The Market Story

Return to Article

Stocks Mired in Red

Mike Taylor

Stocks on Wall Street were trading in the red Thursday, as investors were offered reminders that the credit crisis continues to plague major financial firms as well as economic data that did little to bolster confidence.

The Dow Jones Industrial Average dropped 387 points to 8752, and the S&P 500 gave back 41 points to 911. The Nasdaq shed 55 points to 1626.

In rising off its Oct. 27 lows, the market went from an oversold level to overbought in a very short period, said Robert Pavlik, chief investment officer at Oaktree Asset Management. "It's working off some of that overbought condition," he said. The market has overreacted to a thawing credit market, he said. "I still think there's weakness ahead that just hasn't been factored in."

Pavlik also said that the market has been trading on low volume, meaning that buyers have not committed to making a stand. "I think what you're seeing now is the folks that did that recent buying from the lows of the 10th or the 27th on the hopes of catching something, some kind of major reversal are now getting out of it."

"We're still in an environment where you can't trust any rallies," said Chip Hanlon, president of Delta Global Advisors. He said that although the stock market should turn higher before the economy does, the broader economy is due to stagnate for as much as nine more months.

However, Hanlon also said that if the Obama administration proves disinclined to raise taxes in the face of a weak economy, that could provide an upside that the market is currently not expecting.

As credit markets remained stagnant and the risk of inflation appeared to decline, the European Central Bank and the Bank of England both reduced their key interest rates Thursday. The ECB dropped its target rate 50 basis points to 3.25%, and the Bank of England slashed its rate 1.5% to 3%.

Hanlon said that the market was anticipating rate cuts from Europe, and that there are more to come. "The global economy is still deleveraging. You're going to see more actions like these from central banks around the world," he said.

Additional corporate headlines were offering signs of trouble. Bloomberg reported that Citigroup (C Quote) and Goldman Sachs (GS Quote) have begun laying off staff as part of a plan to eliminate more than 12,000 jobs combined as the financial crisis continues.

Separately, mutual fund operator Fidelity Investments said it is cutting its head count by about 1,300 and will make additional staff reductions in early 2009.

Another report by Bloomberg indicated that Cerberus Capital may give up its stake in GMAC, which it owns jointly with GM (GM Quote). The move is intended to allow GMAC to become a bank and secure funding from the government without subjecting Cerberus to additional regulation.

Elsewhere in the financial space, Wells Fargo announced late Wednesday it would issue $10 billion in common stock.

As for economic data, the Department of Labor reported that jobless claims for the week ended Nov. 1 tallied at 481,000, higher then economists' estimate of 476,000. The previous week's figures were revised up to 485,000 from an initial tally of 479,000.

Meanwhile, the Bureau of Labor Statistics also announced that its preliminary read of nonfarm productivity came in at 1.1%, just ahead of analysts' forecasts but down substantially from 3.6% in the second quarter.

Investors were sorting through a new heap of quarterly earnings results. Tech bellwether Cisco (CSCO Quote) reported profit that was flat year over year even but issued cautious revenue guidance.

Media firm News Corp. (NWS Quote) reported declining profit and cut its 2009 guidance.

Brewery Anheuser-Busch (BUD Quote) reported that its third-quarter results declined 5.7% year over year thanks to charges related to its upcoming sale to European beverage concern InBev.

Carmaker Toyota (TM Quote) said second-quarter net income declined and it cut its full-year profit forecast.

Asset-management firm Blackstone (BX Quote) swung to a loss. The company cited tumultuous credit and equity markets as a source of its troubles.

Entertainment company World Wrestling (WWE Quote) reported a slight increase in income from the year-ago period.

Big-box retail firm Costco (COST Quote) reported that its October same-store sales were down 1%, although total revenue edged up 2%. The same-store figure fell short of analyst estimates. Fellow bulk merchant Wal-Mart (WMT Quote) announced a better-than-expected 2.4% increase in same-store sales.

"In a deleveraging world, that includes the consumer, who is trying to figure out how not to take on more debt for the first time in a long time," said Hanlon of Delta Global. He said that high-end and leisure retailers should continue to feel a pinch, while discount stores like Wal-Mart will continue to benefit.

Elsewhere among retailers, Amazon.com (AMZN Quote) looked to be in for a rough day following a Citigroup downgrade to hold from buy.

In other analyst actions, Goldman reduced its price target for News Corp. to $9 from $13 after the media company's earnings results missed estimates.

In the commodities space, crude oil was down $4.62 to $60.68 a barrel. Gold was losing $9.10 to $733.30 an ounce.

Longer-dated U.S. Treasury securities were falling in price. The 10-year note was down 4/32, yielding 3.72%, and the 30-year was declining 27/32 to yield 4.22%. The dollar was gaining on the euro and pound but falling vs. the yen.

Globally speaking, European exchanges, including the FTSE in London and the DAX in Frankfurt, were trading lower. Asian markets likewise closed to the downside.