Troubles at Citigroup and Merrill Lynch weighed on major indexes Monday, as the fallout continues from toxic subprime debt
U.S. stocks finished broadly lower Monday, though major indexes ended above the worst levels of the session. The final hour of trading saw equities rebound as buy programs kicked in. Financial issues remained under pressure amid more worries about credit on news of management shakeups and writedowns at Citigroup (C) and legal woes for Merrill Lynch (MER). Traders remain uncertain whether the U.S. economy will falter as result of these or other factors, notes Standard & Poor's MarketScope.
On Monday, the Dow Jones industrial average finished lower by 51.70 points, or 0.38%, at 13,543.40. The broader S&P 500 index fell 7.48 points, or 0.50%, to 1,502.17. The tech-heavy Nasdaq composite index dropped 15.20 points, or 0.54%, to 2,795.18.
Action in the broader market Monday was resoundingly negative amid sluggish trading, with 24 issues declining in price for every seven that gained on the NYSE. Nasdaq breadth was 19-9 negative.
Citigroup (C) announced that its chairman and chief executive Charles Prince will resign, a move many investors had been demanding for weeks. But Citigroup also said it would take losses of another $8 billion to $11 billion, even after reporting huge losses from subprime and credit issues in its third quarter earnings release.
Merrill Lynch (MER) is the target of a class-action lawsuit, alleging the company issues false and misleading information on its business and financial results. A week after the ouster of its chief executive, Stan O'Neal, its top job was reportedly offered to Blackrock (BLK) chief executive Laurence Fink.
Amid continued fears of additional announced writedowns by financial institutions - including market rumors of an impending $3 billion hand-washing by Morgan Stanley (MS) -- the S&P Investment Banking & Brokerage index slumped 3.4% Monday.
The turmoil at the financial giants comes as Wall Street is experiencing the worst earnings season in years. With almost 400 of the stocks on the S&P 500 reporting, Reuters Estimates projects third quarter earnings will fall 0.6% from a year ago. While health care and technology companies are showing double-digit increases, financial sector earnings are projected to fall 17% and cyclical consumer goods & services are set to fall 20%.
In a speech Monday at an NAACP event in Washington, D.C., Federal Reserve Governor Randall Kroszner said subprime conditions could get worse before they get better, given problems in the secondary distribution of mortgage risk to the financial system. He said housing activity continues to weaken and the bulk of ARM resets still lie ahead, with delinquencies and foreclosures likely to increase "for a number of quarters."
Traders will be awaiting more "Fedspeak" later in the week. Fed chairman Ben Bernanke, who will give a speech on mircrofinance Tuesday, will likely discuss the credit issue on Thursday at an appearance before the Joint Economic Committee of Congress.
Also offering a bearish assessment of the current environment was the so-called "bond king," Bill Gross of PIMCO. He told CNBC Monday morning that the Federal Reserve eventually will have to cut interest rates deeply, bringing the funds target rate to 3.5%. Also, he warned that the subprime-related problem is a $1 trillion issue, and that troubles could spread to the municipal bond market.
In economic news Monday, the October ISM non-manufacturing index rose to higher than expected 55.8 level from 54.8 in September.
There are no significant economic reports scheduled for Tuesday.
Oil prices fell Monday, with December NYMEX crude futures down $1.95 to $93.98 per barrel on profit taking from Friday's surge to record highs. Dealers cited by S&P MarketScope say traders were disturbed most of the day by weak stock markets that reflected problems at Citigroup and Merrill that many fear will end up slowing global economies, reducing demand for oil.
Comex December gold futures rose $2.30 to $810.80 per ounce Monday as the yellow metal held above the $800 support level amid safe-haven buying spurred by the decline in equities.
Among other stocks in the news Monday, shares of Wellcare Health Plans (WCG) were set to soar after it reported third quarter earnings. It shares plunged previously on news that its offices were being raided by state and federal investigators looking into Medicaid fraud. On Monday, Wellcare reported preliminary earnings of $1.71 per share, vs. $1.06 a year ago on a 42% rise in total revenue. The company's board set up a special committee to conduct an independent investigation of the firm.
IAC/InterActiveCorp I(ACI) says its board approved a plan to separate the firm into five publicly traded companies. It will spin off the Home Shopping Network, TicketMaster, Interval International and LendingTree.
Cardinal Health (CAH) reported earnings of 82 cents per share, vs. 66 cents a year ago. Revenues rose 4.9%, and the firm reiterated its predictions for 2008 earnings. The company says it is disappointed with the performance in its health care supply chain service pharmaceutical segment.
Burger King Holdings (BKC) reported earnings of 35 cents, vs. 30 cents a year ago as same-store sales were up 5.9% and total revenue rose 10%. Also, Burger King says private equity funds plan to offer 23 million shares of its stock.
Oppenheimer Holdings (OPY) agreed to buy several businesses of CIBC World Markets (CM), including its U.S. investment banking, corporate syndicate, institutional sales and trading, equity research, options trading and part of its debt capital markets operation.
Entergy Corp. (ETR) reported earnings of $2.30 per share, vs. $1.80 a year ago, as revenue rose 1.1%. The firm plans to spin off its non-utility nuclear business.
American Financial Realty Trust (AFR) agreed to be acquired by Gramercy Capital GKK in a $3.4 billion deal that includes the assumption of AFR's debt.
Boston Scientific (BSX) will sell its cardiac surgery and vascular surgery businesses to the Getinge Group for $750 million.
European equity indexes fell on Monday. In London, the FTSE 100 index shed 1.06% to 6,461.40. Germany's DAX index dropped 0.53% to 7,807.55. In Paris, the CAC 40 index declined 0.63% to 5,684.62.
Asian markets saw huge declines overnight. In Japan, the Nikkei 225 index was down 1.5% at 16,268.92. In Hong Kong, the Hang Seng index plunged 5.01% to 28,942.32. The Shanghai composite index slid 2.48% to 5,634.45.
Treasuries weakened after trading in narrow ranges throughout the day. The 10-year note fell 08/32 in price to 103-07/32 for a yield of 4.34%. The 30-year bond slid 11/32 to 105-27/32 for a yield of 4.63%. A recovery in equities from their worst levels late in the day contributed to bond price weakness.