Stocks End Higher as Oil Drops
In a late-day rally, stocks finished higher Tuesday as crude oil prices pulled back and the dollar rose. The market had been wobbly most of the session amid a raft of negative earnings reports, led by Wachovia Corp. (WB), which posted a staggering second-quarter loss and announced it was cutting its dividend and 6,350 jobs, and a disappointing forecast and lower gross margins at Apple (AAPL).
On Tuesday, the Dow Jones industrial average rose 135.16 points, or 1.18%, to 11,602.50. The broader S&P 500 index gained 17 points, or 1.35%, to 1,277.00. The tech-heavy Nasdaq composite index finished up 24.43 points, or 1.07%, to 2,303.96.
In the energy markets, August NYMEX crude oil fell $3.84 to $127.20 a barrel. A combination of a sharply higher dollar, and the easing of storm concerns in the Gulf of Mexico, weighed heavily on energy prices, and the market shifted its focus to waning demand due to slowing global growth, says Action Economics. Natural gas had fallen more that 4% at the close, at one point trading under $10/MM BTU for the first time since April. Gasoline shed 7 cents a gallon to $3.15, a two-month low, says Action Economics.
Philadelphia Fed President Charles Plosser jolted the markets Tuesday by saying the Fed needs to raise rates "sooner than later" despite current economic conditions. "We think his comments were surprisingly strong-worded given that he did not dissent at last month's FOMC meeting, but are in line with his position as the committee's most consistent hawk," said Zach Pandl at Lehman Brothers in a note Tuesday.
Peter Orszag, director of the Congressional Budget Office, said a federal rescue of troubled mortgage giants Freddie Mac (FRE) and Fannie Mae (FNM) could cost taxpayers as much as $25 billion. But he predicted in a letter to lawmakers that there's a better than even chance the government will not have to step in to prop up the companies by lending them money or buying stock. Congress is expected to vote this week on a housing measure that would give the Treasury Dept. authority to throw Fannie and Freddie a temporary lifeline.
Treasury Secretary Hank Paulson, optimistic of congressional action, said it's important to stabilize GSEs but warned of "speed bumps" along road.
Washington Mutual (WM) shares rallied in after-hours trading after the bank reported a second quarter loss of $3.33 billion, or $6.58 per share, vs. a profit of $830 million, or 92 cents per share in the year-ago period (results include a one-time reduction of $3.24 related to the company's capital raising in April). Analysts expected a loss of $1.05 per share. WaMu boosted its loan loss reserves by $3.74 billion to $8.46 billion.
Among other stocks in the news Tuesday, Wachovia Corp. (WB) said Tuesday it lost $8.86 billion, or $4.20 a share, in the second quarter, vs. net income of $2.34 billion, or $1.22 a share, a year ago. Even excluding a goodwill impairment of $6.1 billion and merger-related and restructuring charges of $128 million, Wachovia lost $2.67 billion, or $1.27 a share, missing analysts' average estimate of a net loss of 78 cents. The latest results include the bank's October acquisition of A.G. Edwards Inc. Wachovia announced it is slashing its dividend and cutting 6,350 jobs due to the losses. The shares jumped 27% to 16.79.
American Express (AXP) shares fell 7% to 38 after the credit card company reported earnings of 56 cents a share for the second quarter, vs. 88 cents a share a year ago, as it set aside more money to cover souring loans across all its portfolios. Analysts had forecast a profit of 83 cents a share. The results include a $374 million addition to credit reserves, reflecting higher credit losses and the expectation for increased write-offs in the third and fourth quarters.
American Express's results suggest that even wealthier consumers, who account for most of the company's customers, are feeling the pain of the financial crisis.
Apple reported third-quarter earnings of $1.19 a share, vs. 92 cents a year earlier, on 38% sales growth. The maker of the iPhone sees fourth-quarter earnings of about $1.00 a share and revenue of about $7.8 billion. Standard & Poor's downgraded the stock to sell from buy, citing concerns about lower gross margin trends. After falling to as low as 146.53, Apple shares recovered to close at 162.
United Parcel Service (UPS) posted earnings of 85 cents for the second quarter, vs. $1.04 a share a year ago, as increasing fuel costs and a stagnant U.S. economy offset a 6.7% rise in revenue. The company expects to earn $3.50 to $3.70 a share for the full year.
There's not much this week in the way of new economic data for the market to focus on until Thursday, when the existing home sales figures for June come out, followed by new home sales and durable goods orders for June on Friday. lation expectations in this report, he said.
The Treasury reopened its 20-year Treasury Inflation-Protected Securities, or TIPS, program with a $6 billion auction on Tuesday. The offering should be rather well subscribed given its small size and the rise in inflation fears in recent weeks, Action Economics said.
Major European indexes finished mixed Tuesday. In London, the FTSE 100 index shed 0.74% to 5,364.10. In Paris, the CAC 40 was flat at 4,327.26, while Germany's DAX index rose 0.28% to 6,442.79.
In Asia, Japan's Nikkei 225 jumped 2.98% to end at 13,184.96, while Hong Kong's Hang Seng index edged down 0.02% to 22,527.48.
A sharp plunge in crude oil rescued stocks from lows and drove Treasury yields back up to range highs. Predictably hawkish comments from Philly Fed's Plosser helped further fuel the sell-off, while the CBO's $25 billion price tag on Treasury Secretary Paulson's GSE rescue plan was a reminder of the moral and fiscal hazards of bailing out the last surviving bastion of the mortgage sector, says Action Economics.
There was also supply, with the small reopening on the 20-year TIPs causing a little indigestion, though the plunge in crude oil and typically weak demand for TIPS reopenings may have been as much to blame as fiscal concerns, says Action Economics.