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Stocks Head South on Yield Jitters

Robert Holmes

Stocks took a post-holiday dive Tuesday as concern over an inverting yield curve was exacerbated by thin volume. Broad weakness in energy stocks also hurt the blue-chip averages.

The Dow Jones Industrial Average lost 105.50 points, or 0.97%, to 10,777.77, after trading as high as 10,932 earlier. The Dow closed below its break-even point for 2005. The S&P 500 fell 12.12 points, or 0.96%, to 1256.54. The Nasdaq Composite sank 22.53 points, or 1%, to 2226.89.

"It was unanimous we'd have a year-end rally until the yield curve inverted," said Barry Hyman, equity market strategist with Ehrenkrantz King Nussbaum. "We wanted to close the market on a high note this year, but now we're worried that the 2006 market will have to deal with this. The next Federal Reserve meeting will be extremely critical. We have to hope this isn't predictive of a recession or a slowing economy."

The 10-year Treasury bond rose 9/32 in price to yield 4.34%, even with the yield of the two-year note. The dollar rose against the yen and fell against the euro. Yields on the two- and 10-year notes briefly converged earlier, a phenomenon that some economists believe portends recession.

"There was a sense that a year-end rally would take us higher, but there's some concern from the bond market flattening," said Jay Suskind, head of institutional equity trading with Ryan Beck & Co. "The inverting of the yield curve would bring us more problems in 2006. We also have light volume, exaggerating moves to both sides."

An inverted yield curve bucks the normal tendency of interest rates on longer-term bonds to exceed short-term ones. It can be read as a harbinger of economic malaise by suggesting banks will have fewer lending opportunities in the future. A less-depressing interpretation is that the market believes the Fed is done raising short-term rates.

"The inverted yield curve has some historical significance as an indicator, as far as a connection to the global economy," said Richard Hastings, retail analyst with Bernard Sands. "You're going to see material impact on the economy. That is what is spooking people."

About 1.15 billion shares traded on the New York Stock Exchange, with decliners beat advancers by a 2-to-1 margin. Trading volume on the Nasdaq was 1.26 billion shares, with decliners outpacing advancers 3 to 2.

Crude oil continued to ease as bullish energy traders stood pat after a profitable 2005. In Nymex floor trading, crude for February delivery fell 27 cents to close at $58.16 a barrel. Natural gas futures slid $1.26 to $11.02 per million British thermal units. Among large-cap names, Exxon Mobil(XOM Quote - Cramer on XOM - Stock Picks) fell 2.2% to $55.87; Chesapeake Energy(CHK Quote - Cramer on CHK - Stock Picks) lost 4.6% to $30.68; Diamond Offshore(DO Quote - Cramer on DO - Stock Picks) lost 3.6% to $68.76; and Valero(VLO Quote - Cramer on VLO - Stock Picks) shed 3.7% to $50.90.

By sector, the Amex Airline index finished up 1.6% Tuesday, thanks to a 5.1% jump in Continental Airlines(CAL Quote - Cramer on CAL - Stock Picks). Also, JetBlue Airways(JBLU Quote - Cramer on JBLU - Stock Picks) was higher by 4.1%, and AMR(AMR Quote - Cramer on AMR - Stock Picks) gained 1.2%.

Meanwhile, the Philadelphia Stock Exchange Semiconductor Sector Index was lower by 1.3% despite a 2.3% rise in Advanced Micro Devices(AMD Quote - Cramer on AMD - Stock Picks). The Philadelphia/KBW Bank Sector index lost 0.8% while the Amex Oil index fell by 2.8%.

Stocks were narrowly mixed in the week before Christmas. For the year, the S&P 500 remains the best-performing of the three main indices, up about 4.6%. The Dow Jones Industrial Average is up 0.9% year to date, while the Nasdaq Composite has risen 3.3%.

According to the International Council of Shopping Centers, major retailers are expected to report same-store sales gains for December of 3% to 3.5%, led by discounters and electronics retailers. Wal-Mart(WMT Quote - Cramer on WMT - Stock Picks) confirmed over the weekend that its December comps should rise in line with its previous estimate of 2% to 4% compared with a year ago.

Overstock.com(OSTK Quote - Cramer on OSTK - Stock Picks) revised its expectations for 2005, saying it expects results 1% to 2% below its previous outlook of break-even earnings. The online retailer still expects revenue growth to be within its range of 60% to 100% over 2004. Overstock.com dropped $2.49, or 7.4%, to finish at $31.15.

Another big stock market story involved Guidant(GDT Quote - Cramer on GDT - Stock Picks), the pacemaker giant that is currently the subject of a takeover battle between Boston Scientific(BSC Quote - Cramer on BSC - Stock Picks) and Johnson & Johnson(JNJ Quote - Cramer on JNJ - Stock Picks). Citing consumer anxiety over device malfunctions, Guidant forecast fourth-quarter earnings of 17 cents to 23 cents a share on sales of $790 million to $820 million. Analysts had been expecting earnings of 49 cents a share on sales of $928.4 million.

Guidant slid $2.29, or 3.4%, to $64.69. Boston Scientific lost 77 cents, or 3%, to $25.07.

Shares of Bristol-Myers(BMY Quote - Cramer on BMY - Stock Picks) rose after the Food and Drug Administration cleared a drug for rheumatoid arthritis. The intravenously administered drug, abatacept, will be sold under the name Orencia. Bristol-Myers added 15 cents, or 0.7%, to $23.09.

Elsewhere, Dynegy(DYN Quote - Cramer on DYN - Stock Picks) closed another chapter of its foray into energy trading by terminating a wholesale power contract with a power plant in Louisiana. The company will record a fourth-quarter charge of $360 million. Dynegy lost 16 cents, or 3.2%, to $4.91.

Sirius(SIRI Quote - Cramer on SIRI - Stock Picks) says it has already made good on its oft-stated pledge to end the year with 3 million subscribers. In a premarket release, the satellite radio provider also said it expects a "strong year-end." Sirius ended up 16 cents, or 2.3%, to $6.99.

Overseas stocks were mixed, with Germany's Xetra DAX rising 0.5% to 5445 and Japan's Nikkei down 0.9% to 15,969. Exchanges in London and Hong Kong remained closed for the holidays.

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