Markets & Finance

Stocks End Sharply Lower


Stocks posted broad losses Tuesday following rumors of troubles at hedge funds both in Europe and the U.S. The markets also saw some caution ahead of Cisco Systems' (CSCO) earnings report, which came after the market close. Treasuries saw renewed strength after a solid 3-year note auction, and as traders sought safety amid talk of hedge fund liquidations.

On Tuesday, the Dow Jones industrial average fell 103.23 points, or 0.99%, to 10,281.11. The broader Standard & Poor's 500 index lost 12.62 points, or 1.07%, to 1,166.22. The Nasdaq composite index went down 16.90 points, or 0.85%, to 1,962.77.

Crude oil for June delivery rose 4 cents to $52.07 a barrel. Crude prices were reportedly dragged higher early on the back of sharply higher gasoline prices as talk of a refinery outage in Louisiana prompted buying, according to economic research outfit Action Economics. Later in the session, sources mentioned an upcoming summit between EU and OPEC officials (June 9) as being behind crude's slip to session lows. The meeting will apparently address transparency and excess volatility, says Action Economics.

Selling intensified during Tuesday's session as rumors swirled about troubles in hedge funds. "The crux of the matter appears to be the GM/Ford credit downgrades last week, that gave rise to speculation that some leveraged credit default swap or derivatives positions were at risk," says Action Economics.

Speculation in the credit markets was swinging toward collateralized debt obligations (CDOs) as another culprit behind the hedge fund troubles talk, according to Action Economics. The CDOs are designed to segment and repackage corporate credit risks for a higher yield, explains Action Economics. Apparently some of these trades have come unglued in the wake of the b>General Motors (GM) and Ford (F) credit downgrades, which altered the hedging landscape and credit picture, especially on the equity tranches, reports Action Economics.

Separately, GM said after the close Monday it would maintain its 50 cents dividend per share.

In company news, Cisco Systems (CSCO) reported its earnings after the close of trading Tuesday. The internet hardware giant saw earnings excluding special items of 23 cents a share, vs. 19 cents a year ago, on a 10% revenue rise. The earnings were a bit above analysts' estimates.

Delta Air Lines (DAL) warned that it will record a substantial net loss for the last nine months of 2005, and that cash flow will not be sufficient to meet all of its liquidity needs for that period. Standard & Poor's reiterated its sell rating on the stock.

According to the Wall Street Journal, investigators probing insurance giant American International Group (AIG) said they believe that more than just two of the company's former senior executives had knowledge of and participated in questionable accounting practices.

According to reports in Newsweek magazine, DreamWorks Animation (DWA) says it will be "substantially below the 60 cents per share" median analyst estimates. The stock slid by more than 5%.

IBM (IBM) announced it plans to acquire privately-held Gluecode Software, a software and support provider for open source infrastructure applications. The terms of the deal were not disclosed. Standard & Poor's reiterated its hold rating on the stock.

Priceline.com (PCLN) posted first-quarter earnings of 10 cents, vs. 11 cents a year ago, on a 4.1% revenue rise. The company said that the rise in revenue was offset by non-cash amortization expenses associated with acquisitions. Piper Jaffray downgraded the stock to market perform.

Goodrich Petroleum (GDP) posted a 30 cent loss in the first quarter, despite a 22% total rise in revenue. The company said the loss was due to derivatives related to gas hedges.

Up ahead, among the companies reporting quarterly results this week are entertainment giant Disney (DIS) on Wednesday, and discount retailers Wal-Mart (WMT) and Target (TGT) and computer giant Dell (DELL) on Thursday.

The most closely watched economic news this week will be the report on the international trade balance in March, due out Wednesday, and the figures on April's retail sales, expected Thursday. Economists surveyed by Action Economics are expecting the trade deficit to come in at $61.5 billion. Retail sales are expected to grow by 0.7%, up from 0.3% in March.

Treasury Market

Treasury yields pressed lower in the wake of the better-than-expected 3-year auction, as the safety premium in the bond market remained intact amid all the hedge fund talk and equity weakness, says Action Economics. Yields on the benchmark 10-year note pushed lower to 4.22%.

The Treasury will auction $15 billion in 5-year notes on Wednesday and $14 billion in 10-year notes on Thursday.

World Markets

European stocks finished lower on Tuesday. In London, the FTSE 100 was down 17.9 points, or 0.36%, to 4,892.4 after a report said U.K. retail sales grew in April at the slowest level in 10 years due to the housing industry slowdown. Kingfisher, Marks & Spencer, and Boots Group fell on the weak retail sales report. Sage was higher after the company said fiscal first-half profit rose.

Germany's DAX index was down 41.28 points, or 0.96%, to 4,251.13 even though the government reported exports rose more than expected 2.1% after falling 3% in February.

In Paris, the CAC 40 index dropped 19.94 points, or 0.5%, to 4,000.25. Havas was lower after the company said first-quarter sales fell 7% after it sold units and lost business from Intel. Akka Technologies was higher after reporting first-quarter sales rose 32%. Groupe Finuchem was higher after the company reported first-quarter sales rose 39%.

Asian markets finished lower Tuesday. Japan's Nikkei 225 index fell 11.86 points, or 0.11%, to 11,159.46, pressured by losses in information-technology groups. Investors were also cautious ahead of Toyota Motor's and NTT DoCoMo's financial results.

In Hong Kong, the Hang Seng index was down 66.71 points, or 0.47%, to close at 14,018.38. The top laggards were Esprit (-1.7%), PCCW (-1%) and COSCO Pacific (-1.2%). Hutchison Whampoa (-0.4%) has exercised its rights to accelerate the completion of the acquisition of 20% and 15% interest in 3G UK from DoCoMo and KPN.


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