Stocks Finish Mixed
U.S. stocks closed mixed Thursday, as steep price drops in the previous two sessions drew bargain hunters into the market. These buyers, however, failed to support the entire market, as witnessed by closing gains in the Dow industrials and S&P 500 but a drop in the Nasdaq. Data showing a rise in jobless claims and a drop in home prices kept fears of a recession alive.
Former Federal Reserve Chairman Alan Greenspan, the current object of the ire of print and TV commentators, was seen calling for more financial regulation at a House hearing Thursday on housing and the financial crisis. Meanwhile, the Bush administration is considering a $40 billion program to forestall housing foreclosures, according to a press report.
Crude oil futures surged amid speculation that OPEC will cut its output to boost prices. Bonds turned mixed after rising earlier. The dollar index fell. Gold also lost ground.
On Thursday afternoon, the Dow Jones industrial average ended higher by 172.04 points, or 2.02%, at 8,691.25. The S&P 500 index added 11.33 points, or 1.26%, to 908.11. But the Nasdaq composite index fell 11.84 points, or 0.73%, to 1,603.91.
On the New York Stock Exchange, 19 stocks were lower in price for every 12 that advanced. The ratio on the Nasdaq was 20-8 negative.
European stocks were mixed Thursday, with the FTSE 100 index in London up 1.16% at 4,087.83, the CAC 40 index in Paris 0.38% higher at 3,310.87 and Germany's DAX index down 1.12% at 4,519.70. In Asia, markets suffered more selling, with Tokyo stocks falling 2.46%, Hong Kong down 3.55%, and Shanghai lower by 1.07%.
Lawmakers called key players from the past and present to congressional hearings in an effort to find out what caused the biggest financial crisis since the 1930s and determine how the government plans to get the nation out of the mess. Former Fed Chairman Alan Greenspan, the star witness today before the House Oversight and Government Reform Committee, faces questions about actions the government took or didn't take that might have contributed to the boom in subprime mortgages and the subsequent housing market collapse that has led to the loss of billions of dollars in investments, according to AP.
Greenspan, who was succeeded in 2006 by Ben Bernanke, was likely to find himself defending actions he took that are being blamed for contributing to the current crisis. Critics charge that he left interest rates too low in the early part of this decade, spurring an unsustainable housing boom, while also refusing to exercise the Fed's powers to impose greater regulations on the issuance of new types of mortgages, including subprime loans. It was the collapse of these mortgages and rising defaults a year ago that triggered the current crisis.
Greenspan recently described the current episode as the type of wrenching financial crisis that comes along only once in a century. He has defended the use of derivatives, so-named because their value is derived from the value of an underlying asset. He said they were useful in helping to spread risks.
Greenspan called for tighter regulation of financial companies, distancing himself from the free-market culture that he helped to create. Firms that bundle loans into securities for sale should be required to keep part of those securities, Greenspan said in prepared testimony to the House Committee on Oversight and Government Reform. Bloomberg reported on his testimony. Other rules should address fraud and settlement of trades, he said. Greenspan's office released the text ahead of the hearing scheduled for 10 a.m. EDT in Washington.
Paul Volcker, Greenspan's predecessor, said at a New York conference Wednesday that "We are really going to have to rebuild this system from the ground up." Volcker said the creation of complex financial products "instead of spreading the risk and creating transparency" wound up concentrating risk and "opaqueness." Volcker, 81, said the current crisis is more complex than any other in U.S. history.
House Financial Services Committee Chairman Barney Frank called this week for a freeze on executive bonuses and other stronger regulation of Wall Street, following passage of a $700 billion rescue plan for financial institutions. Frank said in a hearing in February that Greenspan "erred" in "his view that regulation was almost never required." Greenspan "often told us" that there were two options: "I can either deflate the entire economy or I can let the problems continue," Frank said. SEC Chairman Christopher Cox and former Treasury Secretary John Snow are also scheduled to appear at the House committee hearing today.
Meanwhile, Neel Kashkari, the interim head of the government's $700 billion rescue effort, told the Senate Banking Committee that $250 billion in bank equity injections under the TARP plan are expected to be "out the door" by the year-end. He said he expects the recipient banks to "make loans," but will not put a dollar amount on it since he doesn't want these institutions to be forced into making bad lending decisions by a "one size fits all" approach. Kashkari also said it would be "a few weeks" before the Treasury will announce the next round of banks to receive equity injections.
He also confirmed the Treasury has formally requested the next TARP tranche of $100 billion from Congress, bringing the total to $350 billion out of $700 billion set aside for the program.
A week ago, Treasury Secretary Henry Paulson announced that the program now would have as a major component the purchase by the government of $250 billion in stock in hundreds of U.S. banks, including $125 billion that would go to nine of the largest institutions.
Paulson has said that the fast-moving nature of the crisis convinced him that money needed to get out more quickly as a way to encourage banks to start lending again. But questions have been raised about whether the huge infusion of government money will actually spur more lending, especially after several banks have said they planned to employ the new capital to help finance purchases of weaker rivals.
The Bush administration is weighing a roughly $40 billion proposal to help forestall housing foreclosures, one of a series of ideas under consideration to address the root causes of the financial crisis according to a Wall Street Journal report. FDIC Chairman Sheila Bair is expected to suggest at a Senate Banking Committee hearing today the government give banks a financial incentive to turn troubled loans into more-affordable mortgages, the paper said citing a person familiar with her testimony.
In economic news Thursday, U.S. initial jobless claims jumped 15,000 to 478,000 in the week ended Oct. 18, from a revised 463,000 the week before (461,000 previously). The four-week moving average slipped to 480,250 versus 484,750.
U.S. foreclosure activity in September rose 21% from a year earlier but fell by double-digits from the prior month as some state laws slowed the foreclosure process, according to a monthly report by research firm RealtyTrac. Notices of default in California fell 51% due to a new law that took effect in September that requires lenders to make contact with borrowers at least 30 days before filing a NOD. The drop in California was significant because the state accounts for nearly one-third of the nation’s foreclosure activity each month, RealtyTrac said.
U.S. monthly home price index fell 0.6% in August, after a 0.8% decline in July (revised from -0.6%), according to the Office of Federal Housing Enterprise Oversight (OFHEO). Declines were widespread, paced by a 1.8% drop in the Pacific region. Only New England posted a gain, up 0.4%. The continued fall in home prices is not surprising and the housing market remains a major source of weakness for the economy, Action Economics said.
Goldman Sachs (GS) plans to cut about 3,260 jobs, a source familiar with the matter said. That represents about 10% of the total staff of the New York-based bank, the source said. Reuters said the bank has so far suffered the least damage in its peer group in the global financial crisis and it remains the leading adviser to mergers and initial public offerings worldwide. But its transition from an investment bank to a traditional bank holding company means the Federal Reserve will use its new regulatory authority to limit the bank's risk taking and encourage longer-maturity funding. Analysts expect Goldman to shrink businesses in prime brokerage and securitization.
The Swedish Central Bank -- the Riksbank -- lowered its repo rate by 50 basis points to 3.75% at today's meeting, a larger cut than the 25 basis points consensus forecast. The central bank said the repo rate is likely to be cut by another 50 bp over the next 6 months. The bank has cut rates by 100 bp this month after hiking 25 basis points in September. The Riksbank revised down its rate path and now sees the repo rate bottoming around 3.2% by the end of 2009. The Bank revised down its GDP forecast to 1.2% and 0.1% for 2008 and 2009 respectively, from 1.4% and 0.8% in September, while CPI is now expected to average 2.1% next year, compared to a 3.2% forecast earlier.
In other U.S. markets Thursday, Treasuries traded mixed in the afternoon, pacing a choppy session in the stock market. The 10-year note fell 05/32
to 103-06/32 for a yield of 3.61%. The 30-year bond rose 24/32 to 108-09/32 for a yield of 4.02%.
The dollar index gave up early gains as oil prices ticked up and was down slightly at 85.39.
December West Texas Intermediate crude oil futures bounced back Thursday to rise $1.40 to $68.15 per barrel. Volatile trading was expected as OPEC officials arrived in Vienna for Friday's special meeting. The cartel is expected to reduce production to stem a steep decline in prices the past three months, with the consensus forecast calling for a cut of 1 million barrels. But Iran is pushing for a 2 million barrel cut.
December gold futures were off $21.20 to $714.10 per ounce as the dollar index rose against sterling and the euro.
Among Thursday's stocks in the news, Amazon.com (AMZN) reported third-quarter EPS of 27 cents, vs. 19 cents one year earlier, on a 31% sales rise. The company sees fourth-quarter operating income between $145-$305 million (-46% to +13% year-over-year) on sales of $6-$7 billion (+6% to +23%). Amazon now expects 2008 operating income of $716-$876 million on sales of $18.46-$19.46 billion.
Amgen (AMGN) reported third-quarter adjusted EPS of $1.23, vs. $1.08 one year earlier, on a 7% total revenue rise. GAAP EPS was $1.09; reflecting write-offs of $590 million of acquired in-process R&D. Amgen raised its 2008 revenue guidance to $14.9-$15.2 billion from $14.6-$14.9 billion, and adjusted EPS to $4.45-$4.55 from $4.25-$4.45.
Potash Corp. (POT) reported third-quarter EPS of $3.93 vs. 75 cents one year earlier, on sharply higher sales. Using a locked in C$/US$ exchange rate of $1.10, Potash expects 2008 EPS to be at the low end of the company's previously provided guidance range, with possible variance of 2% in either direction.
Allstate Corp. (ALL) reported a third-quarter operating loss of 35 cents per share, vs. $1.54 operating EPS one year earlier, on a 19% revenue decline and $1.8 billion in catastrophe losses. Wall Street was looking for 72 cents EPS. The company suspended its $2 billion stock buyback plan.
United Parcel Service (UPS) posted third-quarter EPS of 96 cents, vs. $1.05 one year earlier, as higher operating expenses offset a 7.4% revenue rise. Wall Street was looking for 89 cents EPS in the third quarter. UPS said it anticipates a challenging environment for a number of quarters going forward, and believes the U.S. consumer will be very conservative with spending this year. UPS still expects 2008 EPS will be toward the lower end of the $3.50-$3.70 range provided mid-year.
Altria Group (MO) posted third-quarter adjusted EPS from operations of 46 cents, vs. 40 cents one year earlier, on a 5% revenue rise. The company reaffirmed its 2008 adjusted EPS from continuing operations guidance of $1.63-$1.67.
Dow Chemical (DOW) posted third-quarter EPS of 46 cents, vs. 42 cents one year earlier, on a 13% sales rise. The company posted 60 cents third quarter EPS excluding certain items. Wall Street was looking for 57 cents. Dow says it's well positioned to weather this increasingly difficult economic downturn, as it has a strong balance sheet, and is accelerating its focus on what it can control, namely costs and capital, asset restructuring, and other interventions.
Starwood Hotels & Resorts (HOT) posted third-quarter EPS before special items of 71 cents, vs. 68 cents one year earlier, on flat revenues. The company notes margins at Starwood branded same-store owned hotels worldwide and in North America decreased 208 and 151 basis points, respectively, vs. the year-earlier quarter. The company sees EPS before special items of 36-42 cents for the fourth quarter and $2.07-$2.13 for 2008. It said that given significant uncertainty in the global economy, it is very difficult to provide any definitive guidance looking out four quarters, but Starwood did forecast $1.55 2009 EPS.
Xerox Corp. (XRX) posted third-quarter EPS of 29 cents, vs. 27 cents one year earlier, on a 2% revenue rise. The company said it will take a pre-tax restructuring charge of approximately $400 million, or 31 cents a share, in the fourth quarter to accelerate its cost-reduction activities on a global basis. Excluding the charge, Xerox sees fourth-quarter non-GAAP EPS of 34-36 cents. The company believes operational efficiencies it will gain from restructuring actions in the fourth quarter will position it to deliver double-digit EPS growth in 2009.
Eli Lilly (LLY) posted third-quarter pro forma non-GAAP EPS of $1.04, vs. 91 cents one year earlier, on a 14% sales rise. Lilly posted a 43-cent third-quarter loss per share when including $1.477 billion in charges related to pending Zyprexa investigations. Excluding significant items, the company raised its its 2008 pro forma non-GAAP EPS guidance to $3.97-$4.02 from $3.85-$4.00.
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