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Housing, Jobs Data Weigh on Stocks
Amid weak reports on pending home sales and private-sector employment, traders weighed the possibility of a Fed rate cut on Sept. 18
U.S. stock indexes ended lower on Wednesday, as investors reacted to weaker-than-expected private-sector employment data that could presage a gloomy payrolls report on Friday, and to lower pending home sales that hinted at a deepening housing market slump. There was no relief from the Federal Reserve's Beige Book report, which failed to provide clear signs about whether the central bank will cut interest rates on Sept. 18.
Once again, financial stocks led the way to the downside, but retailers were also weak. On the New York Stock Exchange, losers outnumbered winners nearly three to one, with 24 stocks trading lower for every nine that had gains. On the Nasdaq Stock Exchange, the ratio was two-to-one negative.
The Dow Jones industrial average dropped 143.39 points, or 1.07%, to 13,305.47 on Wednesday. The broader S&P 500 was down 17.13 points, or 1.15%, to 1,472.29. The tech-heavy Nasdaq composite index fell 24.29 points, or 0.92%, to 2,605.95.
Wednesdays losses erased the gains from the previous session. Tuesday's advance reflected the fact that traders back from vacation wanted to put their money to work after seeing the positive market gains last Friday, said James McGlynn, managing director of equities at Summit Investment Partners.
The ADP National Employment Report showed an increase of only 38,000 in August, significantly below the 65,000 gain that had been expected and the smallest increase in four years. The private sector added 48,000 jobs in July.
An independent report from Challenger, Gray & Christmas Inc., an employment consulting firm, said that announced layoffs soared 85% to 79,459 in August from 42,897 in July. The job cuts in August were the highest since February, when they totaled 84,014.
Pending home sales fell 12.2% in July from June and were down 16.1% from a year ago. The July numbers were the lowest since September 2001. The biggest drop -- 20.8% -- was seen in the western U.S., where jumbo loans, whose rates have become especially costly since the credit crunch, are prevalent. Homebuilder stocks fell traded lower on the numbers.
The Beige Book showed that damage from troubles in the financial markets has, for the most part, been limited to the real estate sector, leaving broader economic growth intact across the 12 Federal Reserve districts. Manufacturing continued to expand across most districts and retail sales were stronger, despite weaker auto and furniture sales. Tighter credit standards were reported by more than half of the districts, with tighter conditions for both mortgage and business loans in six of the 12 districts. Delinquencies in consumer loans and mortgages were modestly higher in four districts.
The Beige Book information, though mixed, may add to the body of evidence mounting this week that is building the case for an easing of interest rates by the Fed at its Sept. 18 policy meeting. But analysts are debating whether a cut in the Fed funds rate will filter down to free up liquidity in the credit markets.
Adding firepower to that debate are new worries over an uptrend in the London interbank offered rate, or Libor, a key benchmark for giant floating-rate bank loans taken out by global corporations. At 5.72%, Libor is at a six-year high, markedly above the Fed funds rate and moving in the opposite direction of other short-term interest rates. That could mean that problems in the money markets may not be alleviated by Fed rate cuts.
Far from suggesting that cutting the Fed funds rate wouldn't be that effective, the rising Libor begs that much more for a rate cut, McGlynn said.
"Its a symptom, when Libor goes up, of some tightness. Just because we cant see it doesnt mean it's not happening," he said.
By lowering the Fed funds rate, policymakers would make it more affordable for banks to take onto their balance sheets some of the commercial paper that goes through the conduit and has been defaulted on by other borrowers, McGlynn said. Lowering rates may only indirectly filter through to the larger credit markets, but it would make a difference, he said.
The Fed would be smart not to wait for the full-blown effects of the housing downturn to hit the broader economy but move pre-emptively to cut rates by at least 25 basis points, and preferably 50 basis points, he said. A 50-basis-point cut make more sense, if only to avoid the need for a secret follow-up meeting to lower rates further after seeing more financial turmoil in the wake of a 25-basis-point cut, he added.
"The signs we're seeing in housing and financing [home purchases] are more important as leading indicators than coincident indicators that are in the Beige Book," McGlynn said.
Oil prices have remained firm as traders await the OPEC meeting next week, which is expected to leave production quotas unchanged. The potential for another inventory drawdown, when the Energy Information Administration's weekly numbers come out on Thursday, is also helping to buoy prices, even as concerns about slowing global growth persist, according to Action Economics. September West Texas Intermediate crude oil futures rose 65 cents to $75.73 per barrel.
Among stocks in the news on Wednesday, Costco Wholesale Corp. (COST) fell 4.2% after posting a 2% increase in stores open at least one year in August, much lower than estimates, and a 6% rise in total sales. Costco's report spurred selling across the retail sector, with Wal-Mart Stores (WMT) slipping to 8-year lows.
The latest casualty of the subprime real estate meltdown: The planned merger between mortgage insurers MGIC Investment Corp. (MTG) and Radian Group Inc. (RDN), which the two companies terminated Wednesday. The companies say that current market conditions have made the combination more challenging. An unprecedented number of margin calls in the first half of this year caused liquidity to dry up at C-Bass LLC, a joint venture in which each company owns a 46% stake. At the end of July, Standard & Poor's predicted the C-Bass impairment and the risky nature of Radian's portfolio were likely to derail the merger. MGIC was up 1.0% Wednesday, while Radian shares climbed 0.9%.
Shares of Applix Inc. (APLX) jumped 22.3% on news that the company has agreed to be acquired by Cognos for $17.87 per share, or about $339 million, subject to regulatory approvals.
MasTec Inc. (MTZ) shares fell 16.0% after it projected $265 million in revenue and 18 to 20 cents a share in earnings from continuing operations in the third quarter. The specialty contractor also revised its 2007 profit forecast to 78 to 82 cents a share, citing higher recruiting activity and training and modified compensation policies.
Tyson Foods (TSN) was down 12.9% after it cut its fiscal 2007 earnings outlook to 72 to 80 cents a share, citing higher-than-expected live cattle costs, a decline in beef revenues and higher live hog prices.
L.B. Foster Co. (FSTR) shares were up 10.8% on news that Canadian Pacific Railway has reached an agreement to buy the Dakota Minnesota and Eastern Railroad [DM&E], in which Foster holds a minority equity interest, for $1.48 billion. The acquisition will result in a total payment of about $277.3 million to Foster.
Forest Laboratories (FRX) shares rose 9.9% after the U.S. Court of Appeals affirmed its decision that about the validity of the U.S. patent covering escitalopram, the active ingredient in Lexapro and upheld the injunction preventing Ivax/TEVA's proposed generic product launch. The latest decision confirms Forest's and H. Lundbeck's patent rights for Lexapro.
World markets were trading mostly lower on Wednesday, with European equity markets falling on concern over banks' earnings due to the U.S. subprime mortgage crisis. In London, the FTSE 100 index fell 1.66% to 6,270.70. Germany's DAX index dropped 1.73% to 7,588.03. In Paris, the CAC 40 index plunged 2.14% to 5,551.55.
In Japan, the Nikkei index fell 1.60% to 16,158.45. In Hong Kong, the Hang Seng index rose 0.77% to 24,069.17. The Shanghai composite index was up 0.31% to 5,310.72.
Treasury Markets
Treasuries soared in response to tepid jobs and weaker home sales data, as well as to heightened risk-aversion after a foiled terrorist attack in Germany, S&P MarketScope said. The 10-year note jumped 21/32 to 102-08/32 for a yield of 4.46%, and the 30-year note vaulted 1-00 to 103-20/32 for a yield of 4.77%.
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