By Tomi Kilgore, MarketWatch
Dec 27, 2005
U.S. stocks closed sharply and broadly lower Tuesday, with the Dow Jones
Industrials Average suffering its worst one-day point loss in two months,
as developments in the bond market that have typically foreshadowed
recessions spooked investors, and overshadowed a sharp drop in energy
prices.
The Treasury yield curve inverted -- shorter-term maturities yielded
higher interest rates than longer-term maturities -- for the first time in
five years. The only time in the last 30 years that an inverted curve
wasn't followed by a recession was in 1998, when it inverted briefly
during the Asian financial crisis.
The Dow industrials slumped 105.50 points to a two-week low of 10,777.77,
with 27 of 30 components contributing to losses, and was in danger of
suffering its worst one-day point loss in 2 months. The blue chip
barometer, which had been up as much as 49 points in early trading, closed
with its first triple-digit loss since Oct. 27.
Within the Dow, Exxon Mobil slid 2.2% and American Express shed 2% to
lead the losers, while General Motors paced the winners with a 0.9% gain.
The Nasdaq Composite shed 22.53 points to 2,226.89, reversing gains of as
much as 10 points earlier in the session. The S&P 500 Index slid 12.12
points to a 2-week low of 1,256.54, and also suffered its worst point loss
in 2 months.
"The yield curve is beginning to frighten people," said Paul Mendelsohn,
chief investment strategist at Windham Financial Services.
The bond market grabbed headlines when the yield curve first inverted in
European trading. It normalized briefly in early New York trading, but
settled in inverted territory, with the 2-year Treasury note last yielding
4.347%, and the yield on the 10-year Treasury note last down 0.039
percentage points at 4.341%.
"The inversion isn't a good sign," Mendelsohn added, as it suggests
liquidity is being drained from the market at a rapid rate.
He feels the market is telling the Federal Reserve that they may have
raised interest rates too far, considering the relative rate of change in
overnight rates since the current rate hike cycle began "has been
enormous."
The fed funds rate, what banks charge each other for overnight loans, has
more than quadrupled in the last 18 months, going from 1% in June 2004 to
the current rate of 4.25%.
Adding to selling pressure, Mendelsohn said the stock market is also
technically overbought, and speculators may be prone to close out
positions ahead of yearend.
Investor sentiment had received an early boost from a sharp drop in energy
prices, which came amid forecasts of warmer-than-normal temperatures
across the U.S. in the coming week. The January natural gas futures
contract tumbled $1.261, or 10%, to settle at a 4-month low of $11.022 per
million British thermal units on the New York Mercantile Exchange.
February crude closed down 27 cents at $58.16, paring earlier losses to a
4-week low of $57.30 in the final hour of NYMEX trading.
The U.S. National Weather Service had said over the weekend that demand
for heating fuels could be 25% below normal this week, with natural gas
heating demand almost 28% below average, as most of the country will see
unseasonably mild temperatures.
The early gains in stocks had revived hope that a so-called "Santa Claus"
rally, a phrase attributed to the Stock Trader's Almanac, was in the
works. The Almanac indicates that the average gain over the last five
trading days of the year and first two days in January has produced an
average gain of 1.7% for the S&P 500 since 1969.
"We won't know about that until next week," said Phil Roth, chief
technical market analyst at Miller Tabak. "For now, we give the benefit of
the doubt to the upside and still look for nominal additional gains early
in 2006."
Wal-Mart had eased some investor concern when it said Saturday that it
sees December same-store sales rising 2% to 4%, which was in line with
previous forecasts, after rising 3.8% in November.
Meanwhile, the world's biggest retailer's stock slumped 1.3% to extend
recent losses after a California jury awarded last week $172 million to
116,000 current and former employees whose lunch-break rights were found
to have been violated.
Retailers had been hoping that busy pre-Christmas shopping would salvage
what has otherwise been a lackluster holiday sales period.
"In general, we found stores busier than in our surveys conducted the
prior weekend," said Soleil Securities analyst Daniel Ernst. "With an
additional Saturday ahead of Christmas to shop, we believe there may have
been a greater weighting toward last-minute shopping this year."
KeyBanc's Jeffrey Stein said, however, that the holiday season was proving
to be "more promotional than most," as many retailers were worried about
the impact of higher energy prices.
The S&P Retail Index fell 1%.
In other sector action, oil, oil services, natural gas and Internet stocks
were the biggest decliners, while airline and metals miners enjoyed gains.
Overall market breadth was firmly negative, with decliners dominating
advancers by a 23 to 10 margin on the NYSE, and by a 22 to 9 score on the
Nasdaq stock market.
Volumes were relatively light as many Wall Street traders remained away
for the holidays, with 1.15 billion shares traded on the Big Board and
688.3 million shares moved on the Nasdaq.
Outside of equities, the U.S. dollar traded 0.8% higher vs. the Japanese
yen to 117.38 and added 0.1% against the euro to $1.1832.
Within the metals, February gold climbed $4.90 to settle at $510.10 an
ounce on NYMEX, amid forecasts of continued strong demand from China.
Silver futures closed up 16.7 cents to $8.812 an ounce and copper hiked up
2.80 cents at $2.0675 a pound.
Companies in focus
Guidant shed 3.4% after the company said it received a warning letter from
the U.S. Food and Drug Administration regarding a facility in St. Paul,
Minn. The FDA was requesting additional action to address certain quality
system concerns.
In addition, the medical device maker said in a filing with the Securities
and Exchange Commission late Friday that it expected 2006 adjusted earnings of
$1.65 to $1.75 a share and revenue of $3.8 billion to $4 billion. Analysts
surveyed by Thomson First Call had been expecting earnings of $2.43 a share
and revenue of $4.11 billion, on average.
Bristol-Myers Squibb rose 0.7% after the company said late Friday that
Orencia, a treatment for rheumatoid arthritis, had been approved by the
U.S. Food and Drug administration.
Sirius Satellite Radio ran up 2.3% and was the Nasdaq's second-most active
stock -- the Nasdaq 100 Trust was the most active -- after the company
said it recently passed three million subscribers. The New York-based
company added that it expects a "strong year-end."
This MarketWatch news update is provided to you courtesy of Thomson
Financial.
This is Thomson Financial's Market Commentary, which is issued three times
daily; Pre-Open (9:00 a.m.), Post-Open (10:15 a.m.), and Close (5:00 p.m.).
The information herein is believed to be true and accurate. We take no
responsibility for inaccurate information and reserve the right to
update our reports. If you have any questions please e-mail James Sang at
james.sang@tfn.com or call 646.822.6233. For more information about
Thomson Financial visit us on-line at http://www.thomsonfinancial.com. For
more financial information at your fingertips, please visit
http://www.irchannel.com.
SOURCE Thomson Financial Corporate Group
back to top
