Markets & Finance

Stocks Climb on Stress-Test Optimism


Investors appeared to believe the results of the government's assessment of banks' capital needs would not be as bad as originally feared

U.S. stocks closed higher Wednesday as investors placed bets that Thursday's bank stress test results would not be as bad as earlier feared and as April private sector payrolls data beat expectations.

Sentiment was supported by a smaller than expected decline in the ADP Employment index for April, which added to evidence of economic stabilization.

On Wednesday, the 30-stock Dow Jones industrial average finished higher by 101.63 points, or 1.21%, at 8,512.28. The broader S&P 500 index added 15.73 points, or 1.74%, to 919.53. The tech-heavy Nasdaq composite index, after being in negative territory for much of the session, closed higher by 4.98 points, or 0.28%, at 1,759.10. On the New York Stock Exchange, 22 stocks were higher in price for every nine that declined. Breadth on the Nasdaq was 15-12 positive.

Treasuries were mixed. The dollar index fell. Gold and oil futures rose.

Traders were bracing for Thursday's reports on weekly initial jobless claims and first-quarter U.S. productivity.

According to a Bloomberg News report, Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), and GMAC LLC are among the companies judged to need additional capital according to results of regulators' stress tests on the 19 largest U.S. banks.

Bank of America has the biggest shortfall, at $34 billion, according to people familiar with the matter. Citigroup’s requirement for deeper reserves to offset potential losses over the coming two years is about $5 billion, people with knowledge of that bank’s results said. Wells Fargo requires about $15 billion, while GMAC's need is $11.5 billion, one person said.

Investors received varying reports about the results of the government's stress tests gauging the health of major U.S. financial institutions.

Guess the Stress

Company

% Chg. (5/6/09)

Bank of America

17%

Citigroup

17%

MetLife

17%

Wells Fargo

16%

JPMorgan Chase

6.90%

Goldman Sachs

3.00%

American Express

2.20%

Goldman Sachs Group (GS), Morgan Stanley (MS), MetLife Inc. (MET), JPMorgan Chase (JPM), Bank of New York Mellon (BK) and American Express (AXP) were deemed not to need additional funds, according to the Bloomberg news report.

Meanwhile, the Associated Press reported that American Express, JPMorgan Chase, and Bank of New York Mellon Corp. will not be asked to raise more capital, according to people briefed on the results. Citigroup, Bank of America, and Wells Fargo & Co. all will be asked to raise money, according to the AP's sources.

In economic news Wednesday, U.S. ADP reported private payrolls fell 491,000 in April, after posting a 708,000 decline in March (revised from -742,000). Jobs in the goods producing sector declined 262,000. Manufacturing employment dropped 159,000 (a 38th straight monthly decline). Service sector employment fell 229,000. Construction jobs declined 95,000.

"The slowdown in the pace of job losses is another sign that perhaps the economy is bottoming, though the labor market may not find a nadir for many more months," says Action Economics.

The government's employment report for April, scheduled for release Friday, is expected to show that the U.S. economy lost 560,000 jobs in April after a plunge of 663,000 the month before.

The Challenger, Gray & Christmas survey showed planned job cuts announced by U.S. employers totaled 132,590 in April, down 12% from the 150,411 layoffs recorded the previous month. This was the lowest monthly total since 112,884 cuts were announced last October, but still up 47% from the 90,015 job cuts announced in the same month of 2008. Still, the data provided another sign that the world's largest economy may be bottoming out.

The Mortgage Bankers Association said mortgage applications increased a seasonally adjusted 2% this past week from the prior week. The MBA's survey showed a 5% increase in filings for mortgages to buy homes in the week ended May 1 as well as a 1.2% increase in applications to refinance existing mortgages.

The ABC News/Washington Post consumer comfort index rose two points to -43 in the week ended May 3 from -45 a week earlier. The survey said 9% of respondents expressed confidence in the economy vs. 7% the week before. Also, 51% of those polled said their own finances were in good standing, up from 50% in the prior week.

San Francisco Fed President Yellen said the U.S. economy may be approaching "an inflection point," with reasons for optimism in rising consumer spending and falling business inventories. "For the first time in a while, there is some good news to savor... But when it comes to assessing the future of the economy, the dominant theme is uncertainty," Yellen told a University of California audience.

Minneapolis Fed President Stern testifies before the Senate Banking Committee on Wednesday.

In company news Wednesday, shares of Dow Chemical Co. (DOW) sank after the company confirmed plans to sell $1.63 billion in stock to help pay for the merger with Rohm & Haas.

General Motors (GM) shares fell after the automaker filed documents with the SEC in which it requested increasing authorized common shares to 62 billion and effecting a 1-for-100 reverse split. As part of GM's restructuring plan, the company would issue common stock in satisfaction of certain of its outstanding debt obligations and retiree healthcare obligations, including possible deal with Treasury under which Treasury would exchange at least 50% of such debt for common. If restructuring as currently contemplated occurs, existing GM common holders would hold about 1% of outstanding GM stock.

In earnings news, Walt Disney Co. (DIS) posted better-than-expected $0.43 vs. $0.58 second-quarter EPS (excluding items) on a 7% revenue decline. Wall Street was looking for $0.40 EPS.

Pitney Bowes (PBI) posts $0.55 vs. $0.66 first-quarter adjusted EPS from continuing operations on 12% lower revenue. GAAP EPS totaled $0.50 vs. $0.56. Free cash flow rose 19% to $240 million. For 2009, the company noted that the severity of the current economic environment has changed some customer behavior and has caused greater deferral of office technology capital investments. It now sees 2009 adjusted EPS from continuing operations of $2.40-$2.60, and GAAP EPS of $2.34-$2.54. Pitney Bowes reaffirmed its 2009 free cash flow guidance of $700 million-$800 million.

Garmin Ltd. (GRMN) posted $0.24 vs. $0.67 first-quarter EPS on a 34% revenue drop. Wall Street was looking for $0.42.

Pulte Homes (PHM) posted a $2.02 first-quarter net loss per share vs. a $2.75 net loss as lower homebuilding overhead expense and lower charges offset a 59% drop in revenue.

Centex Corp. (CTX) posted a wider-than-expected $3.26 fourth-quarter loss per share from continuing operations vs. a $7.34 loss as a 49% drop in selling, general and administrative (SG&A) expenses and lower charges offset a 64% drop in revenue. Wall Street was looking for a loss of $0.95.

Devon Energy (DVN) posted $0.48 (adjusted) vs. $1.66 first-quarter EPS on a 32% revenue drop. Wall Street was looking for $0.27-$0.28. Devon noted that current results exclude, among other things, a $4.2 billion non-cash, after-tax reduction in the carrying value of oil and gas properties.


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