Disappointing quarterly results and weak housing data sent stocks lower on Wednesday, but a rumor that the Federal Reserve may cut interest rates before its meeting next week brought stocks well off of their intraday lows. Early in the session, stocks declined sharply after Merrill Lynch (MER) said that it swung to a loss in the third-quarter largely due to $7.9 billion in write-downs due to bad bets on the sub-prime mortgage crisis. Further downward pressure came from technology stocks, as Amazon (AMZN), Broadcom (BRCM) and Altera (ALTR) disappointed investors with their third-quarter results. Capping off the day's negative news was a report issued by the National Association of Realtors, which showed that existing home sales declined by a record amount in September. However, stocks nearly recovered their losses after a rumor circulated that the Fed would cut the discount rate before its meeting next week. Many investors covered their short positions on the speculation. Stocks were down sharply in early trading, with the Dow falling by as much as 150 points. The late-afternoon rumor lifted the major averages off of their intraday lows, but fell short of bringing them into positive territory at the close. The Dow barely finished in negative territory, falling less than a point to close at 13,675.25. The S&P 500 also came well off of its intraday low to end at 1,515.88, a loss of 3.71 points or 0.24 percent. The Nasdaq posted the largest loss by far, falling 24.50 points, or 0.88 percent, to close at 2,774.76. Dow Components The Dow was able to rally back from losses greater than 150 points on Wednesday to close just shy of the unchanged line. Leading the late day rally was strength within Caterpillar (CAT). Shares of Caterpillar rose 1.8 percent, as investors believed that the company's stock was undervalued after it dropped more than 5 percent since reducing its full year forecast. DuPont (DD) also saw considerable strength, continuing to benefit from strong quarterly results released on Tuesday that showed considerable strength overseas. Shares of the company rose 1.5 percent. Microsoft (MSFT) also ended in positive territory on speculation that the company may acquire a minority stake in the widely popular social networking site Facebook.com. Other Dow components that traded higher included Exxon Mobil (XOM), General Motors (GM), and JP Morgan (JPM). On the other hand, Intel (INTC) posted the largest loss within the Dow by far, ending the session 2.9 percent lower. The company suffered from weakness within the semiconductor sector. AT&T (T) also had a rough session, with its shares falling 1.1 percent. The company declined on reports that it is considering a buyout offer for Echostar Communications (DISH) or DirecTV (DTV), which could cost the company up to $30 to $40 billion. General Electric (GE) also moved lower, reversing two straight days of gains by posting a loss of 0.6 percent. During the session, the company's stock hit its worst intraday level in over a month. Financial stocks within the Dow posted some of the greatest losses, reacting to the poor earning results from Merrill Lynch. Citigroup (C) fell 1.4 percent, falling for the seventh time out of eight sessions to reach its lowest closing level since mid-2003. Other Dow components that finished below the unchanged line included American International Group (AIG), Verizon (VZ), Boeing (BA), and Hewlett Packard (HPQ). Sector News Technology stocks posted the largest losses on the day, led by semiconductor stocks. The Philadelphia Semiconductor Index fell 3.5 percent on the day, reaching its lowest closing level since March. Within the semiconductor sector, Broadcom came under extreme selling pressure after it said its third quarter earnings declined to 5 cents per share from 19 cents per share last year. Shares of the company declined 17 percent. Among other semiconductor stocks, shares of Altera fell 15.7 percent after the company reported third quarter earnings that fell to 20 cents from 24 cents per share last year, as sales declined 7 percent to $315.8 million. Networking stocks also declined sharply, driving the Amex Networking Index to a 2.5 percent loss. Juniper Networks (JNPR) saw the greatest weakness within the sector even though its third quarter earnings rose to 15 cents per share from 10 cents last year. Shares of Juniper closed down 8.4 percent. Internet stocks also turned in weak performances, sending the Amex Internet Index down 2.3 percent. Within the sector, Amazon posted the largest loss after analysts raised concerns about the company's lower gross margins. The disk drive sector was another underperforming area of the market as SanDisk (SNDK) led the sector's downward movement. Shares of SanDisk fell 3.7 percent, declining for the second consecutive session and reaching their worst closing level in over 7 months. Along with tech stocks, financials led the markets lower, with bank stocks posting some of the largest losses. Among banking stocks, Countrywide Financial (CFC) experienced one of the worst sessions, as investors reacted to news that the company will help some 82,000 homeowners refinance their home loans. The brokerage sector also turned in a poor performance, as the sector suffered from the poor quarterly results from Merrill Lynch. Legg Mason (LM) also contributed to the weakness, as the company expressed concerns about the large amount of outflows in the company's stock funds and liquidity related products. On the other hand, housing stocks were able to rebound from early losses to end the session in positive territory, contributing to a 1 percent gain by the Philadelphia Housing Sector Index. Oil stocks also ended the day with gains, as they received buying interest following a report that showed that crude inventories unexpectedly fell last week. The Amex Oil Index finished up 1 percent. Other sectors that ended higher included the oil service, defense, chemical, utility, and gold sectors. Home Data and Crude Inventories Wednesday morning, the National Association of Realtors released its report on existing home sales in the month of September, showing that existing home sales fell more than economists had been expecting. The report showed that existing home sales fell 8.0 percent to an annual rate of 5.04 million units in September from a downwardly revised rate of 5.48 million units in August. With the decrease, sales were down 19.1 percent year-over-year and at their lowest level on record. Economists expected sales to fall to a 5.25 million unit rate compared to the 5.50 million unit rate originally reported for the previous month. The bigger than expected decrease came as sales fell in all four regions of the country, with sales in the Northeast and West showing the biggest percentage declines. Later in the session, the Energy Information Administration released a report showing an unexpected drop in crude oil and gasoline inventories. The news sent the price oil higher after it had been trading lower earlier in the session. The report showed that crude oil inventories fell by 5.3 million barrels in the week ended October 19 following an increase of 1.8 million barrels in the previous week. The decrease came as a surprise to analysts, who had expected inventories to increase by about 700,000 barrels. Despite the unexpected decrease, however, the EIA noted that crude oil inventories remain near the upper end of the average range for this time of year. Other Markets In overseas trading, the Asian markets moved lower to weakness among financials, which fell on continued fears of trouble concerning the U.S. sub-prime mortgage mess. Stocks also fell across the pond in Europe, as the U.K.'s FTSE 100 declined 0.5 percent. Gold finished up for the second straight day on Wednesday in U.S. trading. December bullion closed at $765.60 an ounce, up $2.50 on the session. Oil prices rallied sharply on Wednesday after the weekly inventory report. Light sweet crude oil moved to $87.10 a barrel, up $1.83 on the session. The bond market missed reaching a multi-year high Wednesday, although it did reach its strongest close since September 10. For Wednesday, the yield on the benchmark 10-year note closed down 7.4 basis points at 4.331 percent. In currency markets, the dollar dropped sharply against the yen following the weak housing data, while the dollar rose slightly against the euro after a report showed that euro-zone manufacturing growth has slowed. Looking Ahead The markets could experience another volatile session on Thursday, as a plethora of companies are set to release their quarterly results and several economic reports will also be in focus. The notable companies set to release earnings on Thursday include Alaska Air (ALK), Black & Decker (BDK), Bristol-Meyers (BMY), Comcast (CMCSA), Dow Chemical (DOW), Harrah's (HET), LM Ericsson (ERIC), Motorola (MOT), Office Max (OMX), US Airways (LCC), and XM Satellite (XMSR). On the economic front, reports on durable good orders, initial jobless claims, and new home sales will be released.
October 24, 2007 4:42 PM