January 23, 2008

Wall St down despite rally in financials

US stocks rebounded from their worst levels on Tuesday, but a Federal Reserve' rate cut, just a week before its official January meeting starts, failed to arrest pessimism about the US economy and corporate earnings.

About an hour before the opening, policymakers announced a rate cut of 75 basis points, slicing the Fed funds rate to 3.5 per cent. Initially, the move caused S&P stock futures to jump, but the market opened sharply lower.

"The Fed did what they had to do, but it is only part of the solution and more rate cuts are likely," said William Strazzullo, chief market strategist at Bell Curve Trading.

After being closed on Monday for the Martin Luther King holiday, stocks extended their big losses from last week and have now fallen for the past five days.

Traders said an avalanche of sell orders had overwhelmed the stimulus of the Fed's rate cut.

After the S&P 500 initially fell 3.8 per cent, it then pared losses in choppy trade, led by a strong rally in financials, but the benchmark could not turn positive.

At the close of trade the S&P 500 was down 1.1 per cent at 1,310.50 and has now fallen nearly 11 per cent this month.

Equity volatility, as measured by the Vix index, surged 38 per cent to 37.57 and eclipsed the peak set in August when credit and mortgage problems took their toll on the banking sector and the broad market. The Vix closed up 14.2 per cent at 31.04.

The rate cuts and the prospect of more to come sparked a rebound in financial shares, with the S&P sector up 2.2 per cent, although it remains lower by about 11 per cent since the start of the year.

Apart from financials and consumer discretionary, up 1.3 per cent, the rest of the big sectors in the S&P were lower, led by a 3.4 per cent fall in utilities and a 3.2 per cent slide in healthcare stocks, which had been a refuge from selling pressure in recent weeks.

The S&P technology sector fell 3.1 per cent and is down more than 20 per cent from its high of October, meeting the definition of a bear market.

The Nasdaq Composite closed 2 per cent lower at 2,292.27, and has fallen nearly 20 per cent from its high of last year.

Shares in Ebay fell 4.2 per cent to $27.13 after a report said Meg Whitman, the auctioneer's chief executive, was preparing to retire.

The mood in tech was hurt further after the closing bell when Apple reported a 57 per cent jump in first-quarter profit, but lowered its outlook. The stock fell more than 10 per cent in post-market trade.

In spite of the sharp falls, some analysts said the time for the strategic buying of selected stocks loomed.

"It makes sense for investors to consider increasing their exposure to equities into the sell-off, gingerly or aggressively, depending on their investment horizon," said Thomas McManus, chief investment strategist at Banc of America Securities.

Marc Pado, chief market strategist at Cantor Fitzgerald, said: "The question is recession and people are using the term loosely." He added: "Bond yields have been low for some time, while rate cuts and fiscal stimulus from the government will probably propel a strong rebound in the economy during the second half of 2008." Mr Pado said large-cap and growth stocks with exposure to the global economy should be favoured by investors at this time.

The blue-chip Dow Jones Industrial Average closed down 1.1 per cent at 11,971.19. Several blue chips announce their fourth-quarter results this week, led by Microsoft, AT&T, Caterpillar and Honeywell. Investors hope that positive results will help arrest the selling pressure on stocks.

Among the financials in the news was Bank of America (NYSE:BAC) after it said fourth-quarter net income fell to $268m as it reported trading losses of $5.44bn due in part to writedowns of collateralised debt obligations. After an early fall to $33.12, the stock rose 4 per cent to $37.41.

Wachovia (NYSE:WB) reported a 98 per cent fall in earnings as it wrote down $1.7bn and set aside $1.5bn to cover bad loans. The stock also re-bounded from negative territory and gained 3.9 per cent to $31.99.

Ambac reported a loss of $3.26bn after taking a $5.21bn writedown.Fitch Ratings cut the bond insurer to AA last week, a move that has sparked concerns that other financial institutions, which have used the insurer to cover positions, will mark down their portfolios. The stock rallied 27.1 per cent amid hopes it will receive a capital injection.

Shares in Dupont were up 0.4 per cent lower at $42.85, after the chemicals maker posted a quarerlly earings fall of 37 per cent from a year ago, when one-time items boosted results. Excluding those items, profit rose sharply buoyed by international sales.

UnitedHealth (NYSE:UNH) said quarterly earnings rose 3 per cent and it was 5.9 per cent lower at $51.22.

In other earnings, Johnson and Johnson said quarterly profits had risen 10 per cent, as the weak dollar boosted sales by 11 per cent. The stock fell 1.5 per cent to $65.27.

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