Wednesday saw stocks tumble after Federal Reserve Chairman Ben Bernanke told Congress that the outlook for the economy is "unusually uncertain," adding to worries about the pace of the recovery.
Stocks stayed close to the breakeven line through the first half of the session, before embarking on a dramatic decline in afternoon trading. Federal Reserve Chairman Ben Bernanke can take most of the credit for the market's nosedive; in Senate testimony today, he noted that the economic outlook is "unusually uncertain," and central bankers are "prepared to take further policy actions as needed" to support a recovery. "Financial conditions ... have become less supportive of economic growth in recent months," admitted Bernanke.
Bernanke also provided more details on how the Fed plans to withdraw the trillions in stimulus it has pumped into the economy since the start of the financial crisis in 2008. But he also said that the Federal Reserve will be ready to provide additional help if the economy deteriorates.
The Fed chief told lawmakers that, despite ongoing signs of weakness in the economy, central bankers expect gradual recovery over the next few years, although the labor market healing will be slower than previously thought.
"He's basically saying the economy is getting worse, and that while it's still going to grow, it's not recovering at the pace they had hoped," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams.
Stocks were slightly lower through the early afternoon as better-than-expected quarterly profit reports from Apple, Morgan Stanley and Wells Fargo were countered by disappointment about results from Yahoo and others.
However, thanks to the Fed head's sober forecast, traders shrugged off upbeat earnings from the likes of Apple (AAPL) and Morgan Stanley (MS), and fled the equities market in favor of the relative safety of bonds and the U.S. dollar.
"Today was the opposite of yesterday," observed Schaeffer’s Senior Technical Strategist Ryan Detrick. "Today some good earnings were greeted with sellers, whereas yesterday, poor earnings ended up bringing out the buyers. In the end, Bernanke put the brakes on any rally as his caution was too much for the market to handle."
Also, the VIX, or the markets’ so-called “fear gauge,” soared nearly 8%.
Results for Major Market Indexes
The Dow Jones Industrial Average (DJIA – 10,120.53) finished with a loss of 109.43 points, or 1.07%.
The S&P 500 Index (SPX – 1,069.59) had a bigger loss, on the day, of 13.89 points, or 1.28%.
The Nasdaq Composite (COMP – 2,187.33) fared the worst of the tree major indexes, with a loss of 35.16 points, or 1.58%.
The Russell 2000 Index of smaller companies had a loss of 11.60 points, or 1.86%, to settle at 612.64.
The Dow was led lower by financial giants JPMorgan Chase (JPM) and Bank of America (BAC) , which fell roughly 3% a piece. Johnson & Johnson (JNJ) and Alcoa (AA) also posted large declines. The index's best performers were Coca-Cola (KO) and Caterpillar (CAT) .
The Nasdaq Composite underperformed the broader markets despite Apple's big earnings beat. The index was led lower by chip maker Altera (ALTR) and Yahoo! (YHOO) , which tumbled 8% after a weaker-than-expected revenue report.
About 8.6 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year's estimated daily average of 9.65 billion.
Breadth was negative. On the New York Stock Exchange, losers beat winners by two to one on volume of 1.2 billion shares. On the Nasdaq, decliners beat advancers by almost three to one on volume of 2.25 billion shares.
Notes of Interest….
• The Dow Jones Industrial Average’s (DJIA) is still perched just a hair's breadth above its 10-week moving average, which has been toppled only once on a weekly closing basis since April.
• The S&P 500 Index’s (SPX) intraday slump was contained by its 20-day moving average, which has provided tenuous support since July 9.
• The Nasdaq Composite’s (COMP), the tech-rich index, slide was contained by the 2,185 region, home to its 20-day trendline.
• Crude futures: Not only did black gold have to contend with Ben Bernanke's gloomy assessment of the economy, but commodity players also reacted to an unexpected climb in domestic inventories during the past week. As a result, crude oil kept pace with weakness in the equities market, as traders fled riskier assets en masse. August-dated crude futures settled on a deficit of $1.02, or 1.3%, at $76.56 per barrel.
• Gold futures: The precious metal traded relatively flat, unable to break free from its recent trading range near $1,200 per ounce. By the close, gold for August delivery tacked on just 10 cents to settle at $1,191.80 per ounce.
• Bonds: Treasury prices rose, lowering the yield on the 10-year note to 2.89% from 2.93% late Wednesday.
Bernanke's comments, part of his semiannual report to Congress, weren't surprising given the disappointing economic reports and corporate earnings numbers released in recent weeks. But they were enough to upset investors who have grown increasingly nervous about the state of the recovery. Some investors may have been hoping for a more upbeat reading from the Fed chairman. The Fed is still expecting the economy to expand this year, but the central bank has lowered its forecast for growth.
Oliver Pursche, executive vice president at Gary Goldberg Financial Services, said investors took Bernanke's comments as "not exactly a ra-ra USA type of endorsement."
Craig Peckham, market strategist at Jefferies & Co., said stocks fell not because of anything Bernanke said, but what he didn't say about any plans to stimulate the economy. Although Bernanke said the Fed was "prepared to take further policy actions as needed," he also said, "we are not prepared to take any specific steps in the near term" because the Fed is still evaluating the economy.
Peckham said, "The market expected that we'd see more sign of monetary easing in the testimony. But that didn't happen." Monetary easing would include steps to make credit more available or encourage banks to lend more.
"The market sold off because unfortunately there is no remedy provided in Bernanke's commentary to the rising threat of deflation, the excess capacity in the economy and the malfunctioning of the credit system," said Joe Battipaglia, market strategist at Stifel Nicolaus in Yardley, Pennsylvania.
"We are now giving up on the notion of a standard recovery in the U.S. economy."
The market fluctuated for much of the day on another mixed batch of earnings reports. John Merrill, chief investment officer of Tanglewood Wealth Management in Houston said the day was like many others recently: Very little news but lots of professional traders reacting to it.
"Bernanke said he wants to collect more data before doing anything, and that's just fine. But traders are impatient. They got a 'buy' button and a 'sell' button and they're going to do do one or the other," Merrill said.
Wall Street reform: President Obama signed the Wall Street reform bill into law Wednesday, enacting the most far-reaching financial overhaul since the Great Depression.
In currencies: The euro fell versus the dollar. The dollar fell versus the Japanese yen.
European Markets rose, with Britain's FTSE 100 up 1.5%, Germany's DAX up 0.4% and France's CAC 40 up 0.8%.
Asian Markets: ended mixed. Japan's Nikkei fell 0.2%, while Hong Kong's Hang Seng gained 1.1% and the Shanghai Composite gained 0.3%.
Company Earnings Reports
• After the close, eBay (EBAY) reported higher quarterly sales and earnings that topped estimates, thanks to strength at its PayPal only payments unit. The online auctioneer also lowered the high end of its full-year 2010 profit forecast, citing the impact of the weaker euro. Shares gained 3% in after-hours trading.
• Search engine operator Yahoo (YHOO) reported results that disappointed investors. The Internet company reported higher earnings that beat estimates on revenue that was barely higher from a year earlier and was shy of analysts' expectations.
Citigroup downgraded the stock Wednesday, while a variety of other firms downgraded it or cut earnings estimates on the company. Shares fell 8.5%.
• Dow component Coca-Cola (KO) reported higher quarterly sales and earnings that topped estimates, helped by increased sales in most of its markets, with particularly strong demand overseas. Shares gained 1.6%.
• Morgan Stanley (MS), Wells Fargo (WFC) and US Bancorp (USB) all reported strong profits, but bank shares were mixed. The KBW Bank (BKX) index lost 2.4%.
• Morgan Stanley reported a profit of $1.4 billion, better than expected and reversing a loss from the same quarter a year ago. The company also reported higher earnings that topped estimates.
• Wells Fargo reported a higher second-quarter profit that topped expectations, thanks to smaller loan losses. Shares gained 4.7%.
• US Bancorp reported higher quarterly sales and earnings that topped expectations, thanks partly to lower credit costs.
• United Technologies (UTX) reported a 14% rise in second-quarter net income and posted stronger-than-expected EPS of $1.20. Analysts had expected $1.16. Revenue rose 5% to $13.9 billion, also beating estimates. The industrial conglomerate and Dow component also upped its 2010 EPS view to $4.60 to $4.70, compared with consensus views for $4.66.
• Textron (TXT) soared 8.7% after the manufacturer blew away estimates with EPS of 27 cents. Analysts had been looking for EPS of just 9 cents. Revenue rose 3.7% to $2.71 billion, compared with the Street’s view of $2.49 billion. Looking ahead, Textron projected non-GAAP EPS of 55 cents to 65 cents, which would beat forecasts for 50 cents.
• Freeport-McMoRan (FCX) said its net income rose 10% and its EPS of $1.40 easily topped the Street’s view of $1.28. Revenue jumped by a stronger-than-expected 18% to $3.86 billion.
• Altria (MO) reported a 2% rise in net income and EPS of 50 cents a share, matching the Street’s view. The parent of Philip Morris also posted mostly in-line adjusted-revenue of $4.34 billion.
Company News and Movements:
• BP (BP) saw its stock rise 2.6% a day after inking a $7 billion deal to sell some of its oil and gas assets to Apache (APA: 87.39, -0.91, -1.03%) to help pay for costs related to the huge oil spill in the Gulf of Mexico. Meanwhile, BP also denied a Times of London report that CEO Tony Hayward plans to step down within 10 weeks.
The following companies had some impressive options movements:-
• VMware, Inc. (VMW) boasted a profit of 34 cents per share in its second-quarter report on Tuesday night, beating the consensus estimate by 2 cents. The tech stock also issued earnings guidance for the third quarter that is above analyst expectations. Analysts and shareholders reacted positively to this news, with VMW receiving a handful of upgrades today and touching a new 52-week high.
Option activity was rampant ahead of earnings, with roughly 14,000 contracts traded -- triple VMW's expected single-session volume.
The August 75 call was most popular, with 2,712 contracts traded. However, most of these calls traded closer to the bid price, revealing they were sold. Overnight, open interest increased substantially, suggesting that a portion of these calls were sold to open. By selling to open the August 75 call, traders are counting on VMW to remain beneath the $75 level for the next months.
• Put players have pounced on Kraft Foods Inc. (KFT) today, with nearly 3,000 of these bearishly biased options changing hands by midday --more than double the packaged food guru's usual daily put volume of around 1,200 contracts.
Traders have looked ahead to the back-month series, with 756 contracts traded on the September 28 put -- 92% at the ask price, suggesting they were likely bought. However, with 1,629 contracts currently in open interest this strike, it's difficult to say definitively whether these puts are newly added. However, KFT has not closed a week below $27 since December 2009. With this in mind, these out-of-the-money puts may have been purchased as protection.
• SLM Corporation (SLM)is attracting a flurry of call volume in the wake of its quarterly report. Roughly 10,000 calls have changed hands on SLM so far, outpacing the equity's expected daily call volume of about 800 contracts. The stock's January 2011 12.50-strike call is most active, with 7,585 contracts crossing the tape on open interest of 5,492 -- revealing that new positions are being opened here today.
• TASER International, Inc. (TASR) has bolted to a gain of more than 11% today, despite a general lack of stock-moving headlines. Bullish bettors have flocked to TASR as a result, with call volume surging to 81 times the expected level.
Most of the volume is centered on TASR's September 2.50 call, where 10,001 contracts have traded -- 54% at the ask price, indicating they were most likely purchased. Implied volatility on this back-month option has climbed 14.8 percentage points as a result. With just 86 contracts in open interest at the September 2.50 call, it's safe to say that new positions are being added here today.
• Bullish flow detected in 3M (MMM), with 11611 calls trading, or 3x the recent avg daily call volume in the name.
• Bullish flow seen in Navios Maritime Partners (NMM), with 2279 calls trading, or 26x the recent avg daily call volume in the name.
• Bullish flow detected in Sandridge Energy (SD), with 16767 calls trading, or 2x the recent avg daily call volume in the name.
• Increasing volume is also being seen in US Airways (LCC), Morgan Stanley (MS), and Biogen Idec (BIIB).
Stocks found a little momentum Tuesday amid speculation that the Federal Reserve may take more steps to encourage bank lending. But that failed to transfer to Wednesday's trading despite a number of improved earnings.
"Right now the macro-economic environment is trumping the good earnings," Rovelli said. "The earnings have been good but people are worrying about what the next few quarters are going to look like if the recovery is losing steam."
The steep declines on Wall Street come after the Dow soared more than 220 points off its lows on Tuesday, overcoming early jitters sparked by sub-par revenue figures from blue-chip companies.
Wall Street increased its losses and turned solidly negative after Bernanke called the economic outlook "unusually uncertain" and forecasted for moderate growth over the next several years. Bernanke said the Fed is prepared to take further actions as needed and warned of a slow pace for reducing unemployment. In response, the markets were pricing in the lowest chances of a rate hike by year end of the entire cycle.
As if any evidence was needed of Wall Street’s disdain for uncertainty, Bernanke’s testimony on Capitol Hill triggered another wave of risk aversion and reinforced fears of a double-dip recession. While the economic commentary wasn’t all that different from recent Fed forecasts, the markets clearly didn’t appreciate the reminder of the fragile recovery.
“Whenever we see some strong comments come out of Washington, we’re going to get that reaction in the market. I don’t think there was much that was said that we weren’t anticipating," said NYSE trader Jonathan Corpina, senior managing partner at Meridian Equity Partners. “Yes, we know there’s uncertainty that’s going to be there. Yes, we know Europe is something we need to keep on our radar screen.”
“He’s saying things are not as good as we expected them to be. The market was certainly taken aback by it," said Joe Saluzzi, co-head of trading at Themis Trading.
“There is an abundance of doubt and caution. Many would argue that this is precisely the type of environment to buy equities in. My sense is that very few have the conviction or stomach for it,” Peter Kenny, managing director at Knight Capital Group, wrote in a note.
Investors have been selling stocks since late April on a combination of weak economic indicators and disappointing earnings reports. The Dow, which reached a 2010 high of 11,205.03 on April 26, has fallen 10 percent as investors have seized on any piece of bad news and shrugged off more positive signs about the economy.
In the past few days, companies' revenue figures have become a culprit. Wall Street has been caught off guard in recent days as high-profile companies including General Electric Co. (GE) , International Business Machines Corp. (IBM) and Bank of America Corp. (BAC) beat earnings estimates but missed on revenue. The belief in the market is that companies aren't getting the strong sales needed to fuel the economic recovery.
"The numbers aren't bleak but there's no top-line growth, and that's scaring people. There's a realization that the economy is stuck in slow growth for a year or two," said Brian Wenzinger, a portfolio manager at Aronson-Johnson-Ortiz in Philadelphia. Still, the majority of S&P 500 companies are reporting both earnings and revenue above estimates, according to John Butters at Thomson Reuters.
"With 100 S&P 500 companies reporting to date, 76% have reported earnings above estimates and 65% have reported revenue above estimates," Butters said Wednesday in an email.
"These percentages are consistent with final percentages we've recorded over the past three quarters for both earnings and revenues," he added.
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