The latest Fed minutes revealed uncertainty over monetary policy. Meanwhile, crude futures tumbled near $71 on Iran news
Stocks ended a miserable May with gains Wednesday, finishing higher despite a jump in bond yields after the minutes from the most recent Federal Reserve meeting shed little light on the direction of interest rates. Uncertainty over the Fed's plans helped spark recent declines, but bulls showed strong conviction this session, says Standard & Poor's Equity Research.
The Dow Jones industrial average rose 73.88 points, or 0.67%, to 11,168.31, paced by Merck (MRK ) and Exxon Mobil (XOM ), but declined 1.8% in May. The broader Standard & Poor's 500 index climbed 10.25 points, or 0.81%, to 1,270.09, falling 3.1% for the month for its worst May since 1984. The tech-heavy Nasdaq composite added 14.15 points, or 0.65%, to 2,178.88, posting a monthly decline of 6.2%.
The minutes from the Fed's May 10 meeting indicated that the Fed has not yet determined the future course of interest rates. Choices on the table ranged from a pause to a hike of 50 basis points, reflecting policymakers' quandary as they continue to monitor economic data, says Action Economics.
The Fed is waiting for more data, some analysts say. "The members said the outlook for slower growth was 'not yet clear' in the data, while stressing that core inflation was a 'little higher than expected,'" says David Wyss, chief economist at Standard & Poor's. "It is becoming more likely that the Fed will pause in June, but then tighten again in August."
Others say the minutes were generally more hawkish than Wall Street expected. "Whatever we thought a half an hour ago, the odds of a June increase just went up," says Joe Balestrino, fixed-income market strategist at Federated Investors.
Also on the economic docket, the Chicago PMI reading for regional business activity surged unexpectedly to 61.5 in May, from 57.2 in April. Before the open, the recently created ADP employment report showed private nonfarm payrolls rose 122,000 in May, less than expected.
Thursday's economic calendar holds a report on U.S. productivity. First-quarter nonfarm productivity is projected to be revised up to 4.0% from the advanced release of 3.2%, says Action Economics. On Friday, a key payrolls report may provide further clues on the Fed's path.
In corporate news, retailer Costco (COST) was lower after posting 12% higher profit for its fiscal third quarter, slightly below expectations. The results followed a lackluster May sales report Tuesday by rival Wal-Mart (WMT ).
Chipmaker Advanced Micro Devices (AMD ) was higher on a report that some computer makers plan to begin selling systems based on a new group of technologies for managing digital media in the home.
Casino operator Las Vegas Sands (LVS) was higher after the company said it expects to recoup its more than $3 billion investment in its Singapore casino project within five years.
Seed producer Monsanto (MON) was higher after the company raised its full-year profit forecast to as much as $2.55 a share, from a previous estimate of as much as $2.50.
Jewelry retailer Tiffany (TIF )was higher after reporting a 7.7% increase in first-quarter profit on double-digit percentage growth in international sales.
On the downside, Cubist Pharmaceuticals (CBST ) was sharply lower after the pharmaceuticals company said it will offer $275 million in convertible notes.
In broker calls, network equipment maker F5 Networks (FFIV ) was higher after Citigroup upgraded the stock from hold to buy.
In the energy markets Wednesday, July West Texas Intermediate crude oil futures fell 74 cents to $71.29, after Secretary of State Condoleeza Rice said the U.S. would join talks with Iran if the OPEC nation halts its nuclear program.
European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rebounded 71.8 points, or 1.27%, to 5,723.8. Germany's DAX index bounced 70.43 points, or 1.25%, to 5,692.86. In Paris, the CAC 40 index added 36.31 points, or 0.74%, to 4,930.18.
Asian markets finished lower. Japan's Nikkei 225 index tumbled 392.12 points, or 2.47%, to 15,467.33. In Hong Kong, the Hang Seng index was closed for a public holiday after Tuesday falling 105.88 points, or 0.66%, to 15,857.89. Korea's Kospi index was also closed after Tuesday dropping 11.52 points, or 0.87%, to 1,317.7.
Treasury yields pressed higher after the FOMC minutes. Prices for 10-year Treasury notes dropped to 100-02/32 with a yield of 5.11%, while 30-year bonds fell to 89-10/32 for a yield of 5.21%.
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.
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%.
What do Sirius Satellite Radio, TiVo, Playboy, and Taiwan Semiconductor have in common? Their shares trade under $10
Americans have always had a love affair with low prices. What's not to like about grabbing a cheeseburger for a dollar at McDonald's (MCD ), or a bottle of soda for 50 cents at Wal-Mart (WMT )? In the investing world, there's a similar psychological appeal to stocks that trade for less than $10 a share.
A modest share price has advantages. The standard unit for stock transactions is a round lot, or 100 shares. Any order that can't be broken up into round lots is called an odd lot, and can lead to extra fees. Still, savvy investors know that low-priced stocks aren't necessarily cheap. That's why investors and analysts spend so much time studying measurements to assess a stock's valuation. The old saw -- some things are cheap for a reason -- always holds true.
Of course, the whole point of bargain-hunting is finding diamonds in the rough. This week's Five for the Money looks at stocks with attractive prospects and share prices below $10. Keep in mind, though, that these stocks carry higher risk than other, more established names. So even though the pricetag may tempt you, think carefully before putting any of them in your cart.
1. Listen to the stars. Howard Stern for $100 million a year? That probably doesn't sound like a steal. But Sirius Satellite Radio (SIRI), the radio operator paying the shock-jock's salary, could be a good buy for just a few bucks, some analysts say. Shares in the New York-based company were trading at $4.23 on May 25.
Sirius shares hit a 52-week low of $3.60 on May 24 after larger rival XM Satellite Radio (XMSR) cut its forecasts for full-year subscriber growth (to 8.5 million subscribers from 9 million) and revenue amid soft retail sales of satellite radios in the second quarter. Sirius reiterated its outlook for more than 6.2 million subscribers by the end of 2006, and says it may book its first quarter of positive cash flow as early as the fourth quarter. Both stocks have skidded more than 40% this year, following double-digit percentage losses in 2005.
Sirius' depressed price means investors can now tune in for cheap, some analysts say. In a Mar. 8 report, Standard & Poor's analyst Tuna Amobi projected Sirius's subscriber rolls, which at last count was around 3.3 million, will swell to 9.8 million by the end of 2007, helped by Stern's arrival in January, 2006.
"We expect a significant rampup in the automotive channel over the next two years, and see retail sales increasingly benefiting from new portable products," wrote Amobi, who has a strong buy recommendation on the stock. Of the 33 analysts covering Sirius, 14 say buy, only one says sell, and the rest fall somewhere in the middle, according to data from S&P Equity Research.
Nevertheless, Sirius has to cut through some potential interference. For one, the rate of free-trial users becoming paid subscribers could slow, says J.P. Morgan Securities analyst Barton Crockett, who has a neutral rating on the stock. As auto makers increasingly offer satellite radio, "conversion rates are likely to drop, at least initially," Crockett wrote in a May 2 report. (J.P. Morgan Securities makes a market in the stock of Sirius, which is or was in the past 12 months a client.)
Another risk: Record labels could train their legal guns on Sirius. They've already slapped XM with a copyright-infringement lawsuit May 16, saying its "Inno" portable player should be subject to higher performance-rights fees because it can record and store music. Sirius struck a deal with the music industry for its S50 recordable device, but CEO Mel Karmazin has said the agreement won't necessarily extend to future devices. "That's mitigated by strong growth, and what we see as lower 2006 estimate risk for Sirius than XM," Crockett wrote.
2. Zap those ads. While pricing plans for TiVo (TIVO) bottom out at $16.95 a month, buying a share of the Alviso (Calif.)-based maker of digital video recorders (DVRs) looks like a bargain. Shares were trading at $6.41 on May 25, down from a 52-week high of $9.49 hit on Apr. 17 after a federal jury awarded TiVo $74 million in damages in its patent-infringement lawsuit against EchoStar Communications (DISH ).
That verdict was a huge win for TiVo, some analysts say, though opinions on the stock are mixed. While EchoStar's appeal could take years, TiVo has an opportunity to cut lucrative licensing deals with other TV operators, says Citigroup analyst Tony Wible, who has a buy recommendation on the stock. "TiVo could generate between $116 million to $260 million in cash flow from future deals," Wible wrote on Apr. 17, when he raised his target price by $6 to $15. (Citigroup Global Markets or one of its affiliates owns 1% or more of TiVo securities, and also makes a market in the stock.)
TiVo's stock has been stuck in rewind amid rising competition from generic DVRs and doubts about its business model. On May 24, TiVo posted a first-quarter loss of 13 cents a share, narrower than the forecast for a 19 cents loss (but wider than a one cent loss reported a year ago), while net revenue rose 20%, to $56.5 million. The company said higher marketing expenses and costs from its legal battle with EchoStar held down net income. The dispute with EchoStar is likely to drag on. On May 22, TiVo filed an injunction seeking to ban EchoStar from making or selling its DVR.
Still, TiVo stands to improve sales in the year ahead, analysts say. Service and technology revenues should rise 26%, to about $210 million in fiscal 2007, despite lower contributions from DirecTV (DTV ), says S&P's Amobi, who has a strong buy recommendation on the stock. He also believes the Apr. 17 verdict could increase the attractiveness of TiVo as a takeover candidate.
3. For adults only. (Disclosure: Hogan has contributed freelance articles to a Playboy publication.) The recent market downturn probably left Playboy Enterprises (PLA) shareholders feeling a little naked. On May 23, the Chicago-based adult entertainment company's stock dove to a 52-week low of $9.51. It's off 40.1% from a 52-week high of $15.88 touched on November 18, 2005.
But Playboy's famous bunny ears could still perk up, some analysts say. Shares edged up to $9.72 on May 25. A new publisher, as well as higher magazine prices and advertising rates, ought to restore the stock's luster, says S&P analyst James Peters, who has a buy opinion on the company.
While Hugh Heffner still has his smoking jacket and pipe, the company he founded has been forced to change with the times. On May 4, Playboy posted lackluster first-quarter earnings and issued a profit warning for the year, hit hard by lagging TV and magazine revenues. The U.S. adult-TV business "is seeing a fundamental shift," wrote RBC Capital Markets analyst David Bank a day later.
Other ventures could help keep Playboy's festive spirit going, though. The launch of subscription video-on-demand services may improve TV revenues, notes Bank, who has a buy rating but lowered his target price. Bank also thinks that delivering content via the Web and wireless devices should keep Playboy hot in the long term, despite short-term challenges.
The adult-entertainment industry isn't only risque, it's also increasingly competitive. Ironically enough, in this business it's what's inside that counts, according to Credit Suisse analyst William Drewry. "We are fervent believers in the mantra that 'content is king,' and we are confident that as long as Playboy continues to produce top of class content, consumers will find it and pay for it," Drewry wrote May 5, as he maintained an outperform rating and trimmed his target price. (Credit Suisse makes a market in the securities of Playboy and does or seeks to do business with companies covered in its research reports.)
4. Find a chip off a new block. Recent declines in emerging-market stocks pushed American depositary receipts in Taiwan Semiconductor Manufacturing (TSM ), or TSMC, below the $10 mark (see BW Online, 05/23/06, "Emerging Markets Beat Quick Retreat"). Hovering around $9.43, the stock is down 17% from a 52-week-high of $11.37 set May 8.
While the stock could be weak for the time being, some analysts think the Taiwan-based chipmaker has brighter long-term prospects. James Holtzman, a financial adviser and certified financial planner at Pittsburgh-based Legend Financial Advisors, says TSMC is the only stock under $10 in its clients' portfolio. He points to earnings growth projections of 40% for 2006 and 20% over the next five years, along with a price-earnings ratio of 14.5, compared to an industry average of 28.3. "This company has a lot of exposure to the Asian economy," he says. "We like that factor, as well."
On May 22, Morgan Stanley analyst Sunil Gupta maintained an outperform rating on the stock. Gupta trimmed his price target from $12.60 to $12 to reflect a bigger than expected inventory buildup. However, he thinks TSMC should gain market share this year thanks to new product launches in the third quarter. "We expect the stock price to decline by 5% to 8% in the near term and then eventually increase by 25% (including dividend yield) from the lower level," wrote Gupta in a report.
S&P analyst Vincent Ng has a buy recommendation and $12 target for TSMC. He cited rising rates of plant utilization and anticipated industry-wide growth of 12% this year.
5. Catch a wave. Telecom-equipment maker Powerwave Technologies (PWAV) is another stock that has dipped below $10. Shares were trading at $9.83, down from a 52-week high of $15.76 on Mar. 6. The culprit? On Apr. 3, the Santa Ana (Calif.)-based company cut its first-quarter outlook, only to disappoint the Street again May 2 by posting a quarterly loss.
The slow start to 2006 was just temporary static, some analysts say. First Albany Capital upgraded the stock from neutral to buy on May 3, with a $14 price target, citing strong earnings projections for the rest of the year. (First Albany makes a market in the securities of Powerwave.)
Much of the first-quarter shortfall stemmed from seasonal weakness, which also hit competitor Andrew (ANDW), says Canaccord Adams analyst Joanna Makris, who lowered her target price to $15 on May 3. A sharp decline in sales to Cingular was another factor, says Makris, who maintains a buy recommendation on the stock. (Canaccord Adams makes a market in the securities of Powerwave and intends to seek or expects to receive compensation from the company in the next six months.)
Indeed, the recent pullback could give investors a chance to dial in at a lower price. Cingular is likely to boost its spending later in 2006, while Powerwave also does substantial business with Nokia (NOK ) and Siemens (SI ), according to Baird analyst Kenneth Muth. "We feel the stock has been oversold," Muth wrote in a May 3 note, maintaining an outperform rating and lowering his target to $15. (Baird makes a market in the securities of Powerwave and it or its affiliates either intend to seek or expect to receive compensation from the company within the next three months.
Major indexes gained for a third straight session, reversing recent losses. Meanwhile, a closely watched inflation gauge posted its biggest increase in 13 months
Stocks ended a rollercoaster week on an up note Friday, finishing higher after a report showed increases in consumer spending and income but also rising inflation. A drop in bond yields, strength in global stock markets, and speculation that major indexes have established a near-term bottom motivated bulls, says Standard & Poor's Equity Research.
The Dow Jones industrial average rose 67.56 points, or 0.6%, to 11,278.61, paced by AT&T (T ) and Alcoa (AA ) en route to a weekly gain of 1.2%. The broader Standard & Poor's 500 index added 7.28 points, or 0.57%, to 1,280.16, up 1% for the week. The tech-heavy Nasdaq composite advanced 12.13 points, or 0.55%, to 2,210.37, rising 0.8% on the week and returning to positive territory for the year.
Trading was light Friday ahead of the Memorial Day weekend, says S&P Equity Research. Markets and government offices will be closed Monday for the holiday.
Investors were digesting fresh economic data. Personal income rose 0.5% in April, while consumption increased 0.2%. Both were less than expected, says Action Economics. However, a key inflation gauge posted its biggest 12-month increase since March 2005. The personal consumption expenditure (PCE) index deflator excluding food and energy was up 2.1% in April from the same month a year earlier.
The PCE deflator was likely outside Federal Reserve Chairman Ben Bernanke's "comfort zone", some analysts say. "These inflation data do not, in our judgment, support the view of a pause at the June FOMC meeting," writes John Ryding, chief U.S. economist at Bear Stearns.
Also on the economic docket, the University of Michigan's final May reading for consumer sentiment held fairly steady at 79.1, after a preliminary reading of 79.0. That's down from April's 87.4, but in line with expectations.
Markets brushed off reports of gun shots heard in the garage of the House of Representatives' Rayburn office building. The building was shut down for most of the day as officers investigated. Police later said the scare was likely sparked by the sound of construction workers.
Investors will have new economic data to assess in the short week next week. Among reports on tap are May employment, factory activity and consumer confidence, as well as April factory orders and construction spending.
In corporate news Friday, General Motors (GM ) was higher after Prudential upgraded the automaker from neutral to overweight. Rival Ford (F ) also gained.
Financial services stocks got a boost from another pair of analyst upgrades. UBS raised its outlook on Goldman Sachs (GS ), while Wachovia upgraded Merrill Lynch (MER ).
Pharmaceutical stalwart Merck (MRK ) was higher after federal regulators approved its vaccine to prevent shingles.
Also rising was Weight Watchers (WTW ), which anounced a $250 million stock buyback.
In earnings news, Agile Software (AGIL ) was lower after the software maker said it swung to a profit for its fiscal first quarter.
Semiconductor equipment maker Credence Systems (CMOS ) hit a 52-week low after the company reported a quarterly loss and issued lower guidance.
Telecom company Ditech (DITC ) was lower after reporting higher earnings for its fiscal fourth quarter.
Women's clothing retailer Chico's FAS (CHS ) was higher after the company posted 11% higher first-quarter profit.
Among other stocks in focus, Internet phone-service provider Vonage (VG ) was higher after its initial public offering Wednesday marked the worst IPO debut since July, 2004.
In the energy markets Friday, July West Texas Intermediate crude oil futures closed up five cents at $71.37 a barrel.
European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rose 113.3 points, or 2%, to 5,791. Germany's DAX index advanced 82.3 points, or 1.44%, to 5,788.36. In Paris, the CAC 40 index gained 95.56 points, or 1.93%, to 5,045.09.
Asian markets finished higher. Japan's Nikkei 225 index rose 277.01 points, or 1.77%, to 15,970.76. In Hong Kong, the Hang Seng index added 198.21 points, or 1.26%, to 15,895.1. Korea's Kospi index climbed 26.67 points, or 2.06%, to 1,322.43.
Prices for 10-year Treasury notes rose to 100-19/32 with a yield of 5.05%, while 30-year advanced to 90-01/32 for a yield of 5.16%.
Major indexes posted a second straight day of gains after solid economic reports failed to fan inflation fears. Also in focus: Wal-Mart and eBay
Stocks finished higher Thursday, boosted by tame economic reports and a pair of analyst upgrades. Bulls were looking for the start of a near-term uptrend, but they'll need to see price strength driven by increasing volume to have confidence the rally has legs, says Standard & Poor's Equity Research.
The Dow Jones industrial average rose 56.19 points, or 0.51%, to 11,173.74, paced by General Motors (GM ). The broader Standard & Poor's 500 index added 10.44 points, or 0.83%, to 1,269.01. The tech-heavy Nasdaq composite was up 18.74 points, or 0.86%, to 2,187.92.
In legal news, a jury found Enron founder Ken Lay and former Enron CEO Jeffrey Skilling guilty of conspiracy and fraud relating to their role in the energy company's collapse. Skilling was found not guilty on counts involving insider trading.
Economic reports were in focus Thursday. First-quarter gross domestic product (GDP) was revised from 4.8% to 5.3%. The number is lower than forecast and signals firm growth without igniting inflation fears, says S&P Equity Research. The closely watched PCE price index held steady at 2.0%.
Separately, existing home sales fell 2% to 6.76 million in April. The figure was almost exactly in line with forecasts, says Action Economics.
Federal Reserve Chairman Ben Bernanke stressed the significance of "forward looking" monetary policy in a letter to Congress's Joint Economic Committee. His remarks contained little fresh information, says Action Economics, but major indexes reached higher after the news.
On the economic docket Friday, April personal income is expected to rise 0.8%, while consumption increases 0.7%, says Action Economics. The University of Michigan's final May reading for consumer sentiment is seen holding at the preliminary reading of 79.0, down from April's 87.4.
Analyst upgrades helped give stocks a lift Thursday. Wal-Mart (WMT ) was higher after Banc of America upgraded the retail giant from neutral to buy.
Meanwhile, eBay (EBAY) rose sharply after Prudential raised its recommendation on the company from neutral to overweight. The Internet auctioner also unveiled a partnership with Yahoo (YHOO ).
Credit-card issuer MasterCard (MA ) was sharply higher in its debut on the New York Stock Exchange.
Drugmaker Genentech (DNA ) rose on news it filed for regulatory approval to market its Avastin antibody as a breast cancer treatment.
In earnings news, TiVo (TIVO ) was lower after the maker of digital video recorders late Wednesday posted higher earnings and issued in-line guidance.
Computer hardware company Network Appliance (NTAP ) declined modestly after reporting quarterly results that were in line with expectations.
Software maker Opsware (OPSW ) was down on a report of a first-quarter loss. Also in Silicon Valley, Blue Coat Systems (BCSI ) tumbled after guided first-quarter revenue lower than some analysts expected.
Pet supply chain Petco (PETC ) dipped after posting higher earnings but lower revenues.
On the M&A front, Alabama bank Regions Financial (RF ) was modestly lower on news of a $10 billion merger with rival AmSouth Bancorp (ASO ).
Among other stocks in focus, retailer Kohl's (KSS ) was lower after Deutsche Bank trimmed its rating on the stock from buy to hold.
In the energy markets Thursday, July West Texas Intermediate crude oil futures closed up $1.46 at $71.32 a barrel.
European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rose 90.6 points, or 1.62%, to 5,677.7. Germany's DAX index climbed 118.83 points, or 2.13%, to 5,706.06. In Paris, the CAC 40 index advanced 79.51 points, or 1.63%, to 4,949.53.
Asian markets finished lower. Japan's Nikkei 225 index fell 213.45 points, or 1.34%, to 15,693.75. In Hong Kong, the Hang Seng index dropped 125.75 points, or 0.79%, to 15,696.89. Korea's Kospi index tumbled 37.62 points, or 2.82%, to 1,295.76.
Treasuries drifted in a tight range for most of the session, weakening after soft demand for a five-year auction and new of Bernanke's letter. Prices for 10-year Treasury notes fell to 100-13/32 with a yield of 5.07%, while 30-year bonds dropped to 89-26/32 for a yield of 5.17%.
The Nasdaq swung to its lowest close of the year. Crude climbed near $72, while metals prices recovered
Stocks finished lower Tuesday, after a rebound attempt on rising energy and commodity prices slipped away in the closing hour. The recent shift out of speculative markets and into the safety of Treasuries reversed, supporting early gains, but late selling probably reflected underlying concerns about inflation and rising interest rates, says Standard & Poor's Equity Research.
The Dow Jones industrial average slipped 26.98 points, or 0.24%, to 11,098.35, trailed by Home Depot (HD ). The broader Standard & Poor's 500 index fell 5.5 points, or 0.44%, to 1,256.57. The tech-heavy Nasdaq composite dropped 14.09 points, or 0.65%, to 2,158.76, its lowest closing level since Nov. 2, 2005.
Growth fears, not inflation fears, are the cause of recent weakness, some analysts say. "I have long thought that the second half of this year would see a sell-off in risky assets and a rally in bonds," writes Joachim Fels, chief global fixed income economist at Morgan Stanley. "To me, it looks as if the second half of the year has started early."
Others say the Federal Reserve's inflation-fighting efforts are unlikely to damage growth. "Fear the Fed will have to trample on the economy to crush inflation has unleashed a significant risk reduction trade in global financial markets, with a noticeable bull-flattening rally in Treasuries," writes Richard Berner, chief U.S. economist at Morgan Stanley. "In our view, the Fed has more work to do, and we're mildly bearish on bonds."
Meanwhile, another economist says growth has shown no definitive signs of slowing yet. "We continue to believe that U.S. growth will slow and interest rates will decline in the second half of 2006," writes Jan Hatzius, chief economist at Goldman Sachs. "However, we have not yet seen a 'smoking gun' that would confirm the transition to slower growth."
Investors were assessing a bounce in commodities futures Tuesday. Higher metals prices boosted companies like Newmont Mining (NEM ) and Phelps Dodge (PD ), which were among Monday's losers. Aluminum giant Alcoa (AA ) shared in the gains most of the day, but eventually finished lower.
In earnings news, Toll Brothers (TOL) was higher after posting 3% higher profit for its fiscal second quarter. The luxury home builder also trimmed its guidance for fiscal 2006.
Meanwhile, Fannie Mae (FNM) was higher after the mortgage lender said it would implement corrective measures and pay a $400 million penalty as part of settlements with federal regulators.
Internet search giant Google (GOOG ) was higher after launching distribution of video-enabled advertisements through its content partners.
Networking equipment maker Juniper Networks (JNPR) was lower on news the government requested 10 years of information from the company as part of a probe into executive stock-option grants.
Elsewhere, XM Satellite Radio (XMSR ) was lower after terminating a deal to buy WCS Wireless, which owns wireless spectrum licenses. Separately, Ladenburg Thalmann upgraded the stock from hold to buy.
In broker calls, handheld-device maker Palm (PALM ) was sharply lower after Bear Stearns downgraded the stock from peer perform to underperform after Motorola (MOT ) launched a rival smartphone.
On the economic front, the International Council of Shopping Centers (ICSC) and UBS Securities weekly chain stores sales index fell 0.8% for the week ended May 20. Investors were looking ahead to Wednesday's reports on durable goods orders and new home sales for April. A second reading on first-quarter gross domestic product (GDP) and April figures for existing home sales are set to follow Thursday, while a report on personal savings, consumption and income will be in focus Friday.
In the energy markets Tuesday, July West Texas Intermediate crude oil futures closed up $1.80 at $71.76 a barrel, ahead of weekly inventory data Wednesday.
European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rebounded 146 points, or 2.64%, to 5,678.7. Germany's DAX index bounced 132.25 points, or 2.38%, to 5,678.49. In Paris, the CAC 40 index climbed 118.03 points, or 2.45%, to 4,931.53.
Asian markets finished lower. Japan's Nikkei 225 index sank 258.67 points, or 1.63%, to 15,599.2. In Hong Kong, the Hang Seng index slipped 59.04 points, or 0.37%, to 15,864.56. Korea's Kospi index retreated 8.73 points, or 0.65%, to 1,329.86.
Treasuries declined Tuesday after rallying during stocks' weakness the previous session. Prices for 10-year Treasury notes dropped to 100-14/32 with a yield of 5.07%, while 30-year bonds fell to 90-03/32 for a yield of 5.15%.
"It's not a complete meltdown", says S&P's Alka Banerjee, who sees the slump as a natural reaction to the sector's rapid advance
After a long climb, emerging-market stocks have taken a startling tumble. On May 22, the Morgan Stanley Capital International Emerging Markets index fell for a 10th straight day, its longest skid since August, 1998. In India, the Bombay Stock Exchange Sensitive Index finished down 4.2%, recovering from an early 10% plunge that shut down trading for an hour.
The preceding run-up in prices helped set the stage for emerging markets' sudden slump, says Alka Banerjee, who focuses on international markets as vice-president of global index management at Standard & Poor's. "There had to be a pullback," she says. "It doesn't mean in the long run these [equities] are bad bets."
Only recently emerging-market stocks were at all-time highs. The S&P/IFCI Composite index, which tracks emerging markets, surged 20.6% in the first four months of the year. This month, the index has shed 6.3% through May 19. The S&P/IFCI Turkey index alone tumbled 18.9%.
Banerjee recently spoke with BusinessWeek Online reporter Marc Hogan about the factors weighing on emerging-market stocks and what they mean for the rest of the world. Edited excerpts from their conversation follow:
What's behind the volatility we're seeing in emerging markets?
The genesis is in most of the activity that the markets around the world have seen in the last few weeks. You have rising interest rates, expectations of inflation, and high commodity prices. Commodity prices have taken a beating in the last few weeks, but it's also the momentum that has been building up.
Emerging markets have had a good three-year run. They've been up and up and up. This year, all of a sudden, in the last four months they're up 20.6% [through Apr. 30], though individually the rates of increase have been different. That's a very high rate of increase, and at some point profit-taking had to occur. People have pumped huge amounts of funds into emerging markets in the last year [or more]. At some point investors were bound to get edgy because a lot of this money is coming from hedge funds. That kind of money does seem to move out very quickly, and it seems that that ride is over.
But emerging markets are not yet negative even for the year. They've lost some of their value, but they're still up a lot. There's more volatility because people don't know where things are. They don't know if they're overvalued. They don't know whether they should pull out, or if there's still some [upside] left. And it's not just specifically emerging markets. All these fears are pretty universal. This has been in the U.S. markets, too. Emerging markets, because they've had such a run-up, have obviously fallen a lot more than the others.
Along those lines, what implications do the emerging markets' recent declines hold for larger markets globally?
There are two schools of thought. One school says we should just go overseas and let U.S. [asset] allocations remain where they were. Another school of thought says there's value in the U.S., and you should be here. I don't think there's a clear consensus on where market value lies at this point. There's too much volatility.
It's amazing the amount that commodity prices have gone up. Interest rates have gone up, and bond prices have crashed because of that. Some people are just saying put [your assets] in cash and Treasury bills, because that's the safest place to be. My personal view is that these markets have gone up so much they had to pull back. It's natural.
How do higher U.S. interest rates affect emerging markets?
If you have higher interest rates in the U.S., people can invest in U.S. government securities and get reasonable enough returns without having to take on the additional risk and volatility associated with an emerging market. You lend here and you're fine, you get good enough returns, especially because these emerging markets have gone up so much that maybe it's time to pull out.
It's the same thing in Japan, where interest rates have gone up. You even saw a currency crash a few months ago in Iceland. People pulled their money out of Iceland because interest rates came down there, and these developed-market interest rates went up. The differential was much less.
What should investors be looking for in these markets? Are there any areas of opportunities after the recent weakness?
In earlier times, when emerging markets used to have these booms and crashes, a lot of the crashes came because there were inherent inefficiencies in these markets. This time I don't see that so much. There is a lot of run-up because of commodities. Emerging markets are being propped up because of commodity prices going up. It's not just because of pure speculative buying.
Meanwhile, countries like China have gone up because their fundamentals are very strong. There are different reasons, all of which are valid reasons for countries to go up. Even if the markets have pulled back, those fundamentals still remain. They haven't changed.These markets still are a good bet. How much allocation do you give to it? That's an individual manager's choice. I don't think you'll see a crash like in the 1997 Russian crisis, where there were inherent inefficiencies that were revealed.
What factors could exacerbate the recent weakness? Are there any other potential trouble spots?
[The key factors remain] commodity prices, interest rates, and fears of inflation. But the fundamentals that drove these markets up still look good -- unless oil crashes, which I don't really see happening. Or if India, China, and Taiwan suddenly lose all their growth patterns, which again is hard to imagine in the next few months. I don't imagine anything going drastically wrong unless what we've been seeing suddenly reverses.
In general, again, emerging markets have not given back all their gains for the year. It's not a complete meltdown. It's just a natural stop to the heady gains that we've seen.
International markets tumbled, pointing major U.S. indexes lower after last week's declines
Stocks finished a choppy session lower Monday, extending their recent downtrend amid broad weakness in global markets along with an early decline in commodity prices. Inflation worries and uncertainty over the Federal Reserve's interest-rate plans drove a shift out of speculative areans, led by emerging market equities and commodity futures, says Standard & Poor's Equity Research.
Still, major indexes perked up from session lows in the final hour. This late recovery may indicate the market is getting set for an oversold bounce, says S&P Equity Research.
The Dow Jones industrial average edged lower 18.73 points, or 0.17%, to 11,125.33, with Microsoft (MSFT) leading gainers. The broader Standard & Poor's 500 index slipped 4.97 points, or 0.39%, to 1,262.06. The tech-heavy Nasdaq composite lost 21.03 points, or 0.96%, to 2,172.86.
The markets have priced in more risk as they consider the Fed's next move, some analysts say. "The longer-term structure of the market indices remains positive, but equity markets appear to be testing the character of the new Fed Chairman," writes Merrill Lynch chief market analyst Mary Ann Bartels in a research report. "'Data dependent' leaves investors with uncertainty on Fed policy, and therefore, markets are likely to remain volatile until the Fed gives the markets more clarity."
However, recent declines don't point to a market collapse, other analysts say. "Stock markets have been pummeled of late by inflation jitters, slowdown fears and alleged investment community complacency," writes Tobias Levkovich, chief U.S. equities strategist at Citigroup. He adds that the firm's sentiment, earnings expectations and valuation work do not support investor fears about a meltdown in the U.S. equity market.
The economic calendar was quiet to start the week. Investors were looking ahead to Wednesday's reports on durable goods orders and new home sales for April. A second reading on first-quarter gross domestic product (GDP) and April figures for existing home sales are set to follow Thursday, while a report on personal savings, consumption and income will be in focus Friday.
On Monday, investors were assessing falling commodity prices, which rebounded by session's end but still weighed on corresponding equities. Alcoa (AA ), Newmont Mining (NEM ) and Phelps Dodge (PD ) were among the big losers.
M&A news also returned to the picture. NYSE Group (NYX ) was lower after the owner of the New York Stock Exchange offered about $10.2 billion in cash and stock for Euronext NV, Europe's second-largest stock exchange.
Meanwhile, Wal-Mart (WMT) was little changed after the retail giant agreed to sell its unprofitable South Korean business to Shinsegae Co. for $869 million.
Outside of M&A, Bausch & Lomb (BOL) was lower on news it received an IRS notice of liability for the 1999 tax year. Shares were already battered by the recall of the company's contact lens cleaner.
Home-improvement retailer Lowes (LOW ) was lower despite posting 44% higher quarterly profit, ahead of Street expectations. Rival Home Depot (HD ) was also down.
On the positive side, Internet media outfit Yahoo (YHOO ) was higher after a report that a redesigned Web site could drive the stock higher.
Packaged-foods maker Campbell Soup (CPB ) was up after posting 14% higher profit for its fiscal third quarter, on a 6% sales increase.
In the energy markets, June West Texas Intermediate crude oil futures closed up 70 cents at $69.23 a barrel following an early decline, rebounding after Venezuelan Oil Minister Rafael Ramirez hinted at a production cut. Exxon Mobil (XOM ) rose after falling in early trading. Nevertheless, many analysts say oil still has a long way to go on the downside, according to S&P Equity Research.
European markets finished lower. In London, the Financial Times-Stock Exchange 100 index fell 124.7 points, or 2.2%, to 5,532.7. Germany's DAX index dropped 126.04 points, or 2.22%, to 5,546.24. In Paris, the CAC 40 index lost 131.07 points, or 2.65%, to 4,813.5.
Asian markets finished lower. Japan's Nikkei 225 index skidded 297.58 points, or 1.84%, to 15,857.87. In Hong Kong, the Hang Seng index tumbled 507.84 points, or 3.11%, to 15,805.52. Korea's Kospi index sank 33.7 points, or 2.46%, to 1,338.59.
Treasuries rallied early on a flight to safety out of the stock, energy, and commodity markets, says S&P Equity Research. But a late rebound in oil futures and hawkish comments from Dallas Fed President Richard Fisher picked yields up from session lows, says Action Economics. Prices for 10-year Treasury notes rose to 100-22/32 with a yield of 5.04%, while 30-year bonds edged higher to 90-14/32 for a yield of 5.13%.
Real estate investment trusts look appealing after their recent pullback, but some might be best to avoid
After five years of impressive returns, real estate investment trusts (REITs) may once again seem like a buying opportunity. Along with the broader stock market, this group has hit a rough patch. The Standard & Poor's 1500 REITs Sub-Industry index, which hit an all-time high on Mar. 17, was down 9.7% from that level as of May 18. While the drop could provide opportunities to pick up shares on the cheap, investors should look under the roof first.
A REIT is a tax-advantaged company that invests in a portfolio of real estate properties. As always in real estate, location is everything. Shopping center REITs and office REITs continue to be cheaply priced, but residential REITs are "tricky," according to Andrew Clark, a senior research analyst at investment tracker Lipper. "The market seems to be trading residential REITs on much more of a speculative basis than on a fundamental basis," Clark says.
Residential REITs, which invest mainly in apartments and manufactured housing, could benefit as the market for single-family homes shows signs of cooling. On May 16, the Commerce Dept. said U.S. housing starts slowed to 1.85 million units in April, the lowest since November, 2004. A day earlier, the National Association of Home Builders announced that its May index of builders' perceptions of sales conditions dropped to its lowest level in more than 10 years.
PULLBACK OVER? Despite the recent downturn, REITs have posted benchmark-beating returns in recent years. The S&P 1500 REITs Sub-Industry index has climbed 38.3% since its Oct. 9, 2001, launch, compared to a 20.4% gain for the broader S&P 500 index over the same period.
If the bulls are right, the sector's pullback may have run its course. On Apr. 10, S&P Equity Research warned of a potential correction of up to 15% over the next six months in the S&P 1500 REITs Sub-Industry index. Mark Arbeter, chief technical analyst at S&P Equity Research, says most of the expected damage has already occurred.
Still, as with any investment, investors shouldn't try to outsmart the market. REITs can best boost returns as a core asset class in a well-diversified, long-term portfolio, says Michael Grupe, executive vice-president of research and investor outreach for the National Association of Real Estate Investment Trusts. "You can't just invest in three, four, or five REITs and expect to realize the kinds of diversification benefits we have in mind," he says. This week's Five for the Money looks at REITs that investors should survey carefully before buying.
1. Management still matters. Newtown Square (Pa.)-based GMH Communities Trust (GCT ), which focuses on housing for college students and the military, delayed filing its 2005 and first-quarter 2006 financial reports in the wake of an investigation into its accounting procedures. The investigation revealed "material weaknesses" in the company's financial reporting, along with "tone at the top" behavioral issues, GMH said in a Mar. 10 statement.
Facing at least 10 class-action lawsuits, the company has begun efforts to set a new tone. In another statement May 15, GMH announced it had hired J. Patrick O'Grady, a partner with accounting firm KPMG, as its new chief financial officer. The company also said it was close to finalizing its 2005 report and expects to post funds from operations, a common REIT performance measure, of 69 cents a share on $227.6 million in sales. Kathy Grim, GMH's vice president of marketing, declined to comment beyond the statements.
GMH shares have fallen 32.9% from a 52-week high of $17.10 hit on Mar. 1. On Apr. 28, investment researcher Morningstar (MORN) removed its rating on the REIT amid its mounting difficulties. "That's one that we're recommending that investors steer clear of," says Morningstar stock analyst Ryan Dobratz.
Other analysts' opinions were more lukewarm, including two holds and two hold/sells, according to data from S&P Equity Research. On May 15, J.P. Morgan Securities maintained its underweight rating on GMH shares. "We believe that the accounting issues cause an overhang that could linger for a few quarters," analyst Anthony Paolone wrote.
2. Keep an eye on dividends. Part of the appeal of REITs lies in their generally high payouts. If a company shrinks its dividend, steer clear. On May 2, S&P reiterated a strong sell recommendation on shares of Chicago-based Equity Office Properties (EOP ), the largest publicly held owner of office buildings. One reason: a recent dividend cut.
A day earlier, Equity Office Properties posted first-quarter funds from operations of 55 cents a share, a penny above Wall Street's forecast. On Dec. 14, 2005, the company sliced its annual dividend by a third, to $1.32, to better align the payout with taxable income. S&P analyst Roland Shepard says he sees additional risks to dividends in the next year.
The REIT also faces the risk of tenants currently paying above-market rents renewing their leases at cheaper rates. Rents in areas like San Francisco and Boston are lower than they were a few years ago, Shepard says. He projects a 10% decline in rent prices on leases that roll over in 2006, after a roughly 15% drop in 2005. "They also need to make improvements to their buildings," he says, which would place another drag on margins.
Wall Street analyst opinion varies, with "hold" the most common recommendation. Terry Holt, a spokeswoman for Equity Office Properties, points to the stock's strong performance history. In the three years ended Dec. 31, 2005, shares posted total returns of 15.1%, compared to 14.4% for the S&P 500.
"Our geographic diversity offers less risk compared to REITs that have a more narrow market focus, that have heavy development, or that have significant noncore business income," Holt says.
3. Check the price tag. On May 17, shares of Los Angeles-based Kilroy Realty (KRC) closed at $67.83, down 13.1% from their 52-week high of $78.04 reached on Mar. 30. Founded in 1955, the company invests in commercial office and industrial properties in Southern California, including the lucrative San Diego, Los Angeles, and Orange markets.
Morningstar's Dobratz says the REIT should be priced far lower. He pegs Kilroy's fair value at $45 and assigns it a one-star rating, arguing that investors bid up the shares after another Southern California REIT, Arden Realty, went private at a hefty price. Moreover, Kilroy's 3% dividend yield is low for its industry, according to Morningstar. "If investors are paying that price they should expect mid- to high single-digit returns, or more," Dobratz says.
Still, he applauds the company's latest news. On May 8, Kilroy said it would sell 2 million common shares to lead underwriter Bank of America (BAC ), for a price later set at $69.50. Selling shares around the current price level was an "incredibly smart move," Dobratz wrote in a May 9 report.
Other analysts take a more bullish view of Kilroy's value. On Apr. 25, Deutsche Bank Securities reiterated its hold recommendation on the stock, while maintaining a $75 target price. "Some people may be disappointed that rent growth was mixed" in the first quarter, wrote research analyst Lou Taylor. "This is very normal at this point in the cycle, so we're not terribly alarmed." A Kilroy representative did not respond to requests for comment prior to deadline.
4. Conservative investments may lack strong growth. Newton (Mass.)-based HRPT Properties Trust (HRP) owns office buildings in attractive markets like suburban Washington, D.C., Boston, and Southern California. Its 94% occupancy rating is among the best in the business, according to Morningstar.
Dobratz is concerned about the company's conservative investment approach. Rather than developing buildings and finding tenants, the company buys office properties already occupied by creditworthy tenants, he says. "They're paying up for it," he says. "We don't think there's a lot of value-add there."
While Dobratz rates the stock three stars out of a possible five, he also gives it a C for "stewardship." That's partly because unlike most REITs, HRPT Properties Trust is externally managed, which he says may create conflicts of interest. A company representative did not respond to requests for comment prior to deadline.
Still, HRPT continues to generate solid numbers -- and some analysts like what they see. On May 8, the company posted first-quarter funds from operations of 31 cents a share, in line with Street expectations. Ferris, Baker, Watts maintained its buy rating on the stock, but lowered its target price. "We believe HRP shares are significantly undervalued at current levels and provide an excellent risk/reward investment opportunity," analyst Charles Place wrote.
5. Apartments are lofty. If apartments in your neighborhood seem expensive, check out apartment REITs. Despite macroeconomic factors working in their favor, many apartment REITs are simply overpriced, some analysts say.
Expenses for apartment REITs are on the rise, notes S&P's Shepard. The costs of natural gas, heating, and insurance impact his outlook on the shares. Meanwhile, apartment REITs have an average dividend yield of 4.1%, which isn't particularly high for REITs, he says.
Morningstar has a one-star rating on apartment REITs such as Avalon Bay Communities (AVB ), BRE Properties (BRE ) and Post Properties (PPS), none of which responded to requests for comment prior to deadline. "Apartment REITs as a group are priced as if they're being taken private tomorrow," Dobratz says. "It could work out for shareholders if they do get taken private, but otherwise, the return implications of paying today's price are below where we'd want to invest."
Nevertheless, apartment REITs ought to benefit if a weaker housing market leads consumers to start looking to rent. That may already be starting to happen. In fact, higher apartment rents were one of the biggest factors behind the recent greater-than-expected rise in the consumer price index, which sent stocks on their latest tumble.
Major indexes fluctuated as investors weighed inflation concerns and news that Dell will start using AMD chips in its computers
Stocks were clinging to a modest rebound in the final hour Friday, winding down a see-saw session as a quiet economic calendar did little to dispel inflation worries. Recent steep price drops helped lure buyers back to the market, says Standard & Poor's Equity Research.
In afternoon trading, the Dow Jones industrial average edged higher 0.56 points, or 0.01%, to 11,128.85, paced by Boeing (BA ), Verizon (VZ ) and AT&T (T ). The broader Standard & Poor's 500 index advanced 3.04 points, or 0.24%, to 1,264.85. The tech-heavy Nasdaq composite rose 4.49 points, or 0.21%, to 2,184.81.
Chipmaker Advanced Micro Devices (AMD ) was higher after Dell (DELL ) said it will use an AMD chip in its computers. The move was a change from Dell's previously exclusive relationship with Intel (INTC), whose shares fell after announcement. Separately, Dell posted fiscal first-quarter profits that were in line with Wall Street expectations.
Retailers were also reporting earnings. Gap (GPS ) was higher after late Thursday reporting a 17% drop in profit on lower clothing sales. AnnTaylor (ANN ) was also higher after its first-quarter profit more than doubled.
Elsewhere, Merck (MRK) was lower despite an FDA advisory committee recommending approval of the drug maker's Gardasil vaccine to prevent cervical cancer.
Pharmacy benefits manager Caremark RX (CMX ) was lower after getting a subpoena from federal prosecutors requesting records pertaining to granting stock options.
Drugmaker Genentech (DNA ) was higher after Morgan Stanley reportedly boosted its recommendation on the stock from equal-weight to overweight.
On the M&A front, Mittal Steel (MT ) upped its offer by a third for Luxembourg-based rival Arcelor.
Meanwhile, Anheuser-Busch (BUD ) said it bought the Rolling Rock beer brand for $82 million.
Among other stocks in focus, fast-food chain Burger King (BKC ) was higher in its second day of trading.
Though the economic calendar was quiet Friday, next week's will be bustling. Investors are set to receive reports on revised GDP growth, April new and existing home sales, April durable goods orders and March personal income numbers, among other data. Fed Chairman Ben Bernanke, Dallas Fed President Richard Fisher and San Francisco Fed President Janet Yellen are each set to speak, as well.
In the energy markets, June West Texas Intermediate crude oil futures closed down 92 cents at $68.53 a barrel. Fears of slowing growth were offsetting continued geopolitical worries, says Action Economics.
European markets finished mixed. In London, the Financial Times-Stock Exchange 100 index slipped 14.2 points, or 0.25%, to 5,657.4. Germany's DAX index edged higher 6.21 points, or 0.11%, to 5,672.28. In Paris, the CAC 40 index climbed 35.88 points, or 0.73%, to 4,944.57.
Asian markets finished higher. Japan's Nikkei 225 index rebounded 68.27 points, or 0.42%, to 16,155.45. In Hong Kong, the Hang Seng index rose 46.84 points, or 0.29%, to 16,313.36. Korea's Kospi index added 7.14 points, or 0.52%, to 1,372.29.
Prices for 10-year Treasury notes edged higher in afternoon trading to 100-17/32 with a yield of 5.05%, while 30-year bonds rose to 90-10/32 for a yield of 5.14%.
An attempted recovery from Wednesday's slide fizzled. Also in focus: Hewlett-Packard and Sears Holdings
Stocks continued their recent descent Thursday, finishing lower amid interest-rate and inflation concerns in the wake of Wednesday's sharp decline. A pullback in Treasury yields after a surprisingly high jobless number gave stocks an early boost, but rebound hopes sputtered in the final hour of trading.
The Dow Jones industrial average fell 77.32 points, or 0.69%, to 11,128.29, despite leadership from Merck (MRK ), Hewlett-Packard (HPQ ) and Home Depot (HD). The broader Standard & Poor's 500 index dropped 8.51 points, or 0.67%, to 1,261.81. The tech-heavy Nasdaq composite sank 15.48 points, or 0.7%, to 2,180.32.
On the economic docket Thursday, initial jobless claims unexpectedly rose 42,000 to 367,000 for the week ended May 13. The leading indicators index unexpectedly fell 0.1% to 138.9 in April. The Philly Fed index rose to 14.4, modestly stronger than forecast.
In earnings news, Sears Holdings (SHLD ) was sharply higher after the retailer reported a profit of $180 million, up from a loss of $9 million a year earlier.
Software developer BEA Systems (BEAS) was also sharply higher after posting 3% higher first-quarter profit. Credit Suisse lifted its share-price estimate on the stock.
Chinese online travel group Ctrip.com (CTRP ) was up after the company said its first quarter first-quarter profit rose 22%.
After the close, Dell (DELL ) and Gap (GPS ) are among companies set to report quarterly results.
Pharma company Merck (MRK ) was higher ahead of an FDA advisory committee meeting on its Gardasil vaccine. Separately, new company data reportedly indicated that cardiovascular concerns linked to the painkiller Vioxx began four months after people started taking the drug.
Healthcare provider UnitedHealth Group (UNH) was lower on reports the company said it received subpoenas from the U.S. attorney for the Southern District of New York and the Internal Revenue Service over its stock-option grants.
Among other stocks in the news, Burger King (BKC ) was higher in its first day of trading.
In the energy markets, June West Texas Intermediate crude oil futures closed up 76 cents at $69.45 a barrel.
European markets finished mixed. In London, the Financial Times-Stock Exchange 100 index edged lower 3.9 points, or 0.07%, to 5,671.6. Germany's DAX index rose 13.35 points, or 0.24%, to 5,666.07. In Paris, the CAC 40 index slipped 11.62 points, or 0.24%, to 4,908.69.
Asian markets finished lower. Japan's Nikkei 225 index fell 220.49 points, or 1.35%, to 16,087.18. In Hong Kong, the Hang Seng index tumbled 349.03 points, or 2.1%, to 16,266.52. Korea's Kospi index sank 36.32 points, or 2.59%, to 1,365.15.
Treasury yields fell on the high jobless claims number and upbeat comments from both Richmond Fed President Jeffrey Lacker and St. Louis Fed President William Poole. Prices for 10-year Treasury notes rose to 100-14/32 with a yield of 5.07%, while 30-year bonds climbed to 89-24/32 for a yield of 5.18%. Poole said, "Market fears that the yield curve will invert and signal a recession have evaporated."
The Dow had its biggest drop in three years, while the Nasdaq erased its 2006 gains. Says one pro: "The market is grasping for leadership"
Wednesday brought fresh misery to the stock market's not-so-merry month of May as major indexes finished broadly lower on heavy trading volume. Investors headed for the exits after a surprisingly firm inflation report which fanned fears of higher interest rates. The data overshadowed strong quarterly results from technology bellwether Hewlett-Packard (HPQ ), says Standard & Poor's Equity Research.
The Dow Jones industrial average fell 214.28 points, or 1.88%, to 11,205.61, its biggest decline since Mar. 24, 2003. Alcoa (AA ) and Boeing (BA ) were among 29 Dow components retreating on the day.
The broader Standard & Poor's 500 index dropped 21.77 points, or 1.68%, to 1,270.31. The tech-heavy Nasdaq composite declined 33.33 points, or 1.5%, to 2,195.8, extending its losing streak to seven sessions and dipping into negative territory on the year.
NYSE breadth was decidedly negative, with 28 issues declining for each 6 advancing. Nasdaq breadth was 22-8 negative.
A closely watched inflation gauge spooked investors Wednesday. The overall consumer price index rose 0.6% in April, while the core index added 0.3%, the Labor Department said. The slightly higher-than-expected core figure likely negates the market benefit of Tuesday's downside surprise in the core producer price index, says Action Economics.
The inflation data suggest the Federal Reserve will have to continue hiking interest rates when it meets in June, some analysts say. "There is little evidence that the April CPI report was driven by one-time factors and, as a result, the second month of an outsized gain in the core cannot be dismissed," says Lehman Brothers economist Drew Matus. "We believe that this will keep the pressure on the Fed to maintain their inflation-fighting credentials and increases the odds of a June rate hike."
Indeed, for the Fed to pause from its tightening cycle at this point would be a mistake, others say. "The upward pressure on inflation is coming from the services area and thus inflation reports such as the PPI become less of a guide to trends in inflation," says John Ryding, chief U.S. economist at Bear Stearns. "We have argued that as the home ownership market eases and the rental market tightens, higher rents will put upward pressure on inflation and that this dynamic, once it begins, is fairly sticky. This raises the risk, therefore, of higher inflation readings going forward."
The markets were also dealing with recent reversals in industrials, commodity prices and the energy complex. "This is what has really been the buttress of the stock market for the last six months or so, and we've lost that in the last couple of trading sessions," says Gary Wolfer, senior portfolio manager with Univest Wealth Management & Trust. "The market is grasping for some form of leadership."
Investors now await the May 25 preliminary reading of gross domestic product (GDP) for further inflation clues. First-quarter GDP growth is forecast to be revised up to 5.8%, from the 4.8% gain in the advanced report, says Action Economics.
On the economic docket Thursday, initial jobless claims are expected to drop 9,000 to 315,000 for the week ended May 13. The April leading indicators index is seen remaining unchanged.
In company news Wednesday, Hewlett-Packard was the Dow's lone bright spot, rising more than 3% after the computer maker posted a 51% increase in fiscal second-quarter earnings. The upbeat results followed a profit warning last week from rival Dell (DELL ).
On the downside, Applied Materials (AMAT ) was lower after the maker of tools used to manufacture chips said orders this quarter will rise from 5% to 10%, less than the 15% analysts expected.
French media giant Vivendi (V) was lower despite a 41% rise in first-quarter earnings. The company also said it has turned down a breakup proposal by shareholders.
Two teen clothing retailers posted double-digit profits. Abercrombie & Fitch (ANF ) reported a 39% jump in profit, while rival American Eagle Outfitters (AEOS ) enjoyed a 16% rise, both beating expectations.
Outside of earnings, Honda (HMC ) was lower after the automaker said it will open a new factory in the U.S. as part of a $1.18 billion expansion.
Elsewhere, XM Satellite Radio (XMSR) was sharply lower after the Recording Industry Associaton of America filed a lawsuit against the satellite radio operator alleging copyright infringement.
In the energy markets, June West Texas Intermediate crude oil futures closed down 84 cents to $68.69 a barrel, after a weekly inventory report showed a decline of 100,000 barrels.
European markets finished sharply lower in sync with their American counterparts. In London, the Financial Times-Stock Exchange 100 index tumbled 170.7 points, or 2.92%, to 5,675.5. Germany's DAX index slid 196.25 points, or 3.35%, to 5,655.67. In Paris, the CAC 40 index dropped 161.38 points, or 3.18%, to 4,920.31.
Asian markets finished higher. Japan's Nikkei 225 index rose 149.25 points, or 0.92%, to 16,307.67. In Hong Kong, the Hang Seng index climbed 222.44 points, or 1.36%, to 16,615.55. Korea's Kospi index rebounded 19.36 points, or 1.4%, to 1,401.47.
The Treasury market also suffered in the wake of the April CPI report as yields rose on the solid inflation data. Prices for 10-year Treasury notes fell to 99-22/32 with a yield of 5.16%, while 30-year bonds dropped to 88-09/32 for a yield of 5.28%.