Stocks Fall amid Uncertainty

Once again, major indexes erased early gains Tuesday amid rising jitters over subprime loans, housing, and consumer confidence

Stocks moved slightly lower Tuesday amid a mood of uncertainty on Wall Street before the start of a Federal Reserve policy meeting this week and amid continuing worries about subprime loans.

A decline in consumer confidence seemed to ruffle investors. U.S. consumer confidence fell to 103.9 in June, down from 108.5 in May. That was a bit lower than the 105.5 analysts were expecting. The one-year inflation index was steady at 5.4%. The drop in confidence tracked declines in other confidence measures this month, Action Economics says.

New home sales were "almost exactly as expected," Action Economics says. New home sales fell 1.6% to a pace of 915,000 in May. Declines were registered in three of four regions, and the median price rose to $236,100, up from $232,700 in April. Problems in the housing sector were also reflected in disappointing earnings for homebuilder Lennar Corp. (LEN)

But the main focus of investor worries seems to be subprime loans. The latest evidence of the problem is Bear Stearns' problems with subprime loan funds (see, June 25, 2007, "Bear's Big Loss Arouses SEC Interest").

Bill Gross, of the big bond-fund outfit PIMCO, warned Tuesday that the subprime problem could spread. "Currently 7% of subprime loans are in default," he wrote in a note. "The percentage will grow and grow like a weed in your backyard tomato patch." He said "there are hundreds of billions of dollars of this toxic waste," much of it used to cheaply financed homes. "The subprime crisis is not an isolated event and it won't be contained by a few days of headlines," Gross wrote.

Richard Sparks of Schaeffer's Investment Research says the subprime problem is "already bigger than most expected." But, so far the markets are holding up and are not all that worried about the issue, he added. Thus, if problems do get a lot worse, it could shock investors, providing "a substantial reason for the market to go down," he said.

Traders are waiting for the Federal Reserve's policy meeting on Wednesday and Thursday. Many assume the Fed will leave interest rates unchanged, but wonder what statement the Fed will release at the meeting's close.

Tuesday marked the second straight session that stocks ceded early gains to finish in the red. The Dow Jones industrial average was down 14.39 points, or 0.11%, to 13,337.66. The broader S&P 500 index moved down 4.85 points, or 0.32%, to 1,492.89.

The tech-heavy Nasdaq Composite index edged down 2.92 points, or 0.11%, to 2,574.16.

In energy markets Tuesday, July WTI crude oil futures were down $1.41 to $67.77.

Among stocks in the news on Tuesday, homebuilder Lennar Corp. (LEN) was down after reporting a $1.55 per share loss in the second quarter, vs. $2 in earnings per share a year ago. Wall Street had expected earnings of 5 cents per share. Lennar's total revenues were down 37%, and the firm said it sees weak and perhaps deteriorating market conditions for the rest of the year.

Chemical company Huntsman Corp. (HUN) agreed to be acquired by Basell, a unit of the privately held Access Industries, for $9.6 billion. Huntsman shares rose 28% on the news.

Swiss pharmaceutical company Roche made a $3 billion takeover bid for Ventana Medical (VMSI). The Ventana board recommended no action as it reviews the offer, but the stock was up almost 50% on Tuesday.

Altria Group (MO) was flat after saying it will take a pre-tax charge of $325 million, or 10 cents per share, in the second quarter to cut costs by closing a 2,500-employee Philip Morris cigarette factory in North Carolina by the end of 2010.

Energy East Corp. (EAS) agreed to be acquired by Spanish power company Iberdola in a $8.6 billion deal. The terms are $28.50 in cash per Energy East share, which closed at $22.54 on Monday.

BlackRock, Inc. (BLK) was trading higher after it agreed to buy the fund-of-funds business of the Quellos Group LLC for up to $1.7 billion, including $562 million in cash, $188 million in stock upfront and up to $970 million in cash and stock over three and a half years depending on performance.

ITT Corporation (ITT) agreed to pay $395 million for a privately held developer of motion control products. International Motion Control had 2006 revenues of about $200 million.

Dolby Laboratories (DLB) was trading higher after J.P. Morgan analysts upgraded the stock from neutral to overweight.

West Marine (WMAR) was down after lowering its fiscal 2007 guidance to a range of 24 to 34 cents earnings per share on sales of $683 to 688 million. The firm says boating activity in the U.S. has not shown signs of recovery and revenues have been disappointing.

European stock markets moved lower on Tuesday. In London, the FTSE 100 index was down 0.44% to 6,559.3. Germany's DAX index moved down 0.88% to 7,860.52. In Paris, the CAC 40 index was down 0.82% at 5,953.36.

Asian markets were mostly down outside mainland China. In Japan, the Nikkei index was off 0.12% to 18,066.11. In Hong Kong, the Hang Seng index edged 0.09% lower to 21,803.57. In China, the Shanghai Composite index was up 0.82% to 3,973.37.

Treasury Market

Long-dated Treasuries closed lower in price Tuesday. The 10-year note eased 03/32 to 95-13/32 for a yield of 4.11%. The 30-year bond fell 10/32 to 92-29/32 for a yield of 4.22%.

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