Stocks Drop On Weak Jobs, Housing Data
U.S. stock indexes were trading lower on Wednesday, as investors reacted to a weaker-than-expected private-sector employment report that may bode poorly for the payrolls data due out on Friday, and a weaker pending home sales report.
Once again, financial stocks led the way to the downside, but retailers were also weak. The Dow Jones industrial average dropped 146.81 points, or 1.09%, to 13,302.05 on Wednesday. The broader S&P 500 was down 15.85 points, or 1.06%, to 1,473.57. The tech-heavy Nasdaq composite index fell 16.37 points, or 0.62%, to 2,613.87.
The ADP National Employment Report showed an increase of only 38,000 in August, significantly below the 65,000 gain that had been expected and the smallest increase in four years. The private sector added 48,000 jobs in July.
An independent report from Challenger, Gray & Christmas Inc., an employment consulting firm, said that announced layoffs soared 85% to 79,459 in August from 42,897 in July. The job cuts in August were the highest since February, when they totaled 84,014.
Pending home sales fell 12.2% in July from June and were down 16.1% from a year ago. The July numbers were the lowest since September 2001. The biggest drop — 20.8% — was seen in the western U.S., where jumbo loans, whose rates have become especially costly since the credit crunch, are prevalent.
The latest data adds to weaker-than-expected August manufacturing numbers and construction spending data, boosting market confidence that the Federal Reserve will ease interest rates at its Sept. 18 policy meeting. But analysts are debating whether a cut in the Fed funds rate will end up freeing up liquidity and easing the tightening in credit markets.
Adding firepower to that debate are new worries over an uptrend in the London interbank offered rate, or Libor, a key benchmark for giant floating-rate bank loans taken out by global corporations. The fact that Libor is now markedly above the Fed funds rate and moving in the opposite direction of other short-term interest rates, likely indicates problems in the money markets that may not be alleviated by Fed rate cuts.
Oil prices have remained firm as traders await the OPEC meeting next week, which is expected to leave production quotas unchanged. The potential for another inventory drawdown, when the Energy Information Administrations weekly numbers come out on Thursday, is also helping to keep prices strong, even as concerns about slowing global growth persist, according to Action Economics. September West Texas Intermediate crude oil futures rose 13 cents to $75.21 per barrel.
Among stocks in the news on Wednesday, Costco Wholesale Corp. («www.businessweek.com») fell 5.1% after posting a 2% increase in stores open at least one year in August, much lower than estimates, and a 6% rise in total sales. Costco’s report spurred selling across the retail sector.
The latest casualty of the subprime real estate meltdown: The planned merger between mortgage insurers MGIC Investment Corp. («www.businessweek.com») and Radian Group Inc. («www.businessweek.com»), which the two companies terminated Wednesday. The companies say that current market conditions have made the combination more challenging. An unprecedented number of margin calls in the first half of this year caused liquidity to dry up at C-Bass LLC, a joint venture in which each company owns a 46% stake. At the end of July, Standard & Poor’s predicted the C-Bass impairment and the risky nature of Radian’s portfolio were likely to derail the merger. MGIC was up 2.1% Wednesday, while Radian shares dropped 10.6%.
Shares of Applix Inc. («www.businessweek.com») jumped 22.1% on news that the company has agreed to be acquired by Cognos for $17.87 per share, or about $339 million, subject to regulatory approvals.
MasTec Inc. («www.businessweek.com») shares fell 13.4% after it projected $265 million in revenue and 18 to 20 cents a share in earnings from continuing operations in the third quarter. The specialty contractor also revised its 2007 profit forecast to 78 to 82 cents a share, citing higher recruiting activity and training and modified compensation policies.
Tyson Foods («www.businessweek.com») was down 11% after it cut its fiscal 2007 earnings outlook to 72 to 80 cents a share, citing higher-than-expected live cattle costs, a decline in beef revenues and higher live hog prices.
L.B. Foster Co. («www.businessweek.com») shares were up 11% on news that Canadian Pacific Railway has reached an agreement to buy the Dakota Minnesota and Eastern Railroad (DM&E), in which Foster holds a minority equity interest, for $1.48 billion. The acquisition will result in a total payment of about $277.3 million to Foster.
World markets were trading mostly lower on Wednesday, with European equity markets falling on concern over banks’ earnings due to the U.S. subprime mortgage crisis. In London, the FTSE 100 index fell 1.66% to 6,270.70. Germany’s DAX index dropped 1.73% to 7,588.03. In Paris, the CAC 40 index plunged 2.14% to 5,551.55.
In Japan, the Nikkei index fell 1.60% to 16,158.45. In Hong Kong, the Hang Seng index rose 0.77% to 24,069.17. The Shanghai composite index was up 0.31% to 5,310.72.
Treasury Markets
Treasuries soared in response to tepid jobs and weaker home sales data, as well as to heightened risk-aversion after a foiled terrorist attack in Germany, S&P MarketScope said. The 10-year note jumped 19/32 to 102-06/32 for a yield of 4.47%, and the 30-year note vaulted 29/32 to 103-16/32 for a yield of 4.78%.
