U.S. stocks closed mixed Tuesday, with gains in blue-chip energy shares Exxon Mobil (XOM) and Chevron (CVX) helping to drive the Dow industrials higher while the Nasdaq slid on a disappointing fourth-quarter forecast from Baidu (BIDU) and overall weakness among tech issues.
A mixed bag of economic news left investors to grapple with weaker-than-expected consumer confidence data but signs of hope in the housing market. Traders looked ahead to Wednesday's reports on durable goods orders and new home sales.
On Tuesday, the 30-stock Dow Jones industrial average finished higher by 14.21 points, or 0.14%, at 9,882.17. The broad Standard & Poor's 500-stock index was down 3.54 points, or 0.33%, at 1,063.41. The tech-heavy Nasdaq composite index fell 25.76 points, or 1.20%, to 2,116.09.
On the New York Stock Exchange, 20 stocks were lower in price for every 11 that advanced. Breadth on the Nasdaq was 18-9 negative.
Treasuries spiked after a successful $44 billion auction of two-year notes Tuesday afternoon. The dollar index and oil rose. Gold fell.
Earnings remained in focus Tuesday, with U.S. Steel (X) posting a loss, but rallying after it was smaller than expected.
In the energy sector, BP (BP) beat earnings targets by a wide margin, rallying 5% after third-quarter profits dropped by a lower than expected 34%.
In technology, Baidu posted a 42% increase in third-quarter net income on a 39% revenue rise. The Street was disappointed by Baidu's revenue outlook: The company currently expects to generate total fourth-quarter revenues of $174 million-$180 million (vs. $187.3 million in the third quarter), representing 32%-36% year-over year growth. Goldman Sachs and RBC Capital each cut their earnings estimates and price targets on the stock.
In economic news Tuesday, U.S. consumer confidence dove to 47.7 in October, after slipping to 53.4 in September (revised from 53.1 previously). The October figure is much worse than expected, but a decline was the risk after the drop in the University of Michigan sentiment data. The index was 38.8 a year ago. The present situation component fell to 20.7 from 23.0 (revised from 22.7), and was 43.5 last October. The expectations component declined to 65.7 from 73.7 (revised from 73.3), and was 35.7 last year. The inflation expectations index was steady at 5.3% (September's 5.2% was revised up from 5.2%). It was 6.8% last year.
The U.S. Case-Shiller home price index rose 1.18% to 146.00 in August for the 20-city composite, from a revised 144.30 in July (was 143.05). June was revised up a bit as well to 141.97 from 141.42. On a year-over-year basis, the index is down 11.32%, compared to -13.26% year-over-year previously. The 10-city composite index rose 1.03% to 156.4 from a revised 154.81 in July (was 154.69). This makes it three consecutive monthly increases for both indexes.
Sixteen of the twenty cities covered posted price gains on the month, led by San Francisco, up 2.59%. Cleveland prices declined 1.02%.
The latest montly investment outlook from PIMCO bond guru Bill Gross suggests that even with a rebound in growth in late 2009, the Federal Reserve will remain reluctant to hike rates for 12-18 months of 4%+ nominal growth before moving from zero rate policy. Gross also sees an end soon to the rally in risk assets due to continuing risk of "debt deflation in corporate and household balance sheets." In light of this, writes Gross, "investors must recognize that if assets appreciate with nominal GDP, a 4-5% return is about all they can expect even with abnormally low policy rates. Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets, while still continuously supported by Fed and Treasury policymakers, is likely at its pinnacle."
The Senate could vote Tuesday to extend a popular tax break for home buyers that has helped lift the housing market out of its slump. Senate Majority Leader Harry Reid, speaking on the Senate floor Monday, listed the first-time home buyers tax credit among proposed amendments he would like to attach to an unemployment insurance bill. The $8,000 credit has brought new buyers into the housing market, helping prices to rise starting in May after a serious buying drought that, along with high unemployment, has caused havoc for the economy. Reid had floated a proposal with Senate Finance Committee Chairman Max Baucus last Friday to extend the first-time home buyer tax credit through Dec. 31, 2010. Under Reid's plan, the $8,000 tax credit would be phased out over time, dropping to $6,000 in April, $4,000 in July, and $2,000 in October, before expiring at the end of 2010.
In financial-market news, SEC Chairman Mary Schapiro said she was looking for ways to crack down on "naked access" or the practice of brokers giving high-frequency traders unfettered access to public markets. Schapiro said she had concerns with sponsored naked access, where brokerages that have been approved to trade on an exchange rent their access to clients who are able to shave milliseconds from the time it takes to access the markets. "I liken it to giving your car keys to a friend who doesn't have a license and letting him drive unaccompanied," Schapiro said at a Wall Street conference in New York. Schapiro said she has directed SEC staff to come up with rule proposals that would address the risk naked access posed to exchanges and said the proposals would focus on arrangements that enable unfiltered access by non-regulated entities.
Anonymous trading venues known as "dark pools" are a technological evolution that have benefitted both institutional and retail trading by bringing down transaction costs, Goldman Sachs Group said in a memo to the SEC. The Goldman report, posted on the SEC website, summarized a meeting held on Sept. 24 between its executives and the commission staff to discuss issues involving market structure including short selling and dark pools. In the report, Goldman stated five common myths regarding dark pool trading and supplied arguments in an effort to dispel those myths. Dark pools are trading platforms where buyers and sellers can anonymously match large blocks of stock, keeping details of the deals and prices concealed to prevent distorting prices in the broader market. Dark pools, the largest of which are run by banks such as Goldman Sachs and Credit Suisse, account for an estimated 10% to 15% of overall U.S. equity volume.
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