Financial Worries Hit Stocks

The Dow average fell to a three-month low after Morgan Stanley and FedEx posted disappointing results, while Fifth Third Bancorp cut its dividend

Disappointing earnings reports from FedEx (FDX) and Morgan Stanley (MS) sent stocks lower Wednesday, with the Dow average hitting a three-month low. Once again, financial stocks were among the weakest performers, with Fifth Third Bancorp (FITB) tumbling 27% after announcing a divident cut and plans to sell convertible preferred shares and assets to raise capital.

On Wednesday, the Dow Jones Industrial Average fell 131.24 points, or 1.08%, to 12,029.06 -- after dipping below the 12,000 mark for the first time since mid-March. The broader S&P 500 lost 13.12 points, or 0.97%, to 1,337.81. The tech-heavy Nasdaq composite index dropped 28.02 points, or 1.14%, to 2,429.71.

Trouble in the financial sector kept investors on edge, after Morgan Stanley said revenues fell 38% in the second quarter. The Wall Street giant blamed difficult market conditions and lower levels of client activity. The firm posted earnings per share of 95 cents from the second quarter, vs. $2.24 a year ago.

Also Wednesday, a large regional bank announced plans to cut its dividend and raise capital to shore up a balance sheet weakened by credit troubles. Fifth Third Bancorp says it plans to issue $1 billion in tier-one capital in the form of convertible preferred shares, and sell $1 billion in "non-core" businesses. The bank will also reduce its quarterly dividend from 44 cents per share, to 15 cents.

And MF Global Ltd. (MF), a futures and options broker, warned that the narrowing of short term credit spreads has had a negative impact on net interest income and overall pre-tax margins in first quarter. The stock skidded 41%.

FedEx posted earnings of $1.45 per share, vs. $1.90 a year ago. Record fuel prices and a weak U.S. economy offset a 7.8% rise in revenue. The firm expects earnings of 80 cents to $1 per share this quarter, vs. $1.58 last year -- an outlook that assumes no more increases in fuel prices nor any further weakening of the economy.

Adding to the market gloom Wednesday was a dire warning from the Royal Bank of Scotland (RBS), which said that the S&P 500 could fall more than 300 points to around 1,050 by September. "A very nasty period is soon to be upon us - be prepared," wrote the bank's credit strategist Bob Janjuah, who said the threat of inflation will paralyze major central banks.

July West Texas Intermediate crude oil futures rallied through the afternoon session, closing at $136.60, up $2.59 a barrel, after the Energy Dept. reported U.S. crude oil inventories fell 1.2 million barrels to 301.0 million barrels in the week ended June 13. The smaller than expected draw in oil inventories pushed prices down in the morning, but the threat of a Nigerian oil workers strike eventually took over and sparked prices higher, reports Action Economics.

There were no significant economic reports released on Wednesday.

Among other stocks in the news Wednesday, Northwest Airlines (NWA) announced plans to further reduce its capacity in response to the high cost of fuel. The airline plans to reduce its domestic and international capacity by 8.5% to 9.5% in the fourth quarter, vs. the year before.

CarMax (KMX) posted earnings of 13 cents per share, vs. 30 cents a year ago. Same-store used unit sales rose 1%, and total sales rose 3%. However, the vehicle seller saw lower profits on each unit sold, and lower income from its auto finance business. In light of tough economic conditions, the firm temporarily suspending issuing guidance on sales and earnings for the rest of the fiscal year.

Panera Bread (PNRA) raised its earnings guidance for the second quarter from a range of 40 to 44 cents per share, to 48 to 50 cents per share. The bakery and cafe chain says it is see same-store sales growth of a better-than-expected 6.1% to 6.4%.

Major European indexes lost ground Wednesday. In London, the FTSE 100 index fell 1.79% to 5,756.90. In Paris, the CAC 40 index lost 1.44% to 4,618.75. Germany’s DAX index fell 0.99% to 6,728.91.

In Asia, Japan’s Nikkei 225 index rose 0.73% to 14,452.82. In Hong Kong, the Hang Seng index rose 1.16% to 23,325.80.

Treasury market

Treasuries strengthened, extending recent gains to a third consecutive day. The move higher reflects the bond market adjusting after overcompensating for expectations of a rate hike by the Federal Reserve sometime this year, says S&P MarketScope. Federal fund futures had started to price in as many as three rate increases by the end of the year, and then backed off on the belief that this was an overreaction, says S&P MarketScope.

The 10-year note rose 12/32 to 97-27/32 for a yield of 4.14%, while the 30-year bond climbed 21/32 to 94-19/32 for a yield of 4.72%.

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