Tuesday saw bearish sentiment and risk aversion make a big return to Wall Street, where stocks struggled to stay north of breakeven, eventually succumbing to the bears' backlash in the final hours of trading. The late-session selling spree was mostly attributable to a disappointing housing report, after the National Association of Realtors said sales of existing homes unexpectedly fell 2.2% in May, despite the expiring homebuyer tax credit.
"While housing is not the giant part of the economy some imply that it is, we continue to believe that housing remains a crucially important part of the economy from a sentiment standpoint,” Dan Greenhaus, chief economic strategist at Miller Tabak, wrote in a note. “As housing weakens, will consumers continually feel exuberant about their respective financial situations? We think not.”
Meanwhile, Standard & Poor's warned of higher-than-expected credit losses for a slew of Spanish banks, echoing a similar move from Fitch Ratings, which last night downgraded its long-term outlook on France's BNP Paribas SA.
Selling picked up steam during the day’s final two hours as the markets reverted to their tendency last month to reverse course late in the session without much prodding. The energy sector took the brunt of the last-minute selling as the White House said it plans to appeal a decision by a federal judge to block the Obama Administration’s six-month moratorium on deepwater oil drilling in the Gulf of Mexico.
“Clearly [the selloff is] correlated to the headlines coming out of D.C,” said NYSE trader Jonathan Corpina of Meridian Equity Partners. “As we saw yesterday, as the day went on, the market continues to lose steam and fall off the chart.”
Results for Major Market Indexes
The Dow Jones Industrial Average (DJIA – 10,293.52) finished with a big loss of 148.89 points, or 1.43%.
The S&P 500 Index (SPX – 1,095.31) had an even bigger loss, on the day, of 17.89 points, or 1.61%.
The Nasdaq Composite (COMP – 2,261.80) also had a loss of 27.29 points, or 1.19%.
The Russell 2000 Index of smaller companies had a loss of 14.12 points, or 2.14%, to settle at 645.91.
The blue-chip index was led lower by led by economically-sensitive Alcoa (AA), Caterpillar (CAT) and Home Depot (HD). The index's only two advancers were defensive plays: drug makers Johnson & Johnson (JNJ) and Merck (MRK).
Home Depot (HD) fell 2.6% after the release of data showing sales of previously owned homes in the U.S. slipped 2.2% in May to a 5.66 million annual rate. The surprise decline followed two monthly increases driven by a tax incentive for first-time buyers.
Johnson & Johnson (JNJ) held onto slight gains, after agreeing to pay $45 million upfront to develop and commercialize a type-1 diabetes treatment-and-prevention drug from Swedish drug maker Diamyd Medical AB.
The Nasdaq Composite, which had been in the midst of a seven-day win streak as early as last Friday, saw less selling than the broader markets but still slumped by 1% for the second day in a row. Tech stocks such as Nvidia (NVDA) and Cisco Systems (CSCO) declined.
Market breadth was negative. On the New York Stock Exchange, losers beat winners by over three to one on volume of 1.12 billion shares. On the Nasdaq, decliners topped advancers by over three to one on volume of 1.9 billion shares.
Notes of Interest….
• The Dow Jones Industrial Average’s (DJIA) surrendered its perch above the 10,400 level, but the index's losses were contained by its 10-day moving average.
• The S&P 500 Index’s (SPX) surrendered its foothold on the psychologically critical 1,100 level, as well as its own 10-day trendline.
• The Nasdaq Composite (COMP), the tech-rich index, finished the session below its 10-day moving average for the first time since June 10.
• Crude futures retreated into the red today, after a surprise slump in existing-home sales sparked concerns about demand. In addition, Goldman Sachs slashed its 2011 price forecast for crude to $100 per barrel from $98 per barrel, predicting a "slower-than-expected draw on global inventories." Furthermore, commodities traders hesitated to buy black gold ahead of the government's weekly inventories data, which economists are expecting to show a 1.4-million-barrel surplus in distillate supplies. By the close – and despite a federal judge's decision to block the moratorium on offshore drilling in the Gulf of Mexico – August-dated crude oil shed 76 cents to settle at $77.85 per barrel.
• Gold futures finished a volatile session higher today, as a declining greenback made it cheaper for foreign-currency holders to buy the dollar-denominated commodity. In addition, lingering concerns about European debt, as well as a down day in the equities market, triggered a fresh wave of safe-haven demand. Against this backdrop, gold for August delivery gained 10 cents to end at $1,240.80 an ounce.
• Bonds: Treasury prices rallied, lowering the yield on the 10-year note to 3.17% from 3.24% late Monday. Treasury prices and yields move in opposite directions.
Existing Home Sales
Sales of existing homes in the U.S. fell unexpectedly last month, calling into question the recent hints of a recovery in residential real estate.
The National Association of Realtors said Tuesday that existing-home sales dropped by 2.2% in May, far worse than the 5.2% increase economists had been forecasting, according to a survey from Thomson Reuters.
The falloff comes on the heels of an 8% jump in April, revised from the previously reported 7.6% increase.
Meanwhile, the NAR said the median price of an existing home was $179,600, an increase of 2.7% from May 2009.
Despite the drop-off in sales last month, the NAR said sales remain at elevated levels, no doubt helped by the government’s home-buyer tax credit. That program ends soon; deals must close by June 30. Sales were up 19.2% compared with May 2009.
“However, approximately 180,000 home buyers who signed a contract in good faith to receive the tax credit may not be able to finalize by the end of June due to delays in the mortgage process, particularly for short sales,” said Lawrence Yun, the NAR’s chief economist. “In addition, many potential sales are being delayed by an interruption in the National Flood Insurance Program. Florida and Louisiana, also impacted by the oil spill, have the highest percentage of homes that require flood insurance.”
According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to 4.89% in May from 5.10% in April; the rate was 4.86% in May 2009.
Sales rose 4.9% in the West and 0.5% in the South, but plunged 18% in the Northeast and were essentially unchanged in the Midwest.
Underscoring the worries about housing, home builders like DR Horton (DHI), home improvement retailers such as Lowe’s (LOW) and economically-sensitive materials stocks like U.S. Steel (X) all slumped by about 3%. The Morgan Stanley housing index .HGX slumped 2.6 percent.The housing story will be in focus again on Wednesday as economists expect a separate report to show new home sales took a hit in May.
Treasury's Home Affordable Modification Program
The Obama administration's much-maligned program to help struggling homeowners was not meant to keep homeownership at unsustainable levels, and foreclosures are inevitable, Treasury Secretary Timothy Geithner said on Tuesday.
"This program was not designed to prevent foreclosures. It was not designed to sustain homeownership at a level that would be unachievable, imprudent to try and do," Geithner said in testimony to the watchdog panel overseeing the $700 billion bank rescue program.
Photo: Treasury Secretary Timothy Geithner
Geithner made the comments in response to a question about Treasury's Home Affordable Modification Program from panel member Kenneth Troske, who said the increase in the homeownership rate in the past 15 years is a key source of blame for much of the housing crisis.
"My own view on the housing market is we're not going to return to stability until we return a rate in which, you know, 65 percent of households own their own homes," said Troske, an economics professor at the University of Kentucky.
Homeownership rates were about 65 percent from 1965 through 1995 and then surged to about 69 percent during the housing boom before falling to about 67 or 68 percent today, he said.
The Treasury Department on Monday said more people had been kicked out of trial loan modifications than had received permanent modifications.
About 150,000 borrowers who could not prove their income or keep up with the new payments had their modifications canceled in May, bringing the total number of cancellations to 429,696, or just more than one third of the 1.24 million trial modifications started since the program's inception.
The number of borrowers who have received a permanent loan modification rose to 340,459 in May, about 11 percent of 3.2 million HAMP eligible loans.
Central bank policy makers are meeting Tuesday and Wednesday with an announcement expected Wednesday afternoon regarding interest rates and the economy.
Policymakers are widely expected to hold the fed funds rate, a key overnight bank lending rate, steady at historic lows near zero and to indicate that they will continue to do so for the foreseeable future.
Of more interest will be the statement and what the Fed says about the economic outlook, particularly amid concerns that the bankers have run out of ways to prop up the economy.
The Energy Sector
U.S. Judge Rules Against Obama Administration on Drilling Ban
A federal judge in New Orleans on Tuesday ruled against the Obama administration’s six-month moratorium on deepwater drilling that was imposed in the wake of the giant oil spill in the Gulf of Mexico.
The White House quickly responded, saying it will immediately appeal the decision.
The legal decision creates uncertainty over the controversial move to put deepwater drilling on hold amid safety concerns after the April explosion at Deepwater Horizon, the BP Plc (BP) run oil rig in the Gulf of Mexico that created the worst oil spill in U.S. history.
“Continuing to drill at these depths without knowing what happened does not make any sense and puts the safety of those involved… at a danger that the president does not believe we can afford right now,” Robert Gibbs, the White House press secretary, told reporters.
However, the judge ruled the moratorium was "arbitrary" and took into account the huge economic impact of the move.
“While a suspension of activities directed after a rational interpretation of the evidence could outweigh the impact on the plaintiffs and the public, here, the Court has found the plaintiffs would likely succeed in showing that the agency’s decision was arbitrary and capricious,” Martin Feldman, the U.S. district judge ruled. “An invalid agency decision to suspend drilling of wells in depths of over 500 feet simply cannot justify the immeasurable effect on the plaintiffs, the local economy, the Gulf region, and the critical present-day aspect of the availability of domestic energy in this country.”
The decision on Tuesday was a victory for Hornbeck Offshore Services (HOS), the Louisiana-based company that asked to have the drilling ban reversed. Hornbeck argued the U.S. never showed the wells were a danger.
The moratorium was controversial in part because it created another economic hardship for a region that relies on the oil industry for much of its economy.
“I think this may very well go to the Supreme Court,” said John Kingston, global director of news at Platts. “It could make for an interesting summer.”
Louisiana Gov. Bobby Jindal said Tuesday he supports the decision. “I am asking the federal government, I am asking the president, I am asking the administration, I am asking secretary Salazar, do not appeal this injunction,” Jindal told reporters. “Listen to the judge. This moratorium is arbitrary and capricious.”
Tom Hornbeck, the CEO of Hornbeck Offshore Services, told FOX Business on Monday it would feel the effects if the moratorium is not lifted. He also said his company is one week away from pulling all of its equipment and moving it to South America because of the lost income.
“We all know that the moratorium was a very quick decision by the government,” Hornbeck said. “If we lose these assets overseas, it will be many, many years before they return, if they ever do return.”
Shares of Hornbeck briefly jumped to $17.00 after the decision was announced, but were recently trading up just 0.71% to $15.66. Other drillers like Transocean (RIG), which owns Deepwater Horizon, and Diamon Offshore Drilling (DO) had a similar reaction.
The U.K. unveiled some of its steepest spending cuts in decades as it attempts to hold onto its coveted “AAA” credit rating. The plans included higher taxes on spending, capital gains and banks, as well as cuts in corporation taxes and less government spending.
Anxiety remained high over the health of European banks, after French bank Crédit Agricole said it now forecasts its Emporiki Bank of Greece SA unit will return to profit in 2012 instead of 2011 because of higher-than-expected loan losses. That came a day after Fitch downgraded French bank BNP Paribas's (FR:BNP ) credit rating. Last week, European leaders agreed to publish the results of stress tests showing the financial health of individual lenders by the end of July, in a bid to improve market confidence.
In currencies, after its worst day in nearly three weeks, the euro continued to decline against the U.S. dollar, raising worries on Wall Street about Europe’s sovereign debt crisis and pressuring commodities. The euro was off 0.37% to $1.2273 as U.S. markets closed. The currency was hurt by French bank BNP Paribas, which was downgraded by credit company Fitch late Monday, once again resurrecting worries about the state of the European financial system.
European Markets: The U.K.'s FTSE 100 lost 0.98% to 5246.98; France's CAC 40 sank 0.83% to 3705.32 and Germany's DAX fell 0.38% to 6269.04.
Asian Markets: Tokyo's Nikkei 225 was down 1.2% to 10112.90, Hong Kong's Hang Seng dropped 0.45% to 20819.10 and China's Shanghai Composite closed up 0.1% to 2588.70.
Company Earnings Reports
There have been some positive notes today, particularly from the earnings arena. Several companies have presented earnings reports that exceeded analysts’ expectations. These are:-
• Carnival Corp. (CCL)
• Jefferies Group (JEF)
• Jabil Circuit Inc. (JBL)
Red Hat Inc's (RHT) presented an earnings report that met analysts’ expectations.
There have been some negative notes today particularly from the earnings arena. Several companies have presented earnings reports that did not meet analysts’ expectations. These are:-
• Sonic Corp (SONC)
• Steelcase Inc (SCS)
• Walgreen Co. (WAG)
Jabil Circuit Inc. (JBL)
Shares of Jabil Circuit Inc. surged nearly 9% Tuesday evening after the electronics manufacturer's forecast and quarterly results beat Wall Street's expectations.
Jabil shares (JBL) stood out during the late session, rising 8.6% to $14.76. The company said core earnings for its fiscal third quarter came in at 40 cents a share, and revenue rose to $3.46 billion from $2.62 billion. Analysts had expected earnings of 33 cents a share on revenue of $3.21 billion, according to a consensus estimate from Thomson Reuters.
Jabil also swung to a profit of $52 million, or 24 cents a share. In the same period last year, Jabil lost $28.8 million, or 14 cents a share.
The company forecast fourth-quarter core earnings of 45 cents to 50 cents a share on net revenue of $3.8 billion to $4 billion. Wall Street currently expects earnings of 38 cents a share on $3.37 billion.
In addition, Jabil said it entered into a deal to divest of its manufacturing operation in France and Italy.
Red Hat Inc's (RHT)
Business software company Red Hat Inc's (RHT) quarterly revenue and profit both rose 20 percent from a year earlier, as an improving U.S. economy helped it win more sales, including a major deal in North America.
But with a weaker euro denting its deferred revenue, an indicator of future revenue, and earnings and outlook numbers merely in line with expectations, the company's shares fell slightly in after-hours trading on Tuesday.
Red Hat said its net profit for its fiscal first quarter that ended May 31 rose to $24.1 million, or 12 cents per share, compared with $18.5 million, or 10 cents a share, a year earlier.
Chief Executive Jim Whitehurst said the company won the biggest deal in its history during the quarter, an "eight figure deal" in North America.
"We executed well and achieved a significant increase in the number of large deals booked year-over-year, including several with an initial consulting component which we believe is a positive indicator of new project spending and future subscription billings," he said.
Profit excluding stock compensation and amortization expenses rose to 18 cents a share from 15 cents. That matched the average analyst forecast, according to Thomson Reuters.
Its second-quarter outlook for profit excluding items, at 18 cents a share, was also in line with Wall Street's forecast. First-quarter revenue rose 20 percent to $209.1 million, and the company forecast revenue to rise further to a range of $210 million to $212 million in the second quarter, exceeding the market's forecast for $207.5 million.
Red Hat said a sharp drop in the euro at the end of the quarter dented its deferred revenue. Deferred revenue fell around $20 million from the previous quarter, but would have been flat if the euro had not fallen 10 percent over the quarter, it said.
CKE Restaurants Inc (CKR)
CKE Restaurants Inc (CKR), owner of the Hardee's and Carl's Jr. hamburger chains, posted a first-quarter loss, weighed down by one-time costs and stung by high unemployment in its core California market and among its main customers.
For the quarter ended May 17, the company which in April accepted a $694 million takeover offer from affiliates of Apollo Management, reported a net loss of $3.1 million, or 6 cents a share, compared with a profit of $14.4 million or 26 cents, last year.
The net loss includes $20.9 million in transaction fees and costs.
Revenue fell 3 percent to $435.2 million. Same-store sales at company-operated Carl's Jr. restaurants fell 6.1 percent, while the Hardees chain saw a same-store sales decline of 1.2 percent on the same basis.
Analysts on average were expecting the company to earn 18 cents on revenue of $435.3 million, according to Thomson Reuters. Company-operated restaurant margins narrowed 320 basis points to 16.7 percent on costs related to remodeling activities as well as higher commodity and labor costs.
Separately, the company also reported same-store sales for its period five ended June 14 fell 1.1 percent driven down by the Carl's Jr. chain.
Shares of the company, closed at $12.46 Tuesday on the New York Stock Exchange.
H.B. Fuller Co (FUL)
Specialty chemical products maker H.B. Fuller Co (FUL) reported quarterly profit that edged past analysts' estimates, helped by improved end-market demand and new customer wins, and projected higher net revenue for 2010. The company said it expects net revenue to grow between 10 and 12 percent for the full-year and sees raw material costs up 8 percent in 2010 from the previous year.
For the latest second quarter, net income was $11 million, or 22 cents a share, compared with $17.6 million, or 36 cents a share, last year.
Excluding items, the company earned 39 cents a share.
Total revenues for the quarter rose 16 percent to $348 million. Analysts, on an average, expected the company to post earnings of 38 cents a share, excluding items, on revenue of $329.98 million, according to Thomson Reuters.
For the second quarter, each operating segment produced strong net revenue growth and every segment, except Latin America, achieved double-digit organic growth, the company said.
Shares of the company closed at $21.73 Tuesday on the New York Stock Exchange.
Adobe Systems Inc. (ADBE)
Adobe Systems Inc. (ADBE) posted strong revenue gains in the second quarter as a result of its newest version of design software, the Creative Suite 5 helped boost the company’s results.
"Record revenue and our strong Q2 financial performance were driven by the successful launch of Creative Suite 5," said Shantanu Narayen, president and CEO of Adobe in a statement. "Our growth is being fueled by the explosion of digital content across all media and devices."
The software company also gave third-quarter guidance in-line with the Street’s view, forecasting earnings in the range of 46 to 50 cents a share on revenue between $950 million and $1 billion. Analysts were expecting earrings of 48 cents a share on revenue of $959 million, according to a poll Thomson Reuters.
For the second quarter, the company posted a profit of $148.6 million or 28 cents a share, compared with year-ago earnings of $126.1 million or 24 cents a share. Adjusted earnings rose to 44 cents per share, up from 35 cents in the year-ago period.
Revenue rose 34% to $943 million, compared with $704.67 million in the second quarter of last year. The Street had expected earnings of 43 cents a share on revenue of $905.91 million.
Shares of Adobe fell 39 cents or 1.18% in Tuesday’s session, closing the day out at $32.74. The stock was down another 58 cents or 1.77% in after-hours trading.
Company News and Movements:
• JPMorgan Chase (JPM) reshuffled its executive ranks, appointing Doug Braunstein as its new chief financial officer, Michael Cavanagh as its new CEO of Treasury & Securities Services and Heidi Miller as president of a newly-created international position. The moves come as JPMorgan continues to prepare its executives for eventual life after Jamie Dimon, the bank’s charismatic CEO.
• Apple (AAPL) said it has sold three million iPads in 80 days and that it is “working hard” to meet demand, including in nine more countries next month. The tech titan also said developers have created more than 11,000 new apps for the tablet device.
• Dow component McDonald's Corp (MCD) fell 1.4 percent to $68.91. Earlier, the Center for Science in the Public Interest threatened to sue the fast food giant if it doesn't stop using Happy Meal toys to draw children into its restaurants.
• Burger King Holdings Inc (BKC) fell 1.4 percent to $17.90.
The following companies had some impressive options movements:- • Visa Inc. (V)
• General Mills (GIS)
• American Express (AXP)
• Put players have converged on Ralcorp Holdings, Inc. (RAH) today, a session after the cereal sultan said it will buy American Italian Pasta Co. (AIPC) for $1.2 billion and projected weaker-than-anticipated earnings for its fiscal third quarter. In early afternoon activity, the stock has already seen roughly 3,000 puts cross the tape – more than 250 times its expected single-session put volume.
Frontier Communications Corp. (FTR) has attracted a wealth of options activity today, after the company filed a patent infringement lawsuit against Google Inc.
(GOOG) for its Google Voice service. Volume has swelled to more than 35 times FTR's daily average, with more than 83,000 contracts changing hands so far. What's more, according to WhatsTrading.com, 100% of this volume has traded on the put side of the coin.
Stocks marked time in a thinly traded session until the S&P 500 fell through its 200-day moving average, which had been a basis of support in the last few days.
Homebuilders' shares fell after the National Association of Realtors reported sales of existing homes unexpectedly fell in May in the latest of a series of weak economic releases.
"This tells you how weak demand is, and that creates a lot of uncertainty about where the economy is going," said James Meyer, chief investment officer at Tower Bridge Advisors in West Conshohocken, Pennsylvania.
"It's not a good sign," said Bill Strazullo, partner and chief investment strategist at Bell Curve Trading in Boston. "The last line in the sand is 1,050. You break that, it's done. The March '09 rally is over ... it's really critical what's going on here."
Worries that the economy could be heading into a so-called double-dip recession pummeled stocks for six weeks through early June, with the major indexes all losing close to 14%.
Since then, stocks have bounced back about 6%. But trading volume has been weak, reflecting both light summer activity and a lack of conviction on the part of buyers.
Although stocks could rise longer term, in the short run, there's little to reassure investors. "We're going to need a big catalyst to get things moving higher again," said John Wilson, chief technical strategist at Morgan Keegan.
"Without much tangible information to sink your teeth into investors are going to rely on technicals and right now the technicals broke down," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "There are a lot of extreme emotions right now and not a lot of information."
"It's kind of like summer doldrums until earnings season," Peter Tuz, president of Chase Investment Council in Charlottesville, Va., said. "Once that begins you start to get clarity."
Stocks initially rose Monday after China said it would let its currency rise versus the dollar, a move that could boost U.S. exports and manufacturing. But the market slipped by the close as the recent trend of last-hour volatility returned.
The economic data earlier pointed to continued struggles for consumers, even as manufacturing activity in the central Atlantic region, while slightly slower, remained strong in June.
"You've kind of got two economies at work," said Christian Thwaites, president and chief executive of Sentinel Investments. "In the corporate world, you're seeing gradual improvements in confidence, you're seeing a little bit more on the capital expenditure side and other indicators. The other part of the economy is the consumer, and that is flat and still struggling and will for some time. So we're not placing any big bets on the consumer-discretionary side."
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