Stocks End Session Sharply Lower On Weakness In Financials - U.S. Commentary

Tue. August 19, 2008; Posted: 04:27 PM

(RTTNews) - Stocks ended Tuesday's session sharply lower, adding to the losses posted in the previous session. Weakness in the financial sector coupled with troubling inflation data gave investors little reason to buy into the markets.

Earlier in the day, the Labor Department released its report on wholesale price inflation in the month of July, showing that prices increased by much more than expected due in part to a continued increase in energy prices.

The Labor Department said that its producer price index jumped 1.2 percent in July following an unrevised 1.8 percent increase in June. Economists had been expecting a much more modest increase of about 0.6 percent.

The report also showed that the core producer price index, which excludes food and energy prices, rose 0.7 percent in July after edging up 0.2 percent in each of the two previous months. The increase came in well above economists' expectations of another 0.2 percent increase.

At the same time, the Commerce Department released its data on housing starts, which showed a notable decrease in the month of July. While the decrease was not quite as steep as economist had been expecting, it did little to quell the sour mood of the markets.

Financial stocks saw notable weakness following reports that Lehman Brothers (LEH | Quote | Chart | News | PowerRating) is considering the sale of all or part of its investment management business, including the Neuberger Berman unit. Additionally, a JP Morgan analyst estimated that the investment bank might have to write down $4 billion in its third quarter.

Meanwhile, Freddie Mac (FRE | Quote | Chart | News | PowerRating) announced that it priced its new 4.125 percent $3 billion five-year USD Reference Notes security due on September 27, 2013. The issue was priced at 99.781 to yield 4.172 percent, or 113 basis points more than five-year U.S. Treasury Notes.

In other news, Target Corp. (TGT | Quote | Chart | News | PowerRating), the second-largest discount retailer in the U.S., reported a decline in its second quarter profits, as consumers cut back on discretionary spending and delinquencies increased on credit card payments during the ongoing economic downturn.

Target reported net earnings of $634 million for the second quarter of 2008, down 7.6 percent from $686 million in the second quarter of 2007. Earnings per share, however, increased 2.4 percent to $0.82 from $0.80 in the same period a year-ago, as common shares outstanding decreased to 773.9 million from 857.4 million last year.

While the major averages ended the session off of their worst levels of the day, they still closed sharply lower. The Dow closed down 130.84 points or 1.1 percent at 11,348.55, the Nasdaq closed down 32.62 points or 1.4 percent at 2,384.36 and the S&P 500 closed down 11.92 points or 0.9 percent at 1,266.68.

Sector News

Airline stocks turned in some of the worst performances, hurt by a jump in oil prices. The Amex Airline Index ended the session down 7.8 percent, adding to a modest loss posted in the previous session.

After falling as low as $111.64 a barrel, crude for September delivery closed up $1.66 at $114.53 a barrel. In mid-day trading, the price of oil rose as high as $116.65 a barrel, but it gave back some ground going into the close.

Forecasts of a continued decrease in gasoline inventories contributed to the turnaround by the price of oil, with analysts predicting that the Energy Information Administration's weekly oil inventory report will show a decrease in gasoline stockpiles of about 3 million barrels.

Pressured by the weak housing starts data released earlier in the day, housing stocks saw significant selling pressure as well. The Philadelphia Housing Index fell 3.5 percent, pulling back further off the two-month closing high set on Friday.

The financial sector, including bank and brokerage stocks, also showed considerable weakness, as investors fear that more firms will be reporting additional losses. The S&P Bank Index closed down 3.7 percent, compared to a 3 percent decline by the Amex Securities Broker/Dealer Index.

Lehman Brothers was one of the biggest losers within the financial sector following downbeat analyst comments. Shares of the investment bank closed down 13 percent, setting a monthly closing low.

Staples closed down 4.2 percent after reporting disappointing preliminary results for its second quarter. Saks plunged 8.3 percent following the release of its second quarter results, which showed a wider than expected loss.

Other stocks that saw notable declines include semiconductor, real estate and defense stocks. The Philadelphia Semiconductor Index closed down 2.3 percent, the Morgan Stanley REIT Index closed down 2.2 percent and the Philadelphia Defense Index closed down 1.6 percent.

On the other hand, most resource stocks saw considerable strength, boosted by higher commodity prices. Within the sector, natural gas, oil service and gold stocks were some of the biggest gainers.

Dow Components

The majority of the Dow components ended Tuesday session with losses, sending the blue chip index sharply below the unchanged line. Of the 30 stocks that make up the Dow, only 3 ended the session higher.

AIG (AIG | Quote | Chart | News | PowerRating) saw one of the biggest declines in the Dow, falling 5.9 percent. The stock has been trending lower for the past week and today's decline sent it to a ten-year closing low.

Earlier in the day, a Goldman Sachs analyst recommended that investors not buy shares of AIG, citing the increased likelihood of another capital raise or a possible ratings downgrade. The analyst also cut his price target on the insurer to $23 from $30.

General Motors (GM | Quote | Chart | News | PowerRating) also saw significant selling pressure. Shares of the automaker ended the day down 4 percent, adding to losses posted in the previous two sessions. Earlier in the day, GM said it would extend its employee discounts to everyone on all of its 2008 models, expect for its medium-duty trucks, and some of its 2009 models in an effort to clear its remaining inventory of 2008 vehicles.

Home Depot (HD | Quote | Chart | News | PowerRating) also showed notable weakness after the company reported a 24.3 percent decrease in profits for the second quarter, reflecting the ongoing softness in the housing markets. Shares of the home improvement retailer closed down 3.7 percent.

Other Markets

Stock markets across the Asia-Pacific region came under pressure on Tuesday, as fears that the U.S. government will have to bail out the top mortgage finance companies weighed on financial stocks. The Japanese market closed sharply lower, reversing Monday's gains. The benchmark Nikkei 225 index closed down 2.3 percent at a one-month low of 12,865.

Likewise, the major European markets also ended the day sharply lower. While the French CAC 40 Index lost 2.6 percent, the German DAX Index declined 2.3 percent. The U.K.'s FTSE 100 index closed down 2.4 percent.

Meanwhile, treasuries ended Tuesday's session mostly lower. The ten-year note fluctuated in the morning, but it moved to the downside in mid-day trading. Subsequently, the yield on the ten-year note closed up 2.6 basis points at 3.842 percent.

Looking Ahead

The economic calendar is relatively light on Wednesday, with the highlight being a weekly report from the Mortgage Bankers Association on mortgage applications. Later in the morning, the Energy Information Administration will release its weekly oil inventory report.

On the earnings front, Hewlett-Packard (HPQ | Quote | Chart | News | PowerRating) is scheduled to release its third quarter results after the closing bell on Tuesday. Analysts expect the computer maker will earn $0.83 per share, compared to a profit of $0.71 per share in same quarter last year.

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