Tuesday saw economic fears grip Wall Street again as the Dow shed another 268 points and broke below the 10000 level in the wake of crumbling U.S. consumer confidence figures and fresh signs China’s economic recovery could derail.
Wall Street had already been stuck in a weeklong slump, but the latest headlines only reinforced worries that the global economy could suffer a double-dip recession: consumer confidence unexpectedly plunged in June, a leading economic index in China was sharply revised lower and the turbulent euro broke below the $1.22 level.
“If China is slowing down, as the world’s No. 1 exporter, what else is going on around the globe?" said Scott Martin, managing director at Astor Asset Management. “The fundamentals in the market are still solid but I think the market psychology is to sell now and ask questions later."
"This is all part of the global economy we're worried about; there just isn't enough growth around to generate jobs," said Jack Ablin, chief investment officer at Harris Private Bank.
The Conference Board said that its consumer confidence index tumbled to 52.9 in June from the prior month's reading of 62.7, stoking concerns about the economy's fledgling recovery. Earlier, the Conference Board raised investors' hackles across the globe after downwardly revising its index of leading economic indicators for China. The double dose of negative news effectively offset any potential enthusiasm over a slim gain in home prices for April, and stocks dropped right from the start of the session. In fact, the New York Stock Exchange (NYSE) got the chance to test out its new single-stock circuit breakers after the shares of Citigroup (C) threatened to fall more than 10%; trading in the bank was halted for five minutes while the panic subsided.
The markets began the day by following Asian and European stocks lower. Asian exchanges fell after an index that forecasts economic activity for China was revised lower. European stocks continued the slide after Greek workers walked off the job to protest steep budget cuts.
"Between euro worries, some notes of a slowdown out of Asia and a bad consumer sentiment number, there are very few reasons for stocks to rise, and plenty for them to fall or flatten out," said Karl Mills, president and chief investment officer at Jurika Mills & Keifer.
"The largest concern on a broad level remains the issue of debt, both in Europe and the U.S.," he said.
Results for Major Market Indexes
The Dow Jones Industrial Average (DJIA – 9,870.30) finished with a big loss of 268.22 points, or 2.65%.
The S&P 500 Index (SPX – 1,041.24) had an even bigger loss, on the day, of 33.33 points, or 3.10%.
The Nasdaq Composite (COMP – 2,135.18) fared the worst of the three major indexes, with a loss of 85.47 points, or 3.85%.
The Russell 2000 Index of smaller companies had a loss of 25.58 points, or 3.99%, to settle at 615.96.
All 30 stocks on the Dow were stuck in the red, led by heavy losses for Caterpillar (CAT), Boeing (BA) and Alcoa (AA). The index's best performers were defensive-minded Verizon (VZ) and Johnson & Johnson (JNJ).
The Nasdaq Composite took an even bigger hit, nearly dropping triple digits and suffering its worst percentage decline since May 20 as technology stocks like SanDisk (SNDK) and Amazon.com (AMZN) posted steep losses. The index closed at its lowest level since February.
Consumer discretionary stocks like Saks (SKS) and Ford (F) took a bit hit in the wake of the Conference Board data on the consumer confidence index.
Basic materials stocks like U.S. Steel (X) and manufacturing stocks such as Deere (DE) took the Conference Board report on China’s leading economic index for April news particularly hard amid fears of lower demand in Asia .
Technology stocks suffered steeper losses than the broader markets as chip maker Micron Technology (MU) tumbled 13% amid disappointment over its quarterly results. While the company beat the Street and posted its highest net income ever and best quarterly sales in almost 10 years, the markets focused on potential problems with demand.
About 11.38 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, above last year's estimated daily average of 9.65 billion.
Market breadth was negative and volume was moderate. On the New York Stock Exchange, losers beat winners 11 to one on volume of 1.6 billion shares. On the Nasdaq, decliners topped advancers eight to one on volume of 2.58 billion shares.
Only about 260 stocks rose while about 2,840 fell at the New York Stock Exchange, where consolidated volume came to 6.3 billion shares, compared with a light 3.9 billion Monday.
Notes of Interest….
• The Dow Jones Industrial Average’s (DJIA) is at one of its lowest closes of the year, in the red for the fourth day in a row and well below the psychologically-important 10000 mark. The benchmark index has tumbled 428 points, or 4.16%, over the past four trading days and is now off 11.91% from its highest close of the year.
• The S&P 500 Index’s (SPX) managed to hold the 1,040 level for another day. This round-number neighborhood contained the index's lows in late May and early June, and will be a key level to watch in tomorrow's trading. The 200-day moving average on the S&P 500 settled below the previous day's level for the first time since Jan. 2008 -- a particularly bearish signal for traders who watch this technical gauge.
• 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 fell in sympathy with stocks, as traders wrung their hands over the day's disappointing economic reports. Additionally, Tropical Storm Alex continued to beat a path well away from production facilities in the Gulf of Mexico, eliminating any supply-related concerns. By the close, crude oil for August delivery tumbled $2.31, or nearly 3%, to finish at $75.94 per barrel.
• Gold futures were able to notch a minor gain, capitalizing on the malleable metal's reputation as a relative safe haven. In fact, gold even managed to shrug off pressure from the rising U.S. dollar, which caught a flight-to-safety boost of its own today. Gold for August delivery wrapped up the session on a gain of $3.80, or 0.3%, to settle at $1,242.40 per ounce.
• Bonds: Underscoring the flight to safety, the yield on the 10-year Treasury note slipped below 3%, a level it hasn’t seen since April 2009 when it was recovering from the financial crisis. The last time the benchmark actually fell below 3% was Nov. 2008, the height of that crisis.
• The Chicago Board Options Exchange's Volatility Index, known as Wall Street's fear gauge, surged 22 percent to a session high of 35.39, its highest level since early June, in a sign more volatility could be in the offing.
Selling gained serious momentum Tuesday morning after the Conference Board said its consumer confidence index dropped to 52.9 in June, sharply below a reading of 62.7 in May and not even close to forecasts for a rise to 62.8. The report showed Americans remain very worried about the jobs market and grew significantly more concerned about the six-month outlook.
S&P Case-Shiller Home Price Index
The markets weren't helped by the April S&P/Case-Shiller 20-city home-price index, which rose 3.8% annually in April. Economists had expected a more modest rise of 3.4%. Wall Street also continues to play it cautious ahead of Friday's all-important jobs report.
The Energy Sector
**BP (BP), which raised $5 billion last week, is reaching out to a number of banks, including Goldman Sachs (GS) and JPMorgan Chase (JPM), about raising another $5 billion to $10 billion through additional credit lines and a private placement of debt. BP is also offering cash to struggling gas stations around the U.S. that bear its name.
**Analysts at JPMorgan Cazenove are pondering potential takeover scenarios for BP plc (BP). In a note today, the brokerage firm noted that Exxon Mobil (XOM) and Royal Dutch Shell (RDSA) could potentially launch bids for BP, due to their like-minded business models and global asset structures.
Not insignificantly, JPMorgan also believes that Exxon Mobil and Royal Dutch Shell face the lowest potential of political backlash by linking up with BP.
In fact, JPMorgan thinks a possible bid is so likely that it wonders why the market isn't pricing in such an event. The firm believes that traders are hyper-focused on BP's oil-spill liability instead of the potential upside from the catastrophe. However, JPMorgan is definitely focused on the positive; the firm maintains an "overweight" rating on BP.
Leading Economic Index for China
Concerns about the global economy roiled world financial markets Tuesday after a report on leading indicators in China was revised lower.
The Conference Board, a New York-based research group, said its Leading Economic Index for China rose 0.3% in April after an increase of 1.2% in May. The group originally reported a 1.7% gain in April, but that was revised lower due to a miscalculation.
Bart Van Ark, chief economist at the Conference Board, said he expects economic growth in China to moderate in the second half of 2010, although he still forecasts a robust 9% growth rate for the full year.
China has recovered strongly from the global slump in 2008 and 2009. The nation's economy expanded at a nearly 12% rate in the first quarter of this year, driven largely by industrial growth and retail sales.
That has many investors looking to China and other emerging economic engines to power the global economy. China has become increasingly important as economic conditions in Europe have deteriorated and the outlook for U.S. growth has come into question.
"If these numbers turn out to be true, that leads to questions about how strong the global recovery will be if Asia is not participating," said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management.
But a slight moderation in China's growth rate could be viewed as a positive sign, according to Van Ark.
Policymakers in China have been taking steps to slow domestic lending to keep their economy from overheating. And many economists say the rapid expansion of China's real estate sector in recent months could constitute a price bubble.
"I think the market's reaction is very much related to other pieces of news that came at the same time" as the LEI index, said Van Ark.
Europe's common currency also fell, with labor strikes in Greece and Spain illustrating discontent with the continent's austerity measures.
"Credit-default swaps spreads in Greece and Spain have leapt forward to all-time highs as the market is predicting that neither of these countries will be very successful in their austerity measures or cutting their debt enough without some additional aid," said Kevin Giddis, president of fixed income capital markets at Morgan Keegan.
In currencies, the euro was down 0.64% to $1.2195 as U.S. markets closed.
Wall Street suffered by more trouble in Europe as the euro tumbled for the second day in a row and slid below $1.22. The currency has been slammed by the European sovereign debt crisis and was hurt again on Tuesday by riots in Greece, the epicenter of the crisis.
Greece is required to make the cuts under terms of a bailout from other European Union members and the International Monetary Fund. Protests over government cost-cutting in Greece renewed concerns about how well European countries will be able to stick to austerity plans.
European Markets: U.K.'s FTSE 100 plunged 3.1% to 4914.22, France's CAC 40 dropped 4.01% to 3432.99 and Germany's DAX lost 3.33% to 5952.03.
Asian Markets: U.K.'s FTSE 100 plunged 3.1% to 4914.22, France's CAC 40 dropped 4.01% to 3432.99 and Germany's DAX lost 3.33% to 5952.03.
Chinese markets fell after the Conference Board's Leading Economic Index for China was revised to 0.3 percent for April from 1.7 percent.
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:-
• Worthington Industries Inc (WOR)
• Micron Technology (MU)
<The following companies presented earnings reports that met analysts’ expectations.
• EXFO Inc (EXF.TO) (EXFO)
• Sealy Corp's (ZZ)
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:-
• General Mills Inc (GIS)
• Parlux Fragrances Inc (PARL)
• Barnes & Noble Inc. (BKS)
Company News and Movements:
Goldman Sachs Group, Inc.
Brokerage firm KBW lowered its earnings expectations for Goldman Sachs Group, Inc. (GS), with analysts citing weaker revenue from trading and investment banking for the downwardly revised outlook. KBW now expects GS to earn $18.36 per share in 2010, down from its prior view of $20.50 per share. For the second quarter, earnings are expected to arrive at $3.21 per share, compared to KBW's prior estimate of $4.64 per share. The brokerage firm maintains a "market perform" rating on GS shares.
Massey Energy Company
Late Monday, word hit the Street that Massey Energy Company (MEE) filed a complaint with the Federal Mine Safety and Health Review Commission. Massey claims that federal mine safety officials have prevented the coal company from conducting its own investigation into the deadly explosion at its Upper Big Branch Mine in April, according to The Wall Street Journal. The company is now seeking emergency relief from an order prohibiting it from photographing, mapping, and sampling the site.
Regions Financial Corporation
Regions Financial Corporation (RF) snagged an upgrade this morning, as UBS boosted its opinion of the regional banking issue from "sell" to "neutral." The brokerage firm also upped its price target on RF from $6 to $7.10, implying expected upside of just a few pennies from the stock's Monday close at $7.08.
Citigroup's (C) shares were briefly halted on the New York Stock Exchange due to a "bad trade," marking the highest-profile use of the markets' new circuit breaker mechanisms. Citi's shares briefly tumbled 17% but they recovered most of those losses after trading resumed.
Tesla Motors’ (TSLA) surged 38.5% to $23.89 on it first day as a publicly-traded company, making it the second-best debut for any company of the past year. The performance also landed the stock nearly twice as high as estimates for $14-$16 a share. The electric car maker debuted on the Nasdaq Stock Market as the first U.S. auto initial public offering since Ford Motor (F) in 1956.
The following companies had some impressive options movements:-
• Wynn Resorts, Limited (WYNN)
• Ford Motor Company (F)
The gloomy developments triggered another flood of risk aversion, slamming economically-sensitive stocks like Alcoa (AA), commodities like copper and triggering a flight to safety into U.S. bonds and the dollar. In another sign of the jitters in the markets, the VIX, or the so-called “fear gauge,” surged 18% to early June levels.
“That’s an indicator to me that the smart money, which I consider to be the bond market money, is preparing for the worst. It’s not necessarily predicting a double-dip recession but some kind of deflationary spiral,” said Martin.
"While the recession may have technically ended last summer, consumers remain skittish about job and income prospects and are refraining from consuming in a sufficient enough manner as to create substantial growth in GDP," Dan Greenhaus, chief economic strategist at Miller Tabak, wrote in a note.
U.S. markets aren’t typically moved dramatically by the Chinese data point, but the revision was enough to spook already-jittery investors and plays into ongoing worries that China’s economy is slowing down. Plus, the bulls have looked for China to continue leading the world’s economic recovery. However, it's worth noting that just a few months ago the worry on Wall Street was that China's economy was overheating.
“The fear is that the economy is stagnating and maybe contracting a little bit,” said Paul Nolte, managing director at Dearborn Partners. A double-dip in the markets is “a possibility because it’s driven by psychology more than earnings or fundamentals.”
Investors are anxious as they wait for the Labor Department's monthly employment report on Friday. Companies have indicated that business is getting better, yet there are few signs that they are ready to hire in big numbers. The government is expected to say that the unemployment rate rose 0.1 percentage point to 9.8 percent in June.
Investors have been so burned by the financial crisis of 2008-09 that they fear any hint of a slowdown means the economy will start tanking again. And they're selling heavily at the end of the day, fearful about negative economic news that could start coming out of Asia just hours after U.S. trading ends.
Paul Zemsky, head of asset allocation at ING Investment Management in New York, said investors are wrestling with two opposing ideas of where the economy is headed. He said the more likely case is that the recovery continues and corporate earnings growth makes stocks look cheap right now. The darker scenario is that government budget cuts, the end of fiscal stimulus, problems in Europe and a slowdown in China lead to a double-dip in the global economy.
Investors' indecision and uneven economic reports have brought big swings to stocks since late April when debt problems in Greece began to pound world markets.
"The central issue that any investor faces today is fire or ice," Zemsky said. "There's no in-between. It's either one or the other."
Mike Shea, managing partner at Direct Access Partners LLC in New York, took some comfort in the fact that the market closed off its lowest level of the day. That signaled that some buyers were willing to step in.
"Getting that little pop at the end of the day -- it's kind of losing a football game 35-0 and then scoring a touchdown in the last five minutes," he said.
Shea cautioned that trading could continue to be volatile Wednesday, which is the final day of the quarter and the first half. For some traders, it's the last day of their fiscal year. "The market can be a little wacky on the last days of quarters," he said.
Zemsky said there isn't much until the start of corporate earnings reports next month that likely will give investors solid answers about the direction of the economy. Until then, Friday's June jobs report is the one standout. Even with a good report, investors might still be focused on earnings. The May jobs numbers were a disappointment because private employers hired only 41,000 workers.
"I don't think Friday payrolls can do a lot to bring the market a whole lot higher if they're good. But if they're bad, it's really 'Look out below,'" Zemsky said.
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