Stocks Dive on Bank Worries

Fears about government stress tests on major financial institutions and bigger credit losses from BofA send indexes sharply lower Monday

Worries about the financial sector darkened the market's mood Monday, causing U.S. stocks to finish sharply lower. The market, which had rallied over the past six weeks, appeared to be ripe for some profit taking. Financial shares led the way lower amid rumors about Washington stress test results, reports that President Barack Obama was attaching conditions to banks' return of TARP money, and a gloomy outlook on credit losses from from Bank of America (BAC).

Meanwhile, the Conference Board's March index of leading economic indicators fell 0.3%.

On Monday, the 30-stock Dow Jones industrial average finished lower by 289.60 points, or 3.56%, at 7,841.73. The broad S&P 500 index fell 37.21 points, or 4.28%, to 832.39. The tech-heavy Nasdaq composite index shed 64.86 points, or 3.88%, to 1,608.21. On the New York Stock Exchange, 28 stocks were lower in price for every three that gained. Nasdaq breadth was 21-4 negative. Trading was moderately active.

Bonds rallied. The dollar index climbed. Gold futures rose, aided by short covering. Crude oil futures fell.

"Stocks finally faltered, pulled lower by questions of earnings quality at BofA and fresh concerns about the health of the banking system as the government's 'stress test' results approach," noted Action Economics. Spurious rumors of dire bank stress test results were denied Monday by a Treasury spokesman, who said that nothing had yet been released, though by that time the rumors had already fed deep-seated investor anxieties, said Action Economics.

Monday's declines came after the S&P 500 index had rallied for six straight weeks -- the first time since April-May 2007, notes S&P MarketScope. As of Friday's close, the "500" was up 29% from its Mar. 9 bear market low.

Shares of Sun Microsystems (JAVA) gained Monday on news that Oracle Corp. (ORCL) has made an acquisition offer for the company.

After the close of trading Monday, IBM Corp. (IBM) reported first-quarter earnings. IBM said that its profit was $2.3 billion, or $1.70 per share, higher than the $1.66 per share analysts were expecting. Big Blue's sales fell 11% to $21.7 billion, $800 million short of the $22.5 billion analysts polled by Thomson Reuters were expecting. IBM said the revenue drop would have been only 4% were it not for the effects of a strengthening dollar. The company reiterated its previous guidance for earnings of $9.20 per share in 2009.

Shares of IBM were nearly 3% lower in after-hours trading Monday.

Bank of America shares were sharply lower Monday. The company posted $0.44 vs. $0.23 first-quarter earnings per share on sharply higher total revenue, net of interest expense. But the company noted that its provision for credit losses of $13.4 billion rose from $8.5 billion in the 2008 fourth quarter and included a $6.4 billion net addition to the allowance for loan and lease losses.

Goldman Sachs analysts said that while the headline numbers for Citigroup's (C) first quarter, posted Friday, were positive, it estimates that the underlying earnings were a loss of $0.38 per share. Moreover, Goldman says, credit losses, which it sees as critical in drawing a line in stabilizing Citi's capital base, continue to grow at a rapid rate.

According to a report in The New York Times, the Obama Administration was considering converting its existing loans to the nation's 19 biggest banks to common equity. If enacted, that move would free up capital for the banks, without the Administration having to go back to Congress to ask for hundreds of billions more in bailout funds. But it could also dilute the current stakes that private investors hold in Bank of America, which has received $45 billion in government infusions.

The Financial Times reported that strong banks will be allowed to repay federal bailout funds, but only if such a move passes a test to determine whether it is in the national economic interest. The report said banks that had plenty of capital and demonstrated an ability to raise fresh capital from the market should, in principle, be able to repay government funds. But the judgment would be made in the context of the wider economic interest, the report said.

An unnamed official told the FT the government had three basic tests. It needed first to "make sure the system is stable." Second, to not create "incentives for more deleveraging which would deepen the recession." Third, to make sure the system had enough capital to "provide credit to support the recovery." The comments come as Goldman Sachs, JPMorgan Chase and other banks are pressing to be allowed to repay their bailout funds.

Merger and acquisition news also figured in Monday's market. Sun Microsystems agreed to be acquired by Oracle in a $7.4 billion deal, or $5.6 billion net of Sun's cash and debt.

PepsiCo (PEP) proposed to acquire all outstanding common shares it does not already own in its two largest anchor bottlers, Pepsi Bottling Group (PBG) and PepsiAmericas (PAS), at a value of $29.50 per share for PBG and $23.27 per share for PAS. Separately, PepsiCo posted $0.72 vs. $0.70 first-quarter EPS on a 6% revenue rise (constant currency). The company estimates that foreign currency exchange rates, at current spot rates, would have a high-single-digit percentage point adverse impact to its 2009 constant currency core EPS; it noted that 2008 core EPS was $3.68.

GlaxoSmithKline (GSK) agreed to acquire Stiefel Laboratories Inc., a privately held maker of dermatology products, for up to $3.6 billion.

In economic news Monday, the U.S. index of leading indicators fell 0.3% in March to 98.1 from a revised 98.4 (-0.2%) in February (was 98.5). January was also revised lower to 98.6 from 98.9 previously. Six of the ten components were negative, paced by weakness in building permits (-0.26%), stocks (-0.24%), ISM deliveries (-0.21%), and the work week (-0.13%). Positive contributions were seen from money supply (0.34%) and the yield curve (0.26%).

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