Markets & Finance

Stocks Drop on Profit, Oil Concerns


Disappointing earnings reports from banks and higher crude prices prompted another wave of selling

Major U.S. stock indexes ended lower on Tuesday on continued worries about fourth-quarter corporate profits and the inflation implications of surging oil prices. Downbeat news on the housing sector also weighed on equities.

On Tuesday, the Dow Jones industrial average ended 71.86 points, or 0.51%, lower at 13,912.94. The broader S&P 500 index slipped 10.18 points, or 0.66%, to 1,538.53. The tech-heavy Nasdaq index fell 16.14 points, or 0.58%, to 2,763.91.

On the New York Stock Exchange, 23 stocks were sold lower for every nine that had gains, while on the Nasdaq market breadth was 19 to 11 negative, S&P MarketScope said.

Disappointing earnings from a couple of banks put pressure on financial stocks once again, reminding investors that losses on commercial loans and ongoing problems with residential mortgage loans will continue to weigh on this sector's ability to perform. A handful of regional backs, including National City (NCC), Fifth Third Bancorp (FITC), and Zions Bancorp (ZION), sank to 52-week lows on fears that these banks may have inadequate reserves against potential losses in construction and residential loans, CNBC said.

This is the first quarter where the negative fallout is being seen from the upward adjustment of interest rates on the riskier loans the more aggressive banks began to make once credit spreads flattened, said Bernard Horn, Jr., a portfolio manager at Polaris Capital Management in Boston.

Although it will hurt the institutions that were most reliant on the "borrow-short/lend-long" business model, the stock moves suggested investors were lumping all the regional banks into this category, Horn said. Only by looking into each bank's portfolio to see what portion of loans are in default and how high the Loan-to-Value ratios on mortgages are can someone tell how shaky its financial condition is, he added.

The more aggressive banks may not have sufficient reserves to back the loans they've made, while the banks backed by deposits, on which the interest rates have come down since the Fed rate cut, "should have a fair amount of [higher-quality] capital that should allow them to easily weather the storm," he said.

Telecom stocks dropped after Ericsson (ERIC) warned of lower-than-expected third-quarter sales and operating income due to an unexpected shift in the business mix.

Treasury chief Paulson said the housing slump remains the most significant risk to the economy. He said regulators will review off-balance sheet vehicles, but said he has no interest in bailing out speculators, referring to the Treasury-endorsed superfund being created by Citigroup, Bank of America and JPMorgan Chase & Co.

Speaking at the Economics Club of New York on Monday, Federal Reserve Chairman Ben Bernanke said the housing sector problems would probably be a "significant drag" on economic growth through early 2008. He urged firms to be more transparent in how they value assets.

Polaris Capital's Horn said the new superconduit being created "has elements of smoke and mirrors," since it's not clear that it will restore liquidity to the commercial paper market, especially if default rates on the underlying loans held in the structured investment vehicles (SIVs) continue to rise. Again, it comes down to how solid the loans are.

Investors will continue to hold commercial backed by loans on which people continue to make payments, while it's unlikely investors will keep supporting SIVs to allow them to hold loan assets which are slipping into default, Horn said.

Leading Tuesday's economic news, industrial production rose 0.1% in September, as expected, after a revised flat reading in August. Capacity utilization was 82.1%, unchanged from August, which was revised down from 82.2%. Manufacturing production edged up 0.1%, but there was a big drag from the 3.3% decline in vehicles, while production from utilities was off 0.1% and mining production was up 0.2%.

With the revisions, industrial production and capacity utilization were just 0.1% short of expectations, reflecting the vehicle sector's under-performance, which may have resulted from modest labor disruptions during the month, Action Economics said. The data left industrial production growing at a pace of 4.0% in the third quarter, compared with 3.5% in the second quarter.

Builder confidence in the market for new single-family homes, as measured by the the National Association of Home Builders/Wells Fargo Housing Market Index, fell another two points to 18 in October, the lowest level in its 22-year history. Shaking confidence were ongoing mortgage problems, substantial inventories of unsold homes and the impact that negative media reports may be having on prospective buyers. A reading of 50 represents the line between negative and positive sentiment.

Crude oil for November delivery in New York finished $1.48 higher at $87.61 per barrel, after briefly touching $88.05, on concerns about a Turkish military incursion against Kurdish rebel bases in northern Iraq, where one-third of the world's crude reserves are located. The Turkish Parliament is slated to vote on Wednesday on whether to approve an attack. Another drop in the value of the U.S. dollar against foreign currencies like the euro, tight U.S. oil supplies and speculative buying are also pushing prices higher.

One portfolio manager speaking on CNBC said he believed there's at least a $20 risk premium built into oil prices and that they should return to around $60 per barrel in the longer term, but others believe the price will hit $100 before the end of this year.

The ongoing weakness in the dollar is re-igniting fears about rising inflation. Bernanke said he can't be "indifferent" to exchange rates, and that a falling dollar can push up prices but added that, to date, data shows the dollar's impact on prices has been "relatively small," Action Economics reported.

Among stocks in the news Tuesday, Genentech (DNA) shares closed 3.2% lower after it reported late Monday earnings of 64 cents a share for the third quarter, compared with 53 cents a share a year ago on a 22% jump in revenue to $2.91 billion. Revenues came in below Wall Street's forecast of $2.93 billion. S&P reiterated its buy rating but cut its 2007 profit estimate by a penny to $2.70 a share and its target price by $7 to $89.

Johnson & Johnson (JNJ) said it earned 88 cents a share in the third quarter, down from 94 cents in the prior-year period as an after-tax restructuring charge of $528 million offset a 13% increase in sales. On a non-GAAP basis, the health care manufacturer earned $1.06 a share, beating analysts' forecasts, and raised its 2007 outlook to $4.10 to $4.13 a share, excluding the impact of special items such as in-process research and development charges and restructuring charges. Shares were down 0.9% Tuesday.

Wells Fargo & Co. (WFC) posted lower-than-expected third-quarter earnings of 68 cents a share, vs. 64 cents a share a year ago, on a 10% rise in revenue. The banking company said that net credit losses in the latest period rose $172 million from the second quarter. Shares fell 3.9%.

Keycorp (KEY) shares lost 5.9% after it reported a profit of 57 cents a share from continued operations in the third quarter, far short of analysts' 71-cent estimate and below 74 cents a share in the year-ago period, on a 1.9% drop in net interest income. The bank now expects to earn between 68 and 74 cents a share in the fourth quarter, below Wall Street's 75-cent consensus forecast.

Robbins & Myers (RBN) shares leaped 18.1% Tuesday after it reported earnings of $1.05 a share for its fourth quarter, excluding special items, vs. 64 cents a share a year ago, on 13% higher revenue. The industrial equipment manufacturer sees a fiscal 2008 profit of $3.30 to $3.50, compared with $2.96 ($2.84 before special items) in fiscal 2007 and estimated it would earn 54 to 64 cents a share in the first quarter.

ValueClick (VCLK) shares dropped 11.6% on news it has cut its revenue forecast to between $156 million and $157 million from a prior range of $155 million to $165 million for the third quarter on continued weakness in lead generation. The online marketing services company now expects to earn 16 to 17 cents a share in the third quarter and also slashed its full-year revenue forecast to between $635 million and $640 million from $645 million to $660 million. Standard & Poor's reaffirmed its hold rating, while Piper Jaffray kept its outperform rating.

Delta Airlines (DAL) said that third-quarter profit more than quadrupled to 56 cents a share on a 10% rise in revenue driven by more international travel, lower fuel costs and some growth in domestic capacity. The company projected an operating margin of 3% to 5% in the fourth quarter and 6% to 7% for 2007. Shares climbed 0.4%.

European equity indexes were trading lower Tuesday. In London, the FTSE 100 index fell 0.45% to trade at 6,614.30. Germany's DAX bounced back from earlier selling to trade 0.09% lower at 7,962.64. In Paris, the CAC 40 dropped 0.57% to 5,774.36.

Asian markets ended mostly lower. In Japan, the Nikkei 225 index slid 1.27% to 17,137.92. In Hong Kong, the Hang Seng index dropped 1.98% to 28,954.55. The Shanghai composite index climbed 1.03% to 6,092.06.

Treasury Market

Treasury prices were higher Tuesday in a flight to safety from sinking stocks.

The 10-year note rose 07/32 to 100-27/32 for a yield of 4.65%, and the 2-year advanced 05/32 to 99-24/32 for a yield of 4.13%. The 30-year bond gained 04/32 to trade at 101-15/32 for a yield of 4.91%.


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