Markets & Finance

Stocks Struggle for Direction


Consumer confidence plunged, home prices fell a record 10.7% in the past year, and Goldman Sachs says U.S. losses from the credit crunch could hit $460 billion

Stocks finished mixed Tuesday as U.S. home prices continued their steep decline, banks prepared for more subprime losses and consumer confidence continued to plunge.

Tuesday's economic reports rekindled concerns about a recession. The U.S. consumer confidence index hit 64.5 in March, down from 76.4 in February and 108.2 a year ago. "The drop in confidence will add to the pessimism on Wall Street," says economic research outfit Action Economics.

Also, the U.S. S&P Case Shiller 20-city home price index fell 2.36% to 180.65 in January. The index is down a record 10.71% in the past year, with Las Vegas, Phoenix and Los Angeles posting the largest declines.

Goldman Sachs (GS) estimates U.S. financial institutions could suffer about $460 billion in credit losses. Losses from residential mortgages will represent about half the total, while another 15% to 20% of the damage will come from commercial morgages, Goldman's Andrew Tilton says. So far, banks have announced about $120 billion in writeoffs since the beginning of the credit crisis.

On Monday, the Dow Jones industrial average finished down 16.04 points, or 0.13%, to 12,532.60. The S&P 500 index edged up 3.11 points, or 0.23%, to 1,352.99. The tech-heavy Nasdaq composite index rose 14.30 points, or 0.61%, to 2,341.05.

Recent gains for stocks -- ever since the collapse of Bear Stearns (BSC) a week ago -- had raised hopes that stock had finally hit bottom after investors saw the worst of the recent financial crisis.

However, Robert DiClemente of Citigroup warned the outlook is still gloomy and uncertain. "In an historic week of virtually unprecedented policy actions and the near failure of a major investment bank, critical questions about financial stability and the length and depth of the current economic slowdown remain unanswered," DiClemente said in a note to clients. "Concerns about a systemwide breakdown across financial markets have surged to the forefront."

In other economic news Tuesday, according to the U.S. Redbook, chain store sales were up 1.8% in the past three weeks.

In the energy markets on Tuesday, NYMEX May WTI futures were up 29 cents a barrel at $101.15 in late New York dealings. A weaker dollar and concerns about the U.S. economic outlook kept the contract relatively contained through the session, according to S&P MarketScope.

Among stocks in the news, a big winner of the day was Monsanto (MON), which raised earnings guidance for its 2008 fiscal year by 45 cents per share.

In tech, Yahoo (YHOO) got a boost after being upgraded by Citigroup from hold to buy. Citigroup analyst Mark Mahaney says with Yahoo shares now trading at an 11% discount to Microsoft's (MSFT) initial $31 offer, and a 23% discount to a potential Microsoft $34 offer - which he considers reasonable, he believes buying the shares here provides attractive return.

Valero Energy (VLO) says it expects first quarter earnings of between 10 and 35 cents per share, compared to current analysts expectations of 91 cents per share. Valero says it's seeing lower profit margins on gasoline and other products, and the firm says it is battling operating and equipment problems at refineries.

Ford Motor (F) may be set to announce the sale of its Jaguar and Land Rover units to Tata Motors. India TV reports Tata has agreed to pay $2.65 billion, and Dow Jones says Ford plans to make an announcement on Wednesday.

PNC Financial Services (PNC), SunTrust Banks (STI) and Bank of America (BAC) were reportedly downgraded by analysts at Merrill Lynch.

European markets finished with strong gains after being closed Monday for the Easter holiday. In London, the FTSE 100 index jumped 3% to 5,660.30. Germany's DAX index gained 2.97% to 6,507.53, and in Paris, the CAC 40 index was up 3.07% to 4,673.13.

In Asia, stocks were sharply higher. Japan's Nikkei 225 rose 2.12% to 12,745.22, while Hong Kong's Hang Seng index gained 6.43% to 22,464.52.

Treasury market

Treasuries rallied as a drop in March consumer confidence and a weak S&P/Case-Shiller home price index reading raised concerns over the health of the economy. The 10-year note rose 16/32 to 100-02/32 for a yield of 3.90%. The 30-year bond jumped 35/32 to 101-10/32 for a yield of 4.30%.

The financial markets are being driven by two opposing camps: one which holds that all of the bad news regarding slower economic growth and weakness in the financial sector has been digested; the other which is not convinced the worst is over.

Steverman is a reporter for BusinessWeek's Investing channel.

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