July 25, 2008

Stocks Tumble on Grim Home Sales, Earnings

It was nice, if not entirely convincing, while it lasted. The extended rally in major U.S. stock indexes ended Thursday with an accelerated selloff into the market close as investors balked at a worse-than-expected drop in existing home sales and some negative earnings reports. A modest rebound in oil prices only exacerbated the turn in market sentiment.

On Thursday, the Dow Jones industrial average plummeted 283.10 points, or 2.43%, to finish at 11,349.28. The broader S&P 500 slid 29.65 points, or 2.31%, to end at 1,252.54. The tech-heavy Nasdaq composite index closed 45.77 points, or 1.97%, lower at 2,280.11.

The selloff was led by banks and brokerages but widened to include oil producers, transports, semiconductor manufacturers, telecoms, consumer cyclical and healthcare stocks, said S&P MarketScope. On the New York Stock Exchange, 26 stocks traded lower for every six that gained ground, while on the Nasdaq the ratio was 19-9 negative.

Having passed a House vote, the housing bill -- revised with provisions for more explicit government guarantees of the mortgage agency portfolios -- is now headed for a Senate vote, which could come as early as Thursday.

Bill Gross, managing director of bond house Pimco, weighed in on the housing bill currently before Congress, calling the legislation that is designed to lower the cost of mortgage credit "the best way to begin the long journey back to normalcy" in the housing market.

New York Fed President Timothy Geithner, speaking before the House Financial Services Committee, warned that strong financial supervision will be needed to reduce the moral hazard of recent Fed and government backstops such as the Bear Stearns bailout and expanded capabilities of the Treasury and Fed to support the government-sponsored agencies.

Oil prices rebounded from their lows despite ongoing concerns about demand destruction as government data showed higher refined product supplies on Wednesday. August WTI crude oil futures settled $1.05 cents higher at $125.49 a barrel on Thursday.

On the earnings front, Ford Motor (F) posted its worst quarterly performance ever, while Starwood Hotels & Resorts Worldwide (HOT) and Ryland Group (RYL) missed analysts' estimates and Chipotle Mexican Grill (CMG) was ambushed by analysts' downgrades despite delivering higher earnings and missing the Street's average forecast by only a penny.

Ford reported a net loss of $8.67 billion in the second quarter, which included an $8.03 billion write-down due to a decline in the value of its North American assets and its credit division's lease portfolio. Even excluding those items, Ford lost 62 cents per share, more than double the 27-cent loss anticipated on average by Wall Street analysts.

The automaker also said it will retool two more North American truck and sport utility vehicle plants to build small, fuel-efficient vehicles and announced plans to bring six new small vehicles to North America from Europe by the end of 2012.

The 8% gain in the S&P 500 Index over the past seven trading days was largely a short-covering rally sparked by the government's more active support of mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) and by Securities and Exchange Commission Chairman Christopher Cox's ban on shorting the financial stocks, says Phil Orlando, chief equity market strategist at Federated Investors in New York.

"The government is afraid of a potential freefall and is trying to create a mechanism to engender confidence that stocks aren't headed to zero," Orlando says.

The 30-day moratorium on shorting the 19 financial service companies could allow stocks to stabilize, but if it doesn't, Orlando says Cox may decide to extend the rule for another 30 days, make it permanent, expand its application to all stocks or change the uptick rule -- whatever he thinks is needed to prompt more confidence in the market.

From a technical chart perspective, he believes the rally stalled and reversed on Thursday because the S&P 500 hit a technical resistance level that held. Orlando says he'd like to see another test of the 1,200 low from a couple weeks ago to be more certain about market capitulation, but thinks the ultimate downside objective is closer to 1,160.

It's too early to be adding to positions in the financial sector, which has seen a pattern of investors prematurely calling bottoms and jumping in only to get whacked, says Nick Sargen, chief investment officer at Western & Southern Financial Group in Cincinnati, Ohio. The key to look for is a turn in the housing market, although "the problem in the financials has broadened from being purely mortage-related to [commercial and industrial] loans and the credit card area," he says.

In M&A news, The two U.S. satellite radio companies agreed to pay $19.7 million to settle rules violations, which is expected to lead to quick approval of their merger. In a agreement reached with the Federal Communications Commission late Wednesday, XM Satellite Radio Holdings Inc. (XMSR) will pay $17.5 million and Sirius Satellite Radio Inc. (SIRI) will pay $2.2 million to settle agency rules violations. Shares of both companies took a beating from unhappy investors.

Vital Signs (VITL) shares surged after the maker of respiratory management products agreed to be acquired by GE Healthcare, a unit of General Electric (GE) in deal valued at about $860 million under which Vital Signs shareholders will receive $74.50 in cash for esach share they own.

In economic news, existing home sales fell 2.6% to an annualized rate of 4.86 million units in June, lower than the 4.95 million rate that was anticipated. Home sales fell in the Northeast, Midwest and South, but rose 1.1% in the West. The National Association of Realtors estimated that foreclosures now represent 33% to 40% of all existing home sales.

The median price of existing homes fell 6.1% in June from year-ago levels and the number of total existing homes on the market rose 0.2%, pushing the supply of homes for sale to 11.1 months worth from 10.8 months in May.

"While existing home sales continued to decline, the four consecutive monthly increases in sales in the West suggest a possible change in trend in that region," economist John Ryding wrote in an email research note for RDQ Economics. "However, over the next few quarters, foreclosure sales are likely to comprise an increasing proportion of home sales, which could put further significant downward pressure on home prices."

Initial jobless claims for the week ended July 19 jumped 34,000 to 406,000, above the median forecast of 380,000. Since the data reflect the auto industry's retooling season, Action Economics cautioned against putting much weight on the figures until early August.

The bill aimed at curbing oil speculation is on the skids after Democratic and Republican leaders failed to reach an agreement on amendments to the bill regarding expansion of offshore drilling. Financial industry groups and investment banks are opposed to the legislation, whose outlook is grim unless lawmakers can quickly come to a compromise, the Wall Street Journal reported. But the bill could be revived after the recess in August.

The U.S. Commodity Futures Trading Commission charged Amsterdam-based proprietary trading firm Optiver Holding BV with manipulation of the crude, gasoline and heating oil markets, saying the scheme brought roughly $1 million in profit to the defendants.

Among other stocks in the news on Thursday, Amazon.com (AMZN) shares rose after the online retailer reported a near-doubling of earnings to 37 cents a share from 19 cents in the second quarter of 2007 on a 41% gain in sales. Amazon sees third-quarter sales of $4.2 billion to $4.425 billion and operating income of $115 million to $160 million and expects full-year sales to be $19.35 billion to $20.10 billion and operating income to be $745 million to $920 million. Standard & Poor's reiterated its hold opinion on the stock.

Qualcomm (QCOM) and Nokia (NOK) entered into a new agreement covering various technology standards. The agreement will result in the settlement of all litigation between the companies, including Nokia's withdrawal of its complaint to the European Commission. Separately, Qualcomm reported GAAP earnings of 45 cents a share for the third quarter, vs. 47 cents a year ago, despite a 19% rise in revenue. S&P maintained its hold opinion on the stock.

Aflac Inc. (AFL) shares dropped after the insurance company posted $1.00 a share in second-quarter profit, vs. 84 cents a year ago, on a 15% rise in revenue. Aflac said that knowing it needs a 12.5% sales increase in the second half of 2008 to meet the low end of its full-year target, it will clearly be difficult to achieve a minimum 8% increase in earnings for 2008. It said it can't rule out that U.S. economy is a contributing factor to slower sales growth. Aflac expects to report operating income of 98 cents to $1.01 a share in the third quarter and $3.86 to $3.98 for the full year. Standard & Poor's maintained its strong buy rating.

Baidu.com (BIDU) shares leaped after the provider of Chinese online search services reported non-GAAP earnings of $1.23 a share for the second quarter, beating Wall Street's forecast of 97 cents, on a sharp increase in revenue. Baidu.com said the number of active online marketing customers during the second quarter rose 12.4% from the prior quarter to over 181,000. The company sees third-quarter revenue of $132 million to $136 million, reflecting its anticipation of temporarily altered user behavior during the Beijing Summer Olympic Games.

Major European indexes were lower Thursday. In London, the FTSE 100 index shed 1.61% to trade at 5,362.30. In Paris, the CAC 40 slid 1.38% to 4,347.99, while Germany's DAX index was down 1.46% at 6,440.70.

In Asia, Japan's Nikkei 225 gained 2.18% to end at 13,603.31, while Hong Kong's Hang Seng index inched down 0.20% to 23,087.72.

Treasury market

Treasuries rose on weakness in the equity markets. The 10-year note moved up to 98-30/32 for a yield of 4.00% and the 30-year bond climbed to 96-08/32 for a yield of 4.61%.