finished with gains, with Tokyo stocks rising 3.15%, Hong Kong up by 5.59%, and Shanghai climbing 2.03%.
The Wall Street Journal reports that American International Group (AIG) owes Wall Street's biggest firms about $10 billion for speculative trades that have soured, according to people familiar with the matter, underscoring the challenges the insurer faces as it seeks to recover under a U.S. government rescue plan. The details of the trades go beyond what AIG has explained to investors about the nature of its risk-taking operations, which led to the firm's near-collapse in September.
Ivory Investment Management LP, one of Yahoo Inc.'s (YHOO) largest stockholders, proposed to Yahoo's board that the company salvage a deal with Microsoft (MSFT). Under the proposal, Microsoft would own and operate the combined search platform, with Yahoo becoming an affiliate that retains 80% of the revenue generated through searches on its own site. Finally, Microsoft would become the search engine for Yahoo's existing search affiliates. Ivory believes a search deal with Microsoft could deliver value to Yahoo shareholders of $24-$29 per share.
In economic news Wednesday, Treasury posted a $164.4 billion deficit in November, not quite as bad as expected, though it's still two-thirds bigger than last November's $98.2 billion in red ink. TARP spending contributed $76.5 billion to the deficit, says Action Economics, while the Treasury purchased $23.2 billion in GSEs; there were also calendar distortions that boosted the deficit. So far for fiscal 2009, the deficit totals $401.6 billion, compared to the $155.1 billion for the same two-month period last year.
U.S. wholesale sales fell 4.1% in October and inventories were down 1.1%, both about double the declines expected. September sales were revised down to -2.1% (from -1.5% previously), while inventories were revised to -0.4% from -0.1%. The decline in sales was the largest on record, while the inventory drop was the biggest in seven years, as the data were affected by the double whammy of the recession and weaker oil and commodity prices, notes Action Economics. Petroleum sales dropped 11.2%, excluding petroleum, wholesale sales were down 2.9%; auto sales fell 4.5%. The inventory-sales ratio surged to 1.16 from 1.12.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity fell 7.1% to 796.8 in the week ended Dec. 5. The index had more than doubled in the week before after the Fed announced a plan to purchase up to $500 billion in mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae. The MBA index of refinancing applications declined 0.9% to 3,767.3 last week. Its gauge of loan requests for home purchases fell 17.4% to 298.1. Fixed 30-year mortgage rates averaged 5.45% last week, down from 5.47% in the prior week, the MBA said.
The ABC News/Washington Post consumer comfort index rose 2 points to -52 in the week ended Dec. 8, from -54 a week earlier. According to the survey, just 8% of respondents expressed confidence in the economy, up from 7% the week before. Also, 43% of those polled said their own finances were in good standing, up from 42% in the prior week. In assessing the buying climate, 21% of respondents said it was good, up from 20% a week earlier. The consumer comfort index was based on a random survey of 1,000 respondents nationwide in the four weeks through Dec. 8.
Traders were awaiting a report later Wednesday on the Treasury budget, which was expected to showing a $200 billion deficit for November.
Neel Kashkari, Treasury assistant secretary in charge of the Troubled Asset Relief Program, said the Treasury is working with regulators to determine the best way to monitor the effectiveness of the government's $700 billion capital injections into banks. "We may utilize a variety of supervisory information for insured depositories, Kashkari said in testimony before the House Financial Services Committee. Transparency gives taxpayers "comfort in our stewardship of these funds" and markets "confidence that we are stabilizing and strengthening the financial system." The department is actively engaged in talks with regulators to measure the success of TARP capital purchases using data from the Home Mortgage Disclosure Act, the Community Reinvestment Act and "call-report" figures banks furnish to federal regulators, he said.
Kashkari's remarks are aimed at assuaging criticism of Treasury Secretary Henry Paulson's management of the TARP. A congressional oversight committee today said the Treasury isn't using the program to help average Americans and questioned the department's commitment to stem home foreclosures. Paulson is considering whether to tap the second half of TARP funds with six weeks left in the Bush administration. A Treasury report two days ago said all except $15 billion from the first half has been committed, most of it through direct injections into banks that Kashkari said has helped stabilize financial markets.
According to a Wall Street Journal report, the Federal Reserve is considering issuing its own debt for the first time, a move that would give the central bank additional flexibility as it tries to stabilize rocky financial markets. Government debt issuance is largely the province of the Treasury Department, and the Fed already can print as much money as it wants. But as the credit crisis drags on and the economy suffers from recession, Fed officials are looking broadly for new financial tools. Fed officials have approached Congress about the concept, which could include issuing bills or some other form of debt, according to people familiar with the matter. It isn't known whether these preliminary discussions will result in a formal proposal or Fed action.
According to press reports, the UK Treasury is considering extending its 250 billion pound debt guarantee program to spur bank lending. Securities backed by small business loans, car loans or other lending might also be included under an expanded scheme. In addition, the Chancellor is examining whether the government should cut the fees it charges to guarantee debt issues by banks.
In other U.S. markets Wednesday, the 10-year Treasury note was lower in price at 109-12/32 for a yield of 2.674%, while the 30-year bond was lower at 126-27/32 for yield of 3.105%.
The U.S. dollar index was lower at 85.48.
January West Texas Intermediate crude oil was up $2.65 to $44.72 per barrel amid reports Russia will join OPEC in cutting production in the near future. T. Boone Pickens said he believes OPEC will cut output up to one million barrels a day. Some dealers point out that OPEC historically has not abided by quotas. Earlier, Dept. of Energy Energy Dept. report that showed crude oil stocks rose 400,000 barrels in the week ended Dec. 5. At 320.8 million barrels, U.S. crude oil inventories are in the upper half of the average range for this time of year. Gasoline inventories are just below the lower boundary of the average range.
February gold futures, which broke through the $776 technical resistance level, were up $38 to $812.20 in a rally that fed on itself, according to some analysts.
Among other stocks in the news Wednesday, Rio Tinto PLC (RTP) shares were sharply higher. The mining company said that due to sharp falls in commodity prices and a significantly weaker outlook it will reduce 2009 total capital expenditure from over $9 billion to $4 billion, of which $2 billion will be sustaining capital expenditure. Rio Tinto will reduce global headcount by 14,000, comprising 8,500 contractor jobs and 5,500 employee roles. The compamny said it is committed to reducing further net debt by $10 billion by the end of 2009, and is expanding the scope of assets targeted for divestment.
Eastman Kodak Co. (EK) shares were lower after the company withdrew its second-half and full-year 2008 guidance for revenue growth, digital revenue growth, EPS from continuing operations, and cash generation. The company expects all those categories to be below its October forecast, citing a deepening global recession and changes in the value of the dollar. Kodak did not provide a revised forecast, but said it will update investors on business performance when it announces its fourth-quarter and full-year 2008 results on Jan. 29, 2009.
ADC Telecommunicatons (ADCT) posted better-than-expected fourth-quarter non-GAAP EPS of 19 cents, vs. 30 cents one year earlier, as a narrowed gross margin offset a 10% sales rise. Wall Street was looking forcurrent-quarter EPS of 13 cents. Due to the extraordinary level of uncertainty in the marketplace and the economy, ADC says it will only provide guidance for the first quarter; it sees sales for the period of $255 million-$290 million and a GAAP loss per share from continuing operations of 5 cents-7 cents (including non-cash acquisition amortization charges of 9 cents and stock option expense of 2 cents). Morgan Keegan downgraded the shares to market perform from outperform.
Korn/Ferry Intl. (KFY) posted better-than-expected second-quarter EPS of 30 cents, vs. 37 cents one year earlier, on 3.6% lower fee revenue and a 3.4% total revenue decline. The company sees third-quarter fee revenue of $140 million-$160 million and EPS of 8 cents-18 cents, prior to about $11 million-$15 million in expenses related to rationalizing the cost structure to current economic environment. The company said that due to current extraordinary economic conditions, its ability to predict new business is more difficult than normal. If new business deteriorates, its results may be below this guidance.
Electronic Arts (ERTS) says revenue and EPS for fiscal 2009 will be below financial guidance, previously provided on Oct. 30. The company cited lower-than-expected sales across North America and Europe. S&P reiterates sell. Wedbush Morgan downgraded the shares to buy from strong buy. Citigroup downgraded the stock to hold from buy.
Praxair Inc. (PX) cut its fourth-quarter EPS view to 95 cents-$1.00, excluding charges, due to a fall-off in demand in November. The company expects additional customer plant closings in December, which will further reduce volumes for the quarter. Praxair sees 2008 EPS of $4.13-$4.18, before charges. Wall Street was looking for fourth-quarter EPS of $1.04 and 2008 EPS of $4.22.
American Land Lease (ANL) shares jumped after the company agreed to be acquired by affiliates of Green Courte Partners, LLC, a Chicago-based private equity investment firm, for a cash purchase price of $14.20 per share, in deal valued at about $438 million, including assumption of debt and preferred stock.