Indexes gained Tuesday after the financial giant got a $7.5 billion cash infusion. But concerns about the credit market and broader economy persist
Major U.S. stock indexes recouped the lion's share of the prior session's losses on Tuesday, buoyed mostly by a confidence-boosting capital infusion in Citigroup (C) by an Abu Dhabi investment fund. The deal provided much-needed cash to help offset mortgage and other losses at the financial giant.
But the markets were off their highs after Citigroup said it wouldn't use the cash to bring failing SIVs back onto its balance sheet, said one analyst on CNBC Business News.
On Tuesday, the Dow Jones industrial average ended higher by 215.00 points, or 1.69%, to 12,958.44. The broader S&P 500 index rose 21.01 points, or 1.49%, to 1,428.22. The tech-heavy Nasdaq composite index gained 39.81 points, or 1.57%, to trade at 2,580.80.
Leading the rally were financial stocks, consumer staples names Procter & Gamble (PG) and Altria Group (MO), and Boeing Co. (BA). But traders were dismayed by reports showing weaker-than-expected consumer confidence numbers, lower home prices, and reports of soft Black Friday sales at some retailers, S&P MarketScope said. On the New York Stock Exchange, 12 stocks advanced in price for every 11 that declined, while Nasdaq breadth was 17-13 positive amid slow trading.
Tech names such as Intel (INTC and SanDisk (SNDK) were also making solid gains.
The Abu Dhabi Investment Authority said it will invest $7.5 billion in Citigroup in exchange for a 4.9% interest in the nation's largest bank. Citigroup said the investment was passive and won't buy the Investment Authority a seat on the bank's board. An analyst at CIBC World Markets said she still expects Citigroup to cut its dividend and sell assets to deal with its cash constraints.
"If Citigroup can stuff its assets into the super SIV being created, that's even better for Citigroup," said Brian Reynolds, chief market strategist at M.S. Howells & Co. While the cash infusion is a net positive, it's not enough to overcome what’s going in the credit markets, he said.
"We know in fixed income there's going to be more downgrades and writedowns and that they will continue until at least the first quarter" of 2008, he said.
Unless people start buying credit derivatives, the credit markets will weaken further, yet investors aren't likely to start buying credit derivatives until they see a more aggressive easing of interest rates by the Fed, he said. Since the main pillar of the bull market has been stock buybacks and leveraged buyouts, the ongoing attacks on credit derivatives is calling for the Fed to cut rates. But if the Fed only comes through with a quarter-point rate cut, more pressure will be applied to credit derivatives in an effort to take the financial markets lower, he said.
Leading the economic news was the Standard & Poor's/Case-Shiller U.S. national home price index, whose 20-city composite fell 0.9% in September from August, after a 0.7% decline in August. The index, which measures prices of single-family homes in the 20 largest metropolitan areas, was down 4.9% from a year ago, while the 1.7% drop between the second and third quarters was the largest quarterly decline in the index's 21-year history.
The Conference Board said that consumer confidence dropped more than expected to 87.3 in November from the 95.2 reading in October. The index had been projected to fall to 92.0. The latest figure is the lowest since the aftermath of Hurricane Katrina in Fall 2005, while the expectation component was the weakest since just before the start of the Iraq War in early 2003.
The data imply that record gasoline prices, falling equity prices, financial market turmoil and general negative news headlines are all continuing to weigh on sentiment, Action Economics said. Most of the decline was tied to expectations, which plummeted to 68.7 from 80.0, while the current conditions series moderated only to 115.4 from 118.0.
On Wednesday, the durable goods orders and existing home sales will be closely watched. But economic data are taking a back seat to questions about the credit crisis, said Reynolds at M.S. Howells & Co.
With the Fed funds rate at 4.5%, higher than the 10-year Treasury notes, some market observers believe it's inevitable that the Federal Reserve will further ease rates at or before its final policy committee meeting of 2007, on Dec. 11, in order to better manage the slowing U.S. economy.
The Fed funds futures markets are now more than fully pricing in a quarter-point rate cut on Dec. 11, Bear Stearns' chief U.S. economist John Ryding said in a research note on Tuesday. Recent conditions in financial markets seem to be fulfilling the major downside risk to economic growth identified in the Fed policy committee's Oct. 31 minutes. Bear Stearns has changed its forecast from no change to a quarter-point cut in the funds rate target, to 4.25% and said a half-point cut can't be ruled out.
Goldman Sachs now predicts the Fed funds rate will fall to 3.0% within the next six to nine months from the current 4.5% and that unemployment will climb to 5.5% from the current 4.7% due to the worsening housing downturn and a greater threat of recession.
Federal Reserve Bank of Philadelphia President Charles I. Plosser said Tuesday he expects the economy to grow more slowly in the months ahead, despite the Fed's rate cuts, which have also raised the risk of heightened inflation and inflation expectations. Gains in oil and commodities prices still suggest significant inflation risk and oil prices could dampen growth, while lower interest rates could "prolong the process of price discovery" by the markets relating to the financial problems. He predicted a bottom for the housing sector by the end of the second quarter of 2008 and expects the jobless rate to rise to 5.0% next year.
January NYMEX crude oil futures continued to fall on Tuesday, down $3.39 to $94.31 per barrel on fears of the demand impact of an economic slowdown, as well as concerns about production hikes likely to result from next week's OPEC meeting.
Saudi Arabia is already believed to have raised its output to over 9 million barrels per day, while Indonesia's oil minister said he favors a 500,000-barrel-a-day increase and Iran is considering a hike. Qatar's oil minister said he sees no need to raise production. A stronger dollar on warnings of a global economic slowdown was also putting pressure on oil prices.
Among stocks in the news Tuesday, Barclays plc (BCS) shares rose 8.6% after it reassured investors that problems stemming from the subprime-mortgage crisis were being offset by booming business in other parts of the company. Britain’s third largest bank said it expects 2007 profits to be "broadly in line with current market consensus," which estimates earnings $5.43 a share on $47.16 billion in revenue.
Aspenbio Pharma (APPY) shares surged 18.3% after it said it will pursue the more expedient of two paths to securing regulatory clearance from the U.S. Food and Drug Administration for AppyScore, the first blood-based screening/triage test for human appendicitis.
Bidz.com (BIDZ) said that sales over the Thanksgiving holiday weekend jumped 78% from last year. The online jewelry retailer reaffirmed its fourth-quarter outlook for $56 million to $58 million in revenue and $5.6 million to $6.0 million in pre-tax income. Bidz.com expects to earn 47 to 51 cents a share on a fully-taxed GAAP basis in fiscal 2008, but shares fell 28.2% as the company's guidance came in at the low end of expectations.
Signet Group PLC (SIG) shares dropped 22.3% after it reported a third-quarter profit of $1.6 million, vs. $5.2 million in the prior-year period, despite a 10% increase in sales. The specialty jewelry retailer cited a more challenging retail marketplace in the U.S.
Tesoro's (TSO) shares fell 7.1% after Tracinda Corp. announced the withdrawal of its offer for a minority stake in Tesoro, citing the oil refiner's plan for a "poison pill" meant to discourage hostile takeovers. Tracinda, owned by billionaire Kirk Kerkorian, had previously offered to buy up to a 20% stake in Tesoro for $64 a share.
Activision (ATVI) shares rose 13.8% on the video game publisher's quarterly and 2008 earnings forecasts, which it's basing on better-than-expected consumer response to its holiday slate worldwide. The company expects to earn 66 cents a share for the third quarter on $1.23 billion in revenue, and 75 cents a share for fiscal 2008 on $2.3 billion in revenue. Standard & Poor's upgraded the stock to a buy from a hold rating, and Broadpoint Capital raised its estimates and reaffirmed its buy rating.
European equity indexes were trading lower on Tuesday. In London, the FTSE 100 index slid 0.64% to 6,140.70. Germany's DAX index was down 0.48% at 7,531.35. In Paris, the CAC 40 fell 0.44% to 5,434.17.
Asian markets ended mostly lower on Tuesday. In Japan, the Nikkei 225 index climbed 0.58% to 15,222.85. In Hong Kong, the Hang Seng index slipped 1.51% to 27,210.21. The Shanghai composite fell 1.97% to 4,861.11.
Treasury prices retreated as equities staged a modest comeback on Tuesday. The two-year notes were off 11/32 at 101-00/32 for a yield of 3.07%; 10-year notes fell 29/32 to 102-14/32 for a yield of 3.95%; and the 30-year bond dropped 1-10/32 to 110-15/32 for a yield of 4.37%.