Market Report: June 11, 2008
6:30 PM ET, Lehman Could Be In Hot Water: With its $4.0 billion common stock offering due to close Thursday, Lehman Brothers was battered by rumors of problems with the deal, and came under heavy selling pressure late Wednesday.
Shares of Lehman (nyse: LEH - news - people) closed down $3.75, or 13.6%, to $23.75, 15.2% below the $28.00 at which it priced the offering.
The losses accelerated into the close on what TradeTheNews.com called "vague chatter" that the capital raising plan had run into trouble. (See: "Lehman's Bear Necessity")
The report said speculation suggests funds could renege on the deal before Thursday's closing.
Such a turn of events could prove a devastating blow for Lehman, which has spent much of the past few weeks trying to shore up confidence in its balance sheet and liquidity position in the wake of the collapse of Bear Stearns. (See: "Lehman's Confidence Game")
Lehman will surely be a focus on Thursday, as will the rest of the financial sector, which was thrown for another loop Wednesday in a volatile week.
Rumors that Goldman Sachs (nyse: GS - news - people), virtually unscathed by the credit crisis to this point, could be report second-quarter write-downs June 17 may have had an impact, but were hardly the only cause for the selling pressure. The Financial Select Sector SPDR (amex: XLF - news - people) dropped 67 cents, or 2.9%, to $22.41.
Oil prices continue to pressure the market, approaching record levels again, after adding $5.07 to $136.38 Wednesday. The rise was attributed to a 4.6 million barrel drawdown in weekly crude inventories.
After the Fed's Beige Book gave a lukewarm reading on the overall economy, investors get a look at export and import prices Thursday, with the latter expected to jump 2.9% due largely to the soaring cost of oil. Weekly jobless claims and business inventories for April are also on the agenda. (See: "Beige Book Blahs")
Deal news will also be back in the headlines, after Anheuser-Busch (nyse: BUD - news - people) said it has received an unsolicited takeover offer from InBev for $65 a share in cash. The much-anticipated offer values Anheuser at $46.4 billion, and offers an 11.4% premium to Wednesday's close after shares gained $1.20, or 2.1%, to $58.35.
The major averages will look to get back on their feet Thursday, after the Dow lost 206 points, or 1.7%, to 12,084, the S&P 500 fell 23 points, or 1.7%, to 1,335, and the Nasdaq dropped 55 points, or 2.2%, to 2,394.
5:00 PM ET, Fed's On Hold, Stocks Are In The Tank: Wall Street was walking on eggshells Wednesday ahead of the Federal Reserve's informal review of the economy, and once the report was public, there was an omelet waiting to be cooked.
The Dow lost 206 points, or 1.7%, to 12,084, while the S&P 500 fell 23 points, or 1.7%, to 1,335, and the Nasdaq fell 55 points, or 2.2%, to 2,394.
The Fed's Beige Book for its June 24-25 monetary policy meeting provided a reading from the Federal Reserve Banks of economic conditions in their districts, and the picture was not a pretty one.
Three districts reported weaker or slowing economies, while five said conditions barely changed and the remaining four saw sluggish growth. (See: "Beige Book Blahs")
Employment has been spotty, and some rising costs are beginning to filter through to consumers, as retailers have mixed results trying to pass along higher prices.
Speculation over whether the Fed will hike interest rates began in earnest this week, after Chairman Ben Bernanke offered tough words on inflation. (See: "Bernanke's Rate Spike Poker Face")
Vice Chairman Donald Kohn said Wednesday soaring energy prices have led inflation expectations higher, expressing concern but also pointing out that such higher expectations can also become a self-fulfilling prophecy.
While the remarks from Bernanke and Kohn have served notice the central bank is finished cutting interest rates in this cycle, the St. Louis Fed president, James Bullard, sounded a more hawkish tone Wednesday.
Bullard went a step beyond Bernanke and Kohn, saying the credit crisis that caused the central bank to slash rates from September to April had passed, and he said the central bank's current monetary policy is way below "neutral," seemingly making the case for a rate hike.
Treasury yields were reeling early in the day but firmed later in the session. The 10-year note was yielding 4.08%, just below Tuesday's close of 4.10%, while the two-year yield was at 2.81%, still down from Tuesday's 2.90%.
Paul McCulley, managing director of closely watched bond fund Pimco, does not expect the Fed to hike rates in 2008, according to TradeTheNews.com, but he offered a bullish outlook for the dollar, predicting that its fade against the euro was over.
The greenback has been a popular topic of late, stemming from a rare show of support for the U.S. currency by Bernanke. (See: "Bernanke Backs The Buck")
On Wednesday the dollar was weaker though, as the euro climbed to $1.5560, from $1.5456 Tuesday.
Crude prices surged $5.07, to $136.38 a barrel, as traders seized on a weekly inventory report that showed a 4.6 million barrel drawdown. The federal Energy Information Administration said a strong hurricane season could have unpredictable impacts on off-loading from Gulf Coast tankers, which prompted a knee-jerk spike when the report was released.
United States Oil Fund (amex: USO - news - people), an exchange-traded vehicle that invests in crude and oil products, gained 3.8%, while the Energy Select Sector SPDR (amex: XLE - news - people) added 1.0%.
Financial stocks were reeling on rumors that a big write-down could be in the cards for Goldman Sachs (nyse: GS - news - people) when it reports second-quarter earnings June 17.
Goldman did not comment on the speculation, but shares of the brokerage fell 2.9%.
The drop was shallow compared with that of Lehman Brothers (nyse: LEH - news - people), which was reeling as investor confidence in the firm has been shaken in recent weeks. Lehman has seen its shares tumble over the past week due to a variety of factors, including rumors of a loan from the Fed's discount window and a prereported second-quarter loss among them.
Wednesday's slide was exacerbated late in the day by chatter that its $6.0 billion offering of common and preferred stock was running into trouble, according to TradeTheNews.com. The $4.0 billion common stock portion of the raise was reportedly oversubscribed, but shares have fallen well below the $28.00 the offering priced at -- down $3.75, or 13.6%, to $23.75 Wednesday -- and speculation is that certain funds could renege on the deal.
Staples (nasdaq: SPLS - news - people) was the big winner on a dreary day, climbing 5.3% after Dutch rival Corporate Express agreed to accept its 1.7 billion euro ($2.7 billion) takeover bid, giving the office supply retailer a strong European presence. (See: "Sweet Deal For Corporate Express Shareholders")
3:00 PM ET, Oil Leaps, Stocks Fall, Fed's Stuck: Spotty employment, deteriorating credit, increasing input costs, weak real estate, and a challenging retail environment marked the Federal Reserve's Beige Book prepared for its late June meeting, painting a picture of a moribund U.S. economy.
The report showed that three Fed districts saw softer or weaker economies, five noted little change in conditions and the remaining four saw sluggish growth.
A rate cut will not be in the offing though, with Fed chief Ben Bernanke and other officials stressing over the past several days the central bank's job as an inflation-fighter. (See: "Bernanke's Rate Spike Poker Face")
Fed funds futures trading indicates traders expect the Fed will not tighten monetary policy either at its June or August meetings, but could nudge rates a quarter point higher in September. The target on federal funds, which are overnight interbank loans that set an effective floor for American interest rates, is 2.0%, down from 5.25% when the central bank began an easy-money policy last summer.
Treasury yields were in flux, heading back toward Tuesday's levels after dropping for much of the day. The 10-year note was yielding 4.08%, while the two-year yield was at 2.84%.
The dollar was slightly weaker after a firming up earlier in the week, as the euro was up to $1.5552 from $1.5456 Tuesday.
Oil prices surged after U.S. inventories showed a 4.6 million barrel drop for last week, but the Energy Information Administration also warned that a hurricane season expected to be more active than normal has the potential to cause crude production outages, though such a possibility is wildly unpredictable.
Crude was up $5.45, to $136.76 a barrel. United States Oil Fund (amex: USO - news - people), the exchange-traded vehicle that invests in oil, was up $3.50, or 3.3%, to $110.52, while the Energy Select Sector SPDR (amex: XLE - news - people), which tracks stocks in the petrochemicals industry, added $1.06, or 1.2%, to $87.43.
Wall Street grudgingly moved off session lows Wednesday afternoon, but the Dow was still down 129 points, or 1.1%, to 12,161, the S&P 500 lost 13 points, or 1.0%, to 1,345, and the Nasdaq fell 32 points, or 1.3%, to 2,417.
Financial stocks were shaky, on speculation Goldman Sachs (nyse: GS - news - people) may take large write-downs when it reports second-quarter earnings June 17.
Goldman, one of the few firms relatively unscathed by the credit crisis and subprime mortgage meltdown, was down $2.38, or 1.4%, to $164.83 Wednesday.
Fellow broker Lehman Brothers (nyse: LEH - news - people), which said Monday that it expects to lose $2.8 billion for the second quarter, continued its rollercoaster ride, down $1.99, or 7.2%, to $25.51, trading well below the $28.00 level it priced a $4.0 billion common stock offering at earlier this week. (See: "What's Next For Lehman")
1:45 PM ET, Europe Keeps It Cool On Mixed Rate Messages: European stocks recovered slightly Wednesday afternoon after a financial storm triggered by fear of inflation and high oil prices in particular.
Britain's FTSE 100 closed down 1.8%, while France's CAC-40 closed down 2.1% and German's DAX closed down 1.9%.
The European banking sector managed to go up 0.4% in afternoon trading partly because of reports that a Russian billionaire was on the lookout for investments. Suleiman Kerimov, one of Russia's richest men, is reportedly buying stakes in large Western banks like Deutsche Bank (nyse: DB - news - people), UBS (nyse: UBS - news - people) and Morgan Stanley (nyse: MS - news - people) and wants other tycoons to join him.
According to the Russian newspaper Kommersant, he held 3.0% of Deutsche Bank at the end of last year, and wants now to increase that stake to 9.0%. But the German bank said Wednesday that it did not know of any investor that owned more than 3.0% of its shares apart from British bank Barclays (nyse: BCS - news - people) and French insurer AXA (nyse: AXA - news - people). (See: "Banks Love A Russian Rumor")
Also in the banking sector, Royal Bank of Scotland (nyse: RBS - news - people) closed down 9.0% in London, after releasing a cautious trading update. The bank said its future earnings would remain "satisfactory." BNP Paribas (other-otc: BNPQY - news - people) shares went up 1.9% after it agreed to buy the equity prime brokerage unit of Bank of America (nyse: BAC - news - people).
Energy shares were also on the rise, with BP (nyse: BP - news - people) up 2.7% and Royal Dutch Shell (nyse: RDSA - news - people) up 2.0%.
Traders were awaiting U.S. inventory data, due at 10.30 a.m. EST, which was expected to show a fall in crude stocks. That could push up oil prices and reignite fears of inflation.
The euro rose against the dollar after Christian Noyer, a European Central Bank governing board member, said that he expected euro zone inflation to slow gradually, dispelling expectations of a series of rate hikes by the ECB. The euro traded at $1.5498, up from $1.5462. The British pound was quoted at $1.9580 up from $1.9540.
Gold also rose, trading in London at $879.20 per troy ounce, up from $867.75 overnight.
Crude was up by $6.22, at $137.53 a barrel, on the New York Mercantile Exchange.
12:15 PM ET, Street Fades As Oil Jumps: A soft open gave way to a sharp slide in New York Wednesday, as oil prices jumped and investors shied away from stocks while awaiting the latest outlook from the Federal Reserve.
The energy complex had a stark reaction to the weekly inventory report, which showed a 4.6 million barrel draw on crude stocks. Crude spiked above $136 a barrel on a knee-jerk reaction before quickly retreating to earlier levels, up $4.09 at $135.40.
Meanwhile, the Department of Energy said it sees gasoline prices remaining above $4 a gallon and oil staying much higher than $100 a barrel through 2009.
Wall Street had a feeble showing, as the Dow was down 161 points, or 1.3%, to 12,129 by midday. The broader S&P 500 lost 16 points, or 1.2%, to 1,342, while the Nasdaq fell 34 points, or 1.4%, to 2,415.
Market watchers are looking ahead to the 2:00 p.m. release of the Fed's Beige Book for its June 24-25 monetary policy meeting.
Inflation has become a hot topic, thanks to tough talk from Fed chief Ben Bernanke, and investors are waiting to see if the rhetoric is pointing toward a tightening of monetary policy, now that Bernanke and other Fed officials have made it clear the current easing cycle has reached its end. (See: "The Fed Breaks The Silence")
Fed funds futures trading indicates expectations that the central bank will hold rates steady at the June meeting, but a possible rate hike when the monetary policy committee meets again in September. (See: "Bernanke's Rate Spike Poker Face")
Paul McCulley, managing director of closely watched bond fund Pimco, does not expect the Fed to hike rates in 2008, according to TradeTheNews.com, and thinks a rate cut from the European Central Bank is far more likely.
ECB officials gave McCulley's position juice, suggesting a rate hike in July is likely, but board members Christian Noyer and Jurgen Stark softened their tone for the remainder of 2008, expressing confidence that inflation will ease. (See: "Just The One ECB Hike...For Now")
Meanwhile, Wednesday speech from Fed Vice Chairman Donald Kohn reinforced the U.S. central bank's inflation concerns.
Kohn said it can not be assumed that inflation expectations are anchored, a dangerous situation even if real inflation indicators moderate. He also said even correct monetary policy allows for temporary increases in unemployment and inflation after price shocks like oil's record run.
The bond market moved above Tuesday's levels as investors digested more inflation talk. The 10-year Treasury was yielding 4.03%, down from 4.11%, while the 2-year yield was at 3.78%, from 3.91%.
The dollar also softened, with the euro advancing to $1.5561, from below $1.55 Monday.
In corporate news, McDonald's (nyse: MCD - news - people) saw a recent run of good luck run out thanks to a problem in Korea.
The fast food chain, which jumped earlier in the week on a 7.7% rise in May same-store sales, was in negative territory thanks to backlash following the South Korean government's decision to end restrictions on imports of American beef. (See: "Beef Blowback For McDonald's")
McDonald's has borne the brunt of the ire in South Korea, which had been its top growing overseas market in 2007, and shares were down 85 cents, or 1.4%, to $58.92.
Alcoa (nyse: AA - news - people) was the hardest hit on the blue-chip Dow though, as the miner dropped $2.60, or 6.1%, to $40.12. JPMorgan cut its rating on Alcoa to neutral from overweight, after analyst Michael Gambardella said the company is not planning to sell itself or spin off any of its businesses, and will increase its size rather than streamlining.
Staples (nasdaq: SPLS - news - people) was posting a comfortable gain, up $1.00, or 4.3%, to $24.15, after finally reaching a deal to acquire Dutch rival Corporate Express. (See: "Sweet Deal For Corporate Express Shareholders")
After several bids, Corporate Express' board finally endorsed Staples latest offer, a deal that will pay about 1.7 billion euro ($2.7 billion) and expand the office supply retailer's presence in Europe.
The Associated Press contributed to this article.
10:59 AM ET, Street Slackens Ahead of Fed Data: The Federal Reserve is due to release its Beige Book for its June 24-25 meeting Wednesday afternoon, and investors were trading cautiously while waiting to parse the report for any hint that the central bank could tighten monetary policy.
Tough talk on inflation from Fed chief Ben Bernanke fueled discussion of potential rate hikes, but few are convinced the central bank will do anything but stand pat for the time being. (See: "Bernanke's Rate Spike Poker Face")
Paul McCulley, managing director of closely watched bond fund Pimco, does not expect the Fed to hike rates in 2008, according to TradeTheNews.com, and thinks a rate cut from the European Central Bank is far more likely. McCulley was also bullish on the dollar, predicting that its fade against the euro was over, following Bernanke's comments on the U.S. currency, which were rare for a Fed chairman.
The greenback eased modestly on Wednesday, as the euro rose to $1.551, from $1.5480 Tuesday.
Bond markets were jumpy as traders debated the possibility of rate action at the central bank's late June meeting, and Treasury yields took a breather after rising sharply Tuesday. The 10-year note was yielding 4.06%, down from 4.11%, while the 2-year yield was at 2.81%, after leaping 18 basis points, to 2.91%, on Tuesday.
The Beige Book's 2 p.m. release will also be closely watched for the Fed's outlook on employment, after May's jobs report showed unemployment surged to 5.5%. Even though the rise was attributed to more teenagers entering the workforce and looking for jobs, and therefore likely had a seasonal aspect, the number came as a surprise. (See: "Jobbed Out")
Wall Street started the day lower, to follow its recent trend, as the major averages all dipped to open the session. The Dow Jones industrial average was off 45 points, or 0.4%, to 12,245, while the Standard & Poor's 500 lost 2 points, or 0.2%, to 1,356, and the Nasdaq fell 4 points, or 0.2%, to 2,445.
Analysts took a harsh view on several high-profile stocks Wednesday, including two Dow components. Alcoa (nyse: AA - news - people) shares slid $1.63, or 3.8%, to $41.09, after JPMorgan cut the mining company to neutral from overweight and said the company is unlikely to pursue a sale or spinoff of part of its business. Meanwhile, Bernstein Global Wealth Management dropped its price target on aircraft maker Boeing (nyse: BA - news - people) to $92, from $98, citing the slower U.S. economy, which is putting a crimp in the airline industry. Shares of Boeing were down 12 cents, or 0.2%, to $73.55.
Oil prices are also hammering the airlines, and crude was back on the upside Wednesday, adding $3.00, to $134.31 a barrel, ahead of weekly inventory data. Analysts are forecasting a fourth-straight drawdown of U.S. stockpiles. The early rise was thanks in part to BP (nyse: BP - news - people), which said proven global oil reserves were basically unchanged last year, demonstrating the tighter supply environment. Shares of major oil service companies ticked higher, as BP added $1.89, or 2.8%, to $70.39, and Dow component Exxon Mobil (nyse: XOM - news - people) added 15 cents, or 0.2%, to $88.04.
Financial stocks drooped after starting higher in what has been a topsy-turvy week. On Tuesday, Merrill Lynch (nyse: MER - news - people) chief John Thain called for the Fed to extend broker access to its discount window through the original September endpoint, even while pointing out that his firm has not taken advantage of the lending facility. While the extension of the facility was designed to boost liquidity in ailing credit markets and provide a last resort for primary dealers, accessing it has become something of a taboo; just a week ago, Lehman Brothers (nyse: LEH - news - people) saw shares tumble on the mere rumor that it had gone to the window. (See: "Lehman Speculation Batters Market")
In deals news, Staples (nasdaq: SPLS - news - people) finally caught its fish, after the board of Dutch competitor Corporate Express (nyse: CXP - news - people) endorsed a sweetened buyout offer from its office supplies rival. The 1.7 billion euro ($2.7 billion) deal for the Dutch competitor will broaden Staples' reach in Europe. Investors cheered the deal, sending Staples shares up 81 cents, or 3.5%, to $23.96.
9:56 AM ET, Europe Becalmed On Mixed Rate Messages: Stocks in Europe were slightly re-energized Wednesday afternoon, following recent falls prompted by fear of inflation and high oil prices in particular.
Britain's FTSE 100 was down 0.1%, while France's CAC-40 and German's DAX were both up 0.2%, in afternoon trading.
The European banking sector was up 0.4%, partly because of reports that a Russian billionaire was on the lookout for investments. Suleiman Kerimov, one of Russia's richest men, is reportedly buying stakes in large Western banks like Deutsche Bank (nyse: DB - news - people), UBS (nyse: UBS - news - people) and Morgan Stanley (nyse: MS - news - people) and wants other tycoons to join him.
According to the Russian newspaper Kommersant, he held 3.0% of Deutsche Bank at the end of last year, and wants now to increase that stake to 9.0%. But the German bank said Wednesday that it did not know of any investor that owned more than 3.0% of its shares apart from British bank Barclays (nyse: BCS - news - people) and French insurer AXA (nyse: AXA - news - people).
Also in the banking sector, Royal Bank of Scotland (nyse: RBS - news - people) was down 2.1% in London, after releasing a cautious trading update. The bank said its future earnings would remain "satisfactory." BNP Paribas (other-otc: BNPQY - news - people) was up 1.9% after it agreed to buy the equity prime brokerage unit of Bank of America (nyse: BAC - news - people).
Energy shares were also on the rise, with BP (nyse: BP - news - people) up 2.7% and Royal Dutch Shell (nyse: RDSA - news - people) up 2.0%.
Traders were awaiting U.S. inventory data, due at 10.30 a.m. EST, which was expected to show a fall in crude stocks. That could push up oil prices and reignite fears of inflation.
The euro rose against the dollar after Christian Noyer, a European Central Bank governing board member, said that he expected euro zone inflation to slow gradually, dispelling expectations of a series of rate hikes by the ECB. The euro traded at $1.5511, up from $1.5449 late Tuesday in New York. The British pound was quoted at $1.9606, up from $1.9531.
Gold also rose, trading in London at $874.25 per troy ounce, up from $870.45 late Tuesday.
Crude was up by $2.50, at $133.81 a barrel, on the New York Mercantile Exchange.
7:36 AM ET, Japan Reaps Benefits Of Weaker Yen: Japan outshone the other Asian markets Wednesday, as a weaker yen spurred its listed stocks.
The big-cap-heavy Nikkei 225 index closed 1.2% up, at 14,183.48 points, a larger rise than the broader Topix, which was 0.5% higher, at 1,390.03. The yen dropped to a three-month low of 107.7 against the dollar, on expectations of a U.S. interest rate hike later in the year.
Japan investors were also chuffed by better than expected economic growth figures for the first quarter; the government marked up gross domestic product expansion to a revised 1% quarter on quarter, from 0.8% (an annualized rate of 4%, up from earlier estimate of 3.8%), owing to strong exports to emerging economies.
But any sense of bullishness was tempered by a spike in wholesale price inflation, which hit its highest level in 27 years, at 4.7% in May, year on year. "If prices keep rising, they could hurt corporate profits," said Taisuke Nakamoto, an economist at Dai-ichi Life Research Institute, as quoted by TradeTheNews. "This cost-push inflation is not a good trend."
As is usually the case with a weakening yen, it is the largest Japanese exporters that stand to benefit from higher revenues overseas. Canon (nyse: CAJ - news - people) moved higher on Wednesday by 1.5%, to 5,520 yen ($51.25); likewise, Toyota Motor (nyse: TM - news - people), the country's largest automaker, ended the session 2.4% higher, at 5,550 yen ($51.65), and the second-largest, Honda Motor (nyse: HMC - news - people), advanced 2.7%, to 3,800 yen ($35.28). Shares of pharmaceutical firm Daiichi Sankyo (other-otc: DSKYF - news - people) raced ahead by 4.9%, to 2,975 yen ($27.71), after announcing a takeover of India's Ranbaxy Laboratories.
Inflation also caused stress in the "lucky country," Australia. It was blamed in part for the nation's drooping consumer confidence, which hit a 15-year low on worries about high interest rates and ever-rising gas prices. The benchmark S&P/ASX 200 index lost as much as 0.7% early in the day, only to reverse course, finishing 0.55% ahead, at 5,467.30, a day after registering the largest single-session decline in three months.
Investor sentiment remained fragile in China. The benchmark Shanghai Composite index closed another dispirited day heading downward by 1.6%, to 3,024.24, after dipping briefly below 3,000 points. Both Hong Kong and Taiwan were also sluggish: the Hang Seng deflated by 0.2%, to 23,327.60, and the Taiex weighted index slipped by 0.3%, to finish at 8,345.59.
South Korea staged a turnaround of sorts Wednesday, following a three-day losing streak, but trading remained thin. High-tech companies led the charge, with Samsung Electronics (other-otc: SSNLF - news - people) ending the session 2.25% ahead, at 681,000 won ($661.17). Korea Exchange Bank fell by 3.3%, to 14,500 won ($14.11), after the Asia-Pacific chief of HSBC (nyse: HBC - news - people) speculated that the U.K. bank might have to withdraw its bid for a controlling stake in its Korean counterpart. (See: "HSBC May Wave White Flag In Korea")
The announced acquisition by Daiichi Sankyo did little for Ranbaxy Laboratories (other-otc: RBXZF - news - people) shares in India, which eked out a gain of 0.05%, to 561 rupees ($13.08). The Bombay Stock Exchange's Sensex index, having lost substantial ground in recent days, staged a rally of 2.0%, concluding Wednesday at 15,185.32.
In Singapore, the Straits Times index edged up by 0.45%, to 3,046.77.
