Tuesday, May 30, 2006

Stocks Tumble on Inflation, Growth Fears

News Article
May 30, 2006

Business Week Online

Stocks Tumble on Inflation, Growth Fears

The market's May misery continued amid downbeat sales news from Wal-Mart and a fresh rise in crude oil

Stocks resumed their recent downtrend Tuesday, finishing broadly lower amid rising oil prices, lackluster Wal-Mart (WMT ) sales and a General Motors (GM ) downgrade. The rise late last week looks like "an oversold bounce that failed to generate any follow-through buying," says Standard & Poor's Equity Research.

The Dow Jones industrial average fell 184.18 points, or 1.63%, to 11,094.43, as all 30 Dow components declined. The broader Standard & Poor's 500 index retreated 20.29 points, or 1.58%, to 1,259.87. The tech-heavy Nasdaq composite tumbled 45.63 points, or 2.06%, to 2,164.74, slipping back into negative territory for the year amid weakness in bellwethers like Intel (INTC ), Cisco (CSCO ) and Yahoo (YHOO ).

The markets were still suffering from uncertainty over the Federal Reserve's interest-rate plans, some analysts say. "It's more of the same trends of the past couple of weeks," says Joe Battipaglia, executive vice president and chief investment officer for Ryan, Beck. "Investors are concerned that the Federal Reserve will move aggressively further with more rate hikes that will put the economy in jeopardy."

Investors were digesting a tepid sales estimate Tuesday. Wal-Mart (WMT) was lower after the retail giant said same-store sales rose at the low end of the company's forecast due to higher energy costs.

The disappointment sparked worries about what other stocks could come under pressure from rising energy prices, according to Art Hogan, chief market analyst at Jefferies & Co. "This makes us start to think, 'Who else is going to be affected by higher gasoline prices during the official kickoff of driving season?'" he says.

A number of analyst calls also drew attention. Dow component General Motors (GM ) was lower after Deutsche Bank downgraded shares in the automaker from hold to sell.

On the positive side, network equipment maker Sun Microsystems (SUNW ) was higher after UBS boosted the stock from neutral to buy. Meanwhile, Lehman Brothers reportedly lifted Sirius Satellite Radio (SIRI ) from equal-weight to overweight.

M&A activity was also in focus. Kinder Morgan (KMI ) was sharply higher as the pipeline operator's founder seeks to take company private in a $13.5 billion deal. Chemical maker Engelhard (EC ) rose modestly after dropping its resistance to a more than $5 billion takeover bid by German rival BASF.

Elsewhere, Apple (AAPL) was lower after a California appeals court ruled the computer maker can't force Web journalists to reveal their confidential sources.

Among other stocks in focus, Goldman Sachs (GS ) dipped on news Henry Paulson, the investment bank's chairman and CEO, will succeed Treasury Secretary John Snow.

On the economic front, consumer confidence dropped to 103.2 in May, after reaching a four-year high with a revised 109.8 in April. The reading was generally in line with expectations, says Action Economics.

The FOMC minutes for the Fed's May 10 meeting highlight Wednesday's economic calendar. Earlier in the session, investors will be weighing the Chicago PMI reading for regional business activity, along with the recently created ADP employment report.

In the energy markets Tuesday, July West Texas Intermediate crude oil futures closed up 66 cents at $72.03. Worries a stand-off between Iran and the West could lead to supply disruptions overshadowed indications OPEC will probably keep output quotas unchanged at its Thursday meeting in Caracas, says S&P Equity Research.

European markets finished sharply lower. In London, the Financial Times-Stock Exchange 100 index fell 139 points, or 2.4%, to 5,652. Germany's DAX index slid 132.59 points, or 2.3%, to 5,622.43. In Paris, the CAC 40 index tumbled 121.45 points, or 2.42%, to 4,893.87.

Asian markets finished lower. Japan's Nikkei 225 index slipped 56.23 points, or 0.35%, to 15,859.45. In Hong Kong, the Hang Seng index fell 105.88 points, or 0.66%, to 15,857.89. Korea's Kospi index dropped 11.52 points, or 0.87%, to 1,317.7.

Treasury Market

Treasuries declined after hawkish comments from Chicago Fed President Michael Moskow. Prices for 10-year Treasury notes fell to 100-10/32 with a yield of 5.09%, while 30-year bonds dropped to 89-19/32 for a yield of 5.19%.

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