Fading hopes of capital-boosting bailout for Ambac and a Fed report confirming a weaker economy limited gains for indexes Wednesday
Stocks closed higher Wednesday as investors opted to support the market despite a mixed bag of economic news. The Federal Reserve's Beige Book said the economy has slowed since Jan. 1. Other key data showed drops in the ISM Nonmanufacturing Index, Factory Orders, and ADP employment; and gains in Productivity and Unit Labor Costs.
Ambac Financial Group (ABK) shares slid after the bond insurer announced plans to raise at least $1.5 billion in new capital, which apparently disappointed investors.
Treasury bonds and the dollar index slipped. Oil
futures soared after OPEC opted to leave output alone, while gold futures also rallied.
On Wednesday, the Dow Jones industrial average finished higher by 41.19 points, or 0.34%, at 12,254.99. The broader S&P 500 index added 6.95 points, or 0.29%, to close at 1,333.70. The tech-heavy Nasdaq composite index gained 12.53 points, or 0.55%, to 2,272.81.
Hopes for a fruitful solution to Ambac's liquidity troubles evaporated after the company announced plans to sell at least $1.5 billion of stock and convertible securities to help boost capital levels at its main insurance unit, which has been facing potential ratings downgrades. Standard & Poor's said it might still cut the insurance unit's rating but would probably uphold the AAA rating if the capital-raising effort was a success. Ambac shares were down 13.6%.
Networking giant Cisco (CSCO) offered a more upbeat assessment of its growth prospects. Discounter Costco (COST) enjoyed strong earnings.
The Fed's Beige Book survey showed that two-thirds of the districts report a weakening in business activity since the year began, while home prices fell in all markets across the U.S. except Manhattan.
ADP National Employment Report private sector employment index fell 23,000 in February. The estimated change in employment from December 2007 to January 2008 was revised down 11,000 to 119,000. February's decline of 23,000 signals a deceleration of employment growth across businesses of all sizes. ADP said employment in the service-providing sector of the economy grew 47,000, while employment in the goods-producing sector declined 70,000, the 15th consecutive monthly decline. Manufacturing employment fell 40,000 in February after declining a revised 3,000 in January.
Challenger, Gray & Christmas said planned corporate job reductions numbered 72,091 in February, down by about 4% from January's announced cuts and "well below" recessionary levels.
Productivity growth in the non-farm business sector in the fourth quarter was revised to 1.9% in the 2007 fourth quarter from the original estimate of 1.8%, according to a government report. The consensus was for no revision. Unit labor costs were revised upward to 2.6% because of an upward revision to hourly compensation. The data are highly volatile on a quarterly basis, says S&P Economics; over the last four quarters, productivity is up 2.9% and unit labor costs are up 0.9%, indicating little inflationary pressure from the labor market.
U.S. factory orders fell 2.5% in January after a revised 2.0% jump in December (2.3% previously). The previously reported 5% decline in January durable goods orders was revised to -5.1%. Excluding transportation, factory orders were down 0.4%.
The U.S. composite ISM-nonmanufacturing index rose to 49.3 in February, after plunging almost 9 points to 44.6 in January. The business activity index climbed back to expansionary territory at 50.8 from 41.9. The employment index rebounded to 46.9 from 43.9. New orders were up 49.6 from 43.5. Prices paid surprisingly fell to 67.9 from 70.7. The data are much better than expected, according to Action Economics.
Oil futures got an early boost from news that OPEC ministers agreed to hold production levels steady and then surged after an unexpected drop in crude inventories. The U.S. Energy Information Administration reported a more than three million barrel drawdown in crude supplies for the week ended Feb. 29, instead of the build of over two million barrels that had been expected.
Crude oil for April delivery on NYMEX jumped $5.00 to $104.52 per barrel, getting some added fuel from worries that tensions between Venezuela and Colombia will escalate after Venezuelan President Hugo Chavez ordered troops to the border on March 2 in response to a Colombian air raid against a guerrilla camp in Ecuador the day before.
Among Wednesday’s stocks in the news, Pfizer (PFE) reaffirmed its $1.78-$1.93 2008 EPS (reported) guidance range, $2.35-$2.45 adj. EPS, on revenue in the range of $47-$49 billion. PFE says it expects its pipeline of drugs in Phase III trials to grow to 24-28 programs by the end of 2009.
Universal American Corp. (UAM) shares fell 23.3% after the health and life insurance provider cut its 2008 earnings forecast to $1.56-$1.74 per share. UAM says it now expects operating income from its MemberHealth business, acquired in September 2007, to be less than previously forecast. Standard & Poor's downgraded the stock to sell from hold.
BJ'S Wholesale (BJ) posted fourth-quarter EPS of 80 cents, vs. 18 cents one year earlier, (including items) on 5.4% higher same-store sales (incl. gas and pharmacy) and 1.9% higher total sales. Separately, the company reported a 5.9% gain in same-store sales for February.
American Software Inc. (AMSWA) shares fell 32.1% after the company posted adjusted third-quarter earnings of eight cents per share, vs. 10 cents a year ago despite a 3% revenue gain. Software license fees fell 24%.
European indexes finished higher Wednesday. In London, the FTSE 100 index gained 1.49% to trade at 5,853.50. In Paris, the CAC 40 index rose 1.72% to 4,756.42. Germany’s DAX index added 2.12% to trade at 6,683.71.
Asian indexes ended with modest losses. Japan’s Nikkei 225 index fell 0.126% to 12,972.06. In Hong Kong, the Hang Seng index declined 0.02% to 23,114.34.
U.S. Treasury securities fell as an unexpected rebound in February services ISM alleviated fears of economic recession. The 10-year note fell 16/32 in price to 98-15/32 for a yield of 3.69%. The 30-year bond fell 42/32 to 96-13/32 for a yield of 4.60%.