Stocks Fall as Investors Flock to Treasuries
U.S. stocks closed sharply lower Tuesday as investors took profits -- or shifted funds into Treasuries -- after two straight winning sessions. Market players got cold feet as optimism about the government's stimulus plans and progress toward government financing for cash-strapped U.S. automakers was swept away by a wave of poor earnings reports and negative guidance on 2009 profits -- and announcements of further corporate layoffs.
Among the well known names posting earnings warnings Tuesday: FedEx Corp. (FDX), Texas Instruments (TXN), and Broadcom Corp. (BRCM).
One telling sign of investor skittishness: Traders on Tuesday flocked to the Treasury Dept.'s $30 billion auction of four-week bills, which were awarded at a zero percent interest rate, with a near record level of demand for the ultra short-term debt. The auction results show that fear has not left the equities markets at a time when some traders thought major indexes had reached bottom, according to S&P MarketScope.
The Treasury's three-month bill was trading at a negative rate -- -0.01% -- at one point on Tuesday, notes Action Economics.
Congress and the White House were still battling over loans for the auto industry on Tuesday. Congressional Democrats were seeking votes to pass a conditional $15 billion loan to cash-strapped Detroit automakers.
There was limited reaction to a report that the National Association of Realtors' pending home sales index fell 0.7% in October. It is not certain that the market will respond to Wednesday's report on October wholesale inventories, says S&P.
The U.S. dollar index was up. Gold futures were higher. Oil futures were lower.
On Tuesday, the Dow Jones industrial average finished lower by 242.85 points, or 2.72%, at 8,691.33. The broad S&P 500 index was down 21.03 points, or 2.31%, at 888.67. The tech-heavy Nasdaq composite index shed 24.40 points, or 1.55%, to 1,547.34 after spending much of the session in positive territory.
On the New York Stock Exchange, 21 stocks traded lower in price for every 10 that advanced. The ratio on the Nasdaq was 18-9 negative.
European stocks built on Monday's advance, with major indexes rising 2.06% in London, 1.34% in Frankfurt, and 1.55% in Paris. Asian equity markets ended mixed on Tuesday, with Tokyo stocks up 0.80%, Hong Kong down 1.94%, and Shanghai lower by 2.54%.
Congress and the White House inched toward a financial rescue of the Big Three auto makers Tuesday, negotiating legislation that would give the U.S. government a substantial ownership stake in the industry and a central role in its restructuring. Under terms of the draft legislation, which continued to evolve Monday evening, the government would receive warrants for stock equivalent to at least 20% of the loans any company receives. The company also would have to agree to limits on executive compensation and dividend payments, much like those contained in the government's $700 billion rescue of the financial industry.
In the case of General Motors (GM), such a move could give the government a large stake in the company and may hurt existing shareholders. GM is seeking about $10 billion in short-term loans and has a market capitalization of about $3 billion. The legislation didn't specify what kind of stock the government would take, leaving open the option it could be preferred, common, voting or nonvoting. Assuming congressional Democrats and the White House come to agreement on the plan, the car industry would be the latest to submit to strict government scrutiny in return for a bailout, joining most prominently the banking sector.
The auto industry would undergo a restructuring process akin to bankruptcy reorganization, only with fewer rigors and with the government, not a judge, in control, and with many associated political complications. House Speaker Nancy Pelosi, a California Democrat, said: "Everybody's getting a haircut here, in terms of the conditions of the bill," she said, noting the likely impact on labor, bondholders, shareholders, car dealers, suppliers and executives. "The management itself has to take a big haircut on all of this."
In a Bloomberg TV interview, Alan "Ace" Greenberg, the former Bear Stearns chief executive officer who is approaching his 61st year on Wall Street, said the investment-banking model he helped pioneer is "gone." "There's no more Wall Street," Greenberg, 81, said. The entire make-up of Wall Street has changed "forever," Greenberg said. "Rumors can start and turn into a self-fulfilling prophesy," Greenberg said, adding he's "never seen anything close" to the current economic decline and turmoil in the financial markets. Firms that specialize in advisory work on mergers and acquisitions are "going to stay in business" as demand for independent opinions grow, Greenberg said.
Shares of FedEx tumbled Tuesday after the package-delivery concern cut its $4.75-$5.25 fiscal 2009 earnings per share (EPS) guidance to $3.50-$4.75, as significantly weaker macroeconomic conditions are expected to offset the benefits from lower fuel prices and the announced departure of DHL from the U.S. domestic package market. FedEx's outlook assumes stable fuel prices.
Shares of rival United Parcel Service (UPS) were also lower Tuesday.
Texas Instruments lowered its fourth-quarter guidance to EPS of 10 cents-16 cents on revenue of $2.3 billion-$.5 billion from 30 cents-36 cents EPS on revenue of $2.83 billion-$3.07 billion.
Broadcom cut its fourth-quarter revenue guidance to $1.05 billion-$1.10 billion (including the AMD digital TV acquisition) from $1.17 billion-$1.235 billionm (excluding the AMD Digital TV acquisition). Broadcom notes that due to the current global economic environment, customers across each of its targeted end markets requested adjustments in their deliveries in the fourth quarter, resulting in significant pushouts and cancellations since the company originally provided guidance in October, 2008.
Sony Corp. (SNE) will reduce investment in its electronics business by about 30% in fiscal 2010 vs. its mid-term plan, reduce the total number of manufacturing sites by about 10%, reduce headcount in electronics business worldwide by about 8,000, and reduce headcount in its seasonal and temporary workforces.
In economic news Tuesday, the U.S. pending home sales index slipped 0.7% to 88.9 in October from a revised 89.5 in September (89.2 previously). And on a year-over-year basis, sales are down 0.6% versus a 7.9% pace previously. Sales were mixed regionally with a 8.7% drop in the West and a 4.3% decline in the Midwest, vs. a 7.8% increase in the South and a 0.6% increase in the Northeast.
The International Council of Shopping Centers and Goldman Sachs weekly sales index for the week ended Dec. 6 fell 0.8% after rising 0.1% the week before. On a year-over-year basis, retail sales rose by 0.4% after rising 1.3% the week before. "Over the last week, the completion rate of holiday gift-buying fell behind last year and with it holiday spending," said Michael P. Niemira, ICSC chief economist. "The tough economic and retail environment, which continued into early December, is likely to dominate the full month's sales performance as well." The ICSC expects monthly comparable-store sales will be flat to up 1% for December with late holiday shopping driving the month's overall performance.
Japan's economy shrank 0.5% in the third quarter, worse than a preliminary reading of 0.1%. As a result, the Yomiuri newspaper reported the government was considering an economic package including spending of up to 20 trillion yen ($216 billion).
The Office for National Statistics said U.K. industrial output fell 1.7% in October, the biggest fall since January 2003.
Germany's trade surplus, adjusted for seasonal swings, rose to €15.8 billion ($20.43 billion) but forward-looking indicators show foreign demand for German goods has crumbled since the start of the year, and the latest data underlined the weakness of economies such as Britain, Germany's biggest trading partner.
In other U.S. markets Tuesday, Treasury bonds soared after the Treasury Dept. sold $30 billion of 4-week bills at a yield of zero percent. There were more than $125 billion in bids, resulting in a 4.20 cover ratio. Indirect bidders were awarded 47.2% of the auction, up from 31.7% last week, and the best since early October. These results reflect the high degree of demand for the safety of Treasuries, and especially over the turn of the year. The 30-year bond was up 2-13/32 to 128 at 2:41 pm EST for a yield of 3.053%, 10-year notes were up 29/32 to 109-21/32 for a yield of 2.645%, and the 2-year notes were up 06/32 to 100-26/32 for a yield of 0.846%.
Tuesday's action suggests the government won't have much trouble selling billions of Treasurys in coming weeks, according to S&P MarketScope.
The U.S. dollar index was higher at 85.81.
January West Texas Intermediate crude oil futures were lower at $42.81 per barrel.
February gold futures were higher at $774.20 per ounce.
Among other stocks in the news Tuesday, AutoZone Inc. (AZO) posted first-quarter EPS of $2.23, vs. $2.02 one year earlier, on 1.5% lower same-store sales and 1.6% higher total sales. Wall Street was looking for current-quarter EPS of $2.18.
National Semiconductor Corp. (NSM) posted second-quarter EPS of 14 cents, vs. 33 cents one year earlier, on a 15% sales decline. The company sees a sequential third-quarter sales decline of about 30%. National Semi cited "significantly" lower-than-usual demand levels in the post-holiday season, especially for personal mobile devices. The company also expects gross margins to decline as it plans to significantly lower its manufacturing activity in the third quarter.
Toro Co. (TTC) reported fourth-quarter EPS of 8 cents (before a charge), vs. 16 cents one year earlier, despite a 2.6% sales rise. The company sees first-quarter EPS of 15 cents-25 cents, and fiscal 2009 EPS of $2.50-$2.70, which is higher than the Wall Street forecast of $2.41.
Con-Way Inc. (CNW) cut its 2008 EPS from contiuning operations guidance from $2.60-$2.80 to $2.20-$2.35, excluding charges. The company added that since its conference call on Oct. 23, the decline in year-over-year tonnage at Con-way Freight has accelerated significantly as the economy has continued to deteriorate. In response, Con-Way reduced its nationwide workforce by about 8%; the move will result in a charge of about $7.5 million.
Danaher Corp. (DHR) cut its $1.17-$1.25 fourth-quarter adjusted EPS from continuing operations view to $1.03-$1.10. The company sees 2008 adjusted EPS from continuing operations of $4.15-$4.22. Danaher will cut 1700 jobs.
Molex Inc. (MOLX) cut its $750 million-$800 million second-quarter revenue view to $650 million-$670 million. Molex says it is lowering expenses, including headcount and related employee costs. These cost reductions are in addition to the previously announced expense controls and restructuring initiatives. As these actions have not been fully quantified, Molex doesn't believe it appropriate to provide a December-quarter EPS view at this time.
Wyndham Worldwide (WYN) announced acceleration of its initiatives to increase cash flow and eliminate its reliance on the asset-backed securities (ABS) market by reducing the sales pace and cost structure of Wyndham Vacation Ownership. The company now expects to reduce gross Vacation Ownership Interest (VOI) sales in 2009 to about $1.2 billion from expected gross VOI sales of about $2 billion in 2008 by eliminating sales offices and marketing programs. Wyndham sees a charge of about $50 million-$60 million in the 2008 fourth quarter and $10 million-$15 million in the 2009 first quarter. It now sees total 2009 revenues of about $3.7 billion-$4.1 billion, with adjusted EBITDA of $790 million-$840 million.