January 18, 2008

Wall St extends sharp losses

Wall Street stocks retreated again Wednesday, extending Tuesday's sharp losses, after Intel's earnings miss sapped confidence in the technology sector.

Financial stocks were mixed, with JPMorgan attracting buyers after its avoided severe subprime-related losses but as Ambac Financial, the bond insurer, said it would issue new equity to shore up its capital reserves.

Less than an hour after the opening bell, the S&P 500 was down 0.6 per cent 1373.20, the Dow Jones Industrial Average fell 0.3 per cent to 12,463.15 but the tech-heavy Nasdaq fell 1.4 per cent to 2,384.54.

Tuesday's sharp sell-off on the S&P has left the index threatening some key support levels.

Traders will be watching to see if the index breaches a closing low of 1370.60 set on March 5th last year, when subprime mortgage problems first became a big worry for traders.

Technology shares sold off after Intel's quarterly results missed Wall Street's expectations and its fiscal first quarter outlook also disappointed analysts.

The shares fell 11.2 per cent to $20.15 after several brokerages cut their price targets on the stock.

Intel's earnings disappointment sapped confidence in a broad range of tech stocks amid heightened concerns about growth prospects in the sector.

The Nasdaq Composite has fallen 9.5 per cent this year while the PHLX semiconductor sector index is down 15 per cent.

Although fourth quarter earnings in technology are likely to hold up well, posting an expected increase of more than 20 per cent, Todd Salamone, vice president of research at Schaeffer's Investment Research, cautioned that this bullishness could set the sector up for a fall.

"The tech sector is expected to have strong earnings growth so it may have more trouble beating estimates," he said.

BEA Systems's shares were a lone bright spot in the sector on Wednesday, soaring 19.3 per cent o $18.59 after Oracle agreed to buy the company for $8.5bn. However, Oracle's shares slipped 0.3 per cent to $21.25 after it was forced to raise its offer price.

The financial sector was mixed after JP Morgan's quaterly results revealed much less exposure to subprime damage than some of its competitors.

Fourth quarter earnings fell by 34 per cent to $2.97bn, worse than expected, after the bank took a $1.3bn writedown on its mortgage investments and boosted its loan loss provision by $2.54bn.

However JPMorgan's problems were small compared with the $18.1bn in writedowns revealed by Citigroup on Tuesday. Citi reported a $9.8bn fourth quarter loss and revealed a sharp increase in consumer credit costs.

JPMorgan's shares rose 3 per cent to $40.34, but Citigroup fell 2.6 per cent to $26.24.

Also reporting fourth-quarter earnings on Wednesday was Wells Fargo, up 1 per cent at $26.76, said fourth quarter profit fell for the first time in more than six years from $2.18bn to $1.36bn, in line with expectations.

Shares in Ambac Financial slumped 25 per cent to $15.93 after the troubled bond insurer said it would issue $1bn in equity and securities and slash its dividend. It also replaced its chief executive. MBIA, a rival, fell 8.5 per cent to $14.68.

Elsewhere, Boeing was in focus after it postponed the launch of its 787 Dreamliner aircraft until early 2009, instead of late 2008. The shares rose 0.2 per cent to $78.04 after falling 4.7 per cent on Tuesday amid reports of potential delays.

In economic news consumer price inflation rose 0.3 per cent in December compared to expectations of a 0.2 per cent increase.

Core prices, which strip out volatile food and energy inputs, rose 0.2 per cent, as expected. For the year CPI rose 4.1 per cent, while core prices were up 2.4 per cent.

The relatively modest monthly increase in consumer prices may leave the door open for the Fed to cut interest rates aggressively, as the market is demanding.

"While this is hardly good news for the Fed, it shouldn't come as too much of a surprise and thus does little to alter the message that Bernanke sent last week," David Greenlaw, economist at Morgan Stanley, said. "The Fed is now clearly downplaying the emphasis on inflation while raising their focus on the downside risks confronting the real economy."

The futures market has priced in at least a 50 basis point cut, with a 46 per cent chance of a 75bp cut by the end of this month.

Some analysts believe the Fed will ease rates in advance of its month-end meeting, but others suggest this would provide the market with a panic signal.

Asian equity markets suffered heavy falls on Wednesday with the Hang Seng closing 5.4 per cent lower, its worst day since September 2001. The Nikkei dropped 3.4 per cent.

European stocks recovered from early losses as Wall Street opened. The FTSE Eurofirst 300 index was down 0.2 per cent, the FTSE 100 fell 0.2 per cent while the Dax gave up 0.5 per cent in Germany.

Bond prices pared early gains on Wednesday with the yield on the two-year Treasury note rising at 2.50 per cent and the 10-year Treasury note yield up 1.5 basis points at 3.68 per cent.

The dollar was a fraction weaker against the euro at $1.4811 but fell 0.4 per cent against the pound to $1.9698 and slipped 0.2 per cent to Y106.56.

Gold prices shed $6.90 to $895.70 while crude oil prices slipped $0.75 to $91.15

No comments: