Markets & Finance

Lehman Worries Push Stocks Lower


Lehman Brothers may need to raise up to $4 billion in extra capital. Bernanke said the Fed won't be changing interest rates soon

Worries about one of Wall Street's major investment banks pushed major stock indexes lower Tuesday afternoon.

Lehman Brothers (LEH) reportedly is considering raising up to $4 billion in new capital, a sign that the firm may be set to report large losses during its June earnings report.

On Tuesday, Wall Street also reacted to a speech from Federal Reserve chairman Ben Bernanke, and better-than-expected data on factory orders.

Responding to reports in the Wall Street Journal, Lehman initially tried to reassure Wall Street, which is very concerned about credit troubles after the March collapse of Lehman rival Bear Stearns. Lehman downplayed the implications of the move. The investment bank said capital-raising wasn't its only option, and it wasn't seeking the capital under duress, the firm said.

However, investors' worries seemed to intensify as the day wore on. By late afternoon, Lehman shares had tumbled 9%.

Also Tuesday, General Motors (GM) said it would close four truck plants. The closures, along with removal of two shifts at two other truck plants, should result in savings of more than $1 billion, the company said. Also, GM said its electrically powered vehicle, the Chevy Volt, will go into commercial production, and could be in showrooms by late 2010. GM's vehicle sales fell 28% in May.

Federal Reserve Chairman Ben Bernanke's remarks Tuesday morning seemed to indicate the Fed will be holding interest rates steady for the near future. "For now policy seems well positioned to promote moderate growth and price stability over time," he said in speech delivered via satellite to an international monetary conference. The housing market shows "clearer signs of stabilization," said Bernanke, who also said rising oil prices posed "additional risk to growth."

"Reading between the lines," Action Economics says, "it sounds like policy stability is the most likely outcome rather than further [interest rate] cuts or a quick hike on the horizon."

The U.S. dollar moved higher against other currencies Tuesday after Bernanke said the Fed was "attentive" to the implications of a weak dollar, particularly rising import prices.

Stocks spent most of the morning in positive territory, but turned lower Tuesday afternoon. Late in the trading session, the blue-chip Dow Jones industrial average was down 85.5 points, or 0.68%, to 12,418.32. The broader S&P 500 index lost 6.68 points, or 0.48%, to 1,378.99. The tech-heavy Nasdaq composite index fell 12.33 points, or 0.49%, at 2,479.20.

Trading was moderate. On the New York Stock Exchange, 19 stocks fell for every 11 in positive territory. On the Nasdaq, the ratio was 15 to 11 positive.

Oil prices were falling. On the NYMEX, crude oil for July delivery was off $3.86 at $123.90 per barrel. The Senate Commerce Committee was holding a hearing Tuesday morning exploring whether energy markets were being manipulated. Legendary investor George Soros testified, along with Terrence Duffy, the chairman of the CME Group (CME).

Soros told senators record oil prices are the result of a "bubble," created by partly by speculation.

In economic news Tuesday, U.S. factory orders rose 1.1% in April, after a 1.5% increase in March. Excluding transportation, factory orders were up 2.6%. Action Economics called the data "much stronger than expected."

Among stocks in the news Tuesday, luxury homebuilder Toll Brothers (TOL) reported a loss of 59 cents per share last quarter, vs. earnings of 22 cents a year ago. Total revenue fell 30%.

State Street Corp. (STT) announced it began an offering of about $2.5 billion of common stock.

Staples (SPLS) raised its bid for Corporate Express to $2.65 billion, from 8 euros a share, which it bid last month, to 9.15 euros a share for the Dutch company.

CSX Corp. (CSX) says it is confident it can achieve compound annual growth in earnings per share of 18 to 21% through 2010. The railroad says it is growing in new markets such as ethanol and export coal, and forging partnerships with trucking companies for long-distance shipping.

Walgreen (WAG) saw same-store sales rise 3.9% in May. Total sales increased 10%.

Sherwin-Williams Co. (SHW) says it expects lower-than-expected earnings in the second quarter of $1.40 to $1.50 per share, due to lower domestic sales and higher raw material and other costs.

Sandisk Corp. (SNDK) introduced a new line of flash memory-based solid-state drives (SSDs), which are designed for portable consumer electronics.

Major European stock indexes rose Tuesday. In London, the FTSE 100 index added 0.83% to 6,057.70. In Paris, the CAC 40 index gained 0.98% to 4,983.71. Germany's DAX index edged up 0.15% to 7,019.13.

Major Asian indexes lost ground. Japan's Nikkei 225 index fell 1.6% to 14,209.17. In Hong Kong, the Hang Seng index dropped 1.83% at 24,375.76.

Treasury market

Treasuries moved mostly higher Tuesday. The two-year note was up 01/32 to 100-09/32 for a yield of 2.492%; ten-year notes rose 01/32 to 99-11/32 for a yield of 3.963%; and 30-year bond off 01/32 to 95-07/32 for yield of 4.678%.

Steverman is a reporter for BusinessWeek's Investing channel.

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