Traders Wednesday weighed Bernanke's testimony and news of "stress tests" for U.S. banks
U.S. stocks closed lower Wednesday after a late rally attempt fizzled, though indexes ended off the session's worst levels. Trading was volatile, especially among financials, as U.S. regulators began conducting "stress tests" on the nation's largest banks to determine how they would fare if the economy worsens. Many on Wall Street contend that bolstering the banks is essential for a broader economic recovery.
There was nothing new revealed in the House Financial Services Committee's questioning of Federal Reserve Chairman Ben Bernanke in his second day of his semi-annual monetary policy testimony, says S&P MarketScope. Lawmakers once again grilled Bernanke about the government's economic stimulus and bank bailout plans.
Investors Wednesday weighed more bad news from the housing sector: January existing home sales fell by a worse-than-expected 5.3% to a 4.49 million unit annual rate from 4.74 million in December.
On Wednesday, the 30-stock Dow Jones industrial average finished lower by 80.05 points, or 1.09%, at 7,270.89. The broad S&P 500 index fell 8.24 points, or 1.07% to 764.90. The tech-heavy Nasdaq composite index shed 16.40 points, or 1.14%, to 1,425.43.
Wednesday's market pullback followed a broad-based rally Tuesday, in which the Dow climbed 3.32%, the S&P 500 rose 4.01%, and the Nasdaq jumped 3.90%. There is uncertainty over whether the stock market has bottomed from its recent slide, notes S&P MarketScope.
Treasuries were lower despite a solid auction of $32 billion in five-year notes. The dollar index rose sharply, sending gold futures into retreat. Crude oil futures rallied after the Energy Dept. reported U.S. crude oil inventories rose 700,000 barrels in the week ended Feb. 20, gasoline stocks fell 3.4 million barrels, and distillate stocks rose 800,000 barrels.
Traders watched the question-and-answer period that followed Bernanke's testimony before a House panel Wednesday. Bernanke told lawamkers that the "best capital is private capital," reiterating one of the main themes from Tuesday's questioning, reports Action Economics, as he assuaged fears that a government takeover of the distressed banks would wipe out common stockholders. He admitted he was too optimistic on dealing with the credit crisis last September and noted that a global financial meltdown was narrowly averted last fall. He doubts inflation will be a problem over the next few years, but he said he is confident of the ability to unwind the special Fed lending programs eventually given their short-term nature. Bernanke stated the obvious, noting that large numbers of home foreclosures are detrimental amid falling home prices.
Bernanke said no nationalization is planned for Citigroup, though the government could end up with a substantial "minority stake" in the company, and other banks, following the upcoming "stress tests." Following these tests, banks will be told how much capital they need to raise and will be granted 6-months to tap the private capital markets. He noted that in Citi's case, if they have to convert preferred shares to common (as mooted in the press), the government's take could be larger, though an outright nationalization would be disruptive for the economy.
The Fed released details Wednesday on the Capital Assistance Program (CAP), the so-called stress tests on U.S. banks. According to the Fed's release, "the assessments will be conducted at eligible U.S. bank holding companies with assets exceeding $100 billion under two economic scenarios: a baseline and a more adverse scenario. The baseline scenario reflects a consensus expectation among private forecasters and the more adverse scenario reflects a deeper and longer recession than in the baseline. The agencies expect to complete the assessment process as soon as possible, but no later than the end of April 2009."
There was little market reaction to Obama's speech to a joint session of Congress Tuesday night in which he sketched a broad agenda but provided no details, notes S&P. Obama Wednesday nominated Gary Locke as Commerce Secretary.
In economic news Wednesday, U.S. existing home sales fell 5.3% to a 4.49 million unit annual rate in January from a 4.74 million rate in December, reaching the slowest pace in 12 years. The months supply of homes for sale rose to 9.6 from 9.4. The median sales price fell to $170,300 from $175,700 in December, and is down 14.8% over last year. The Northeast region paced the weakness, falling 14.7% month-over-month and 23.8% year-over-year. Sales in the West were flat over the month, though are down 29% year-over-year. The National Association of Realtors now estimates that distressed sales make up about 40% to 45% of the market, which help explain the relative strength in January sales in the West.
The existing home sales slide was worse than expected, notes Morgan Stanley economist Ted Wieseman. "Still, the plunge in prices and moderation in mortgage rates -- though this has disappointingly badly stalled out since the Fed actually began buying MBS in January -- has at least lifted housing affordability to all-time record highs, which should eventually help home sales find a bottom," he wrote in a note Wednesday.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for decreased 15.1% to 743.5 in the week ended Feb. 20 after surging 45.7% the previous week. The MBA's seasonally adjusted purchase index fell 2.6% to 250.5 after rising 9.1% the previous week. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 0.4%.
The ABC News/Washington Post consumer comfort index rose 1 point to -48 in the week ended Feb. 22 from -49 a week earlier. According to the survey, 5% of respondents expressed confidence in the economy, unchanged from the week before. Also, 49% of those polled said their own finances were in good standing, up from 47% in the prior week. In assessing the buying climate, 24% of respondents said it was good, unchanged from a week earlier.
The U.K. Office for National Statistics said its second estimate of final-quarter GDP showed a contraction of 1.5% and the annual rate was revised down by 0.1 percentage points to a fall of 1.9%. European Union officials are concerned that the pound's slide to a record low against the euro could destabilize the British economy, according to a document prepared last month by European Commission and EU finance ministry officials. The head of sovereign ratings at Standard & Poor's said he expected more sovereign ratings downgrades than upgrades this year compared with a year ago.
German fourth-quarter GDP was confirmed at -2.1% quarter-over-quarter and -1.7% year-over-year.
The dollar was up at 96.57 yen as the deterioration in Japan's economy eroded the currency's allure for investors fleeing the financial crisis in the U.S. and Europe.
Among stocks in the news Wednesday, Allstate Corp. (ALL)lowered its quarterly dividend to $0.20 per share, payable on April 1, 2009 to stockholders of record at the close of business on March 13, 2009. Co. previously paid $0.41.
United States Steel (X) revised its fourth-quarter and full-year 2008 results that were reported on January 27, 2009. Following the release of financial results, the company made certain updates and corrections mainly related to lower of cost or market inventory valuations. Net income was reduced by $18 million, or $0.15 per share, resulting in fourth-quarter net income of $290 million, or $2.50 per share, and full-year 2008 net income of $2.112 billion, or $17.96 per share.
J.M. Smucker (SJM) posted $0.88 vs. $0.79 third-quarter non-GAAP EPS on a 6% sales rise (excluding the impact of acquisitions and foreign currency translation). The company cut its fiscal 2009 sales forecast to $3.6 billion-$3.7 billion from $3.8 billion-$4 billion, and sees non-GAAP EPS of $3.15-$3.30. The company noted that the effect of lost peanut butter sales and margins, additional advertising and consumer communication costs, and unrecovered overhead are expected to result in a negative impact to earnings per share in the range of $0.05-$0.07.
First Solar (FSLR) posted $1.61 vs. $0.77 fourth-quarter EPS on sharply higher revenue. The company reportedly said the short-term outlook for the solar industry has never looked more difficult. First Solar sees 2009 revenue of $1.8 billion-$1.9 billion.
Wynn Resorts (WYNN) posted $0.07 vs. $0.72 fourth-quarter adjusted EPS on a 14% revenue decline. The revenue drop was driven primarily by a decline in gaming volumes, significantly lower hold percentage, and an overall reduction in non-gaming revenues in Las Vegas. Adjusted property EBITDA in the fourth quarter was $127.5 million vs. $196.9 million one year earlier.
Chicago Bridge & Iron (CBI) posted $0.72 vs. $0.46 fourth-quarter EPS on a 15% revenue rise. The company sees $1.20-$2.00 2009 EPS on revenue of $4.4 billion-$4.8 billion, and new awards of $3.5 billion-$5.5 billion. Wall Street was looking for $2.15 2009 EPS. The company suspended its quarterly dividend.
DreamWorks Animation SKG (DWA) posted $0.58 vs. $0.98 fourth-quarter EPS on a 31% revenue decline. Earnings fell short of Wall Street's $0.60 estimate. The company expects 2009 results to be driven primarily by Madagascar: Escape 2 Africa and Monsters vs. Aliens, which opens domestically on March 27, 2009.