Closing Bell: The Rally Abortion

Mar 16, 2009 7 Comments ›› Pat Dollard

FOX Business:

Rally Aborted on Falling Bank Stocks

by Dunstan Prial

Bank stocks faded midday Monday and with them the broader stock market, killing any chance at keeping alive a four-day rally.

Today’s Markets

The Dow Jones industrial average fell 7.01, or 0.10%, to 7216.97. The Standard & Poor’s 500 index fell 2.66, or 0.35%, to 753.89, while the Nasdaq composite index fell 27.48, or 1.92%, to 1404.02. The consumer friendly FOX 50 rose 1.86, or 0.33%, to 566.78.

Stocks rose early, climbing 150 points by midday buoyed by comments on the economy from Federal Reserve Chairman Ben Bernanke. Later a speech from President Barack Obama that federal rescue programs will be used to help small businesses seemed to offer additional optimism.

But traders said the rally ended quickly after bank stocks began to fade.

“Buyers got a little tired,” said Michael James, senior equities trader at Wedbush Morgan Securities. “When the financials rolled over the rest of the market went with it.”

James said the economy is still in bad shape and that it’s probably too early to expect a sustained rally in the stock markets.

Banking titans Goldman Sachs (GS: 93.56, -5.53, -5.58%) and Morgan Stanley (MS: 22.97, -2.48, -9.74%) led the way down.

Bernanke said Sunday the recession would probably end this year if the government’s program to boost the banking industry succeeds. But the Fed chairman also cautioned that the task of improving the banking system is a difficult one.

During an interview with CBS’ “60 Minutes,” Bernanke said the government needs to get banks to lend more freely and get the financial markets to work more normally.

Bernanke’s comments come as some of the hardest hit banks have said in recent days that operations were improving in early 2009. Last week, both Citigroup (C: 2.2, 0.41, 22.91%) and Bank of America (BAC: 6.055, 0.285, 4.94%), reported improving trends for January and February.

Ted Weisberg, a trader with Seaport Securities, urged caution, however, during the early part of the session, and his warning proved correct.

“This is nothing more than a technical rally in a bear market,” he told the FOX Business Network.

The Economy

The economic landscape is still cloudy with bad news. Industrial production data showed U.S. factories matched their lowest rate of usage in February since records began in 1967. General Motors (GM: 2.52, -0.1618, -6.03%) warned that U.S. sales for March were following in the trend set earlier this year by all of the Big Three auto makers.

Tech stocks never even got started Monday, with names like Microsoft (MSFT: 16.25, -0.4, -2.4%), Cisco (CSCO: 15.45, -0.06, -0.39%), and Adobe (ADBE: 18.45, -0.23, -1.23%), and Apple (AAPL: 95.42, -0.51, -0.53%) all down.

Corporate Movers

Barclay’s (BCS: 5.31, 0.89, 20.14%) rose 20% after the British banking giant gave a bullish report on its own operations. The comments came not long after a handful of U.S. banking titans made similar comments.

General Electric’s (GE: 9.67, 0.051, 0.53%) shares rose following an analysts report stating “the likelihood of further negative catalysts in the near-term is now much lower.”

WSJ:

Market’s Gains Evaporate

By ROB CURRAN, GEOFFREY ROGOW and PETER A. MCKAY
A surge for financial stocks waned Monday afternoon and some technology and manufacturing stocks sank, putting an end to a four-session winning streak.

The Dow Jones Industrial Average, which rallied more than 600 points last week and posted a triple-digit gain earlier Monday, fell 7.01 points, or 0.1%, to 7216.97. Weakness in the tech sector helped to drag the average lower, as Intel sank 3.1% and Microsoft fell 2.4%. Investors also sold Pfizer and Merck shares after big rallies for those names last week.

The Nasdaq Composite Index dropped 27.48 points, or 1.9%, to 1404.02. The S&P 500-stock index declined 2.66 points, or 0.4%, to 753.89 as its financial, consumer-discretionary, technology and health-care sectors slipped. Utilities, a popular defensive sector, managed to hold some of their gains, rising 2.7%.

Financials initially rallied after British bank Barclays moved to shore up its capital and the Financial Accounting Standards Board agreed on Monday on proposed guidance that would make it easier for companies to use their own models, estimates and judgment in determining the “fair value” of their assets.

But plenty of clouds remain on the horizon: industrial production data showed that U.S. factories matched their lowest rate of usage in February since records began in 1967. General Motors warned that its U.S. sales this month are following the weak patterns of the outset of 2009, and it gave back 7.4% after nearly doubling in value last week.

Investors had been jumping back into beaten-down banks since last week, when the chief executives of Citigroup, Bank of America and J.P. Morgan Chase said that the first two months of the year had been profitable. The KBW Bank Index surged by nearly 40% in five days. It slipped 0.2% Monday as Citigroup gained 31% and Bank of America rose 7.3% but many other banks declined.

“The banks were maybe a little overly optimistic in saying they were profitable for two months because the reality is they are profitable or not depending on what write-downs there are,” said Jonathan Vyorst, a fund manager with the Paradigm Value Fund.

Traders noted that cash has moved from the sidelines back into stocks over the last week, but investors aren’t sticking their necks out too far. Beyond the banks touting early-year strength defensive sectors have seen the largest inflows. But a short-term mentality is still shaping the market, traders said.

Kim Caughey, senior investment analyst at Fort Pitt Capital Group, said her firm has been doing a little more short-term trading lately while also continuing to hold more cash than usual in its clients’ accounts. “We’re just not in a buy-and-hold environment again yet,” said Ms. Caughey. “I don’t know that the financial markets’ problems are really fixed.”

Federal Reserve Chairman Ben Bernanke said in an interview on “60 Minutes” aired Sunday that the U.S. recession will likely end this year but that a recovery would hinge on the health of financial markets. “The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis,” Mr. Bernanke said.

G20 finance officials over the weekend pledged coordinated action on cleaning up toxic assets. The Wall Street Journal reported that the Obama administration is moving with growing speed on a plan to overhaul financial-market oversight, including an enhanced role for the Fed to monitor and address broad economic risk and tougher capital requirements for big banks.

The market’s early gains damped demand for U.S. Treasury debt, a popular safe haven for investors. The two-year note fell 2/32 to yield 1.005%. The 10-year note dropped 18/32 to yield 2.962%. The 30-year bond declined 18/32, yielding 3.766%.

Bond traders have focused on the potential for “quantitative easing” in which the Fed would purchase longer-dated Treasury securities to spur the economy. Rick Ackerman, a partner at the futures and options trading firm Blue Fin Financial, said he remains concerned that expectations of quantitative easing by the Fed, whether they ultimately prove true or not, could draw buyers’ attention away from other forms of debt aside from Treasury bonds.

“There’s a bid in the Treasury market right now because of the Fed, and eventually that bid will be tested,” he said. “In the meantime, what’s going to happen to all the other fixed-income issues that aren’t perceived as safe because they don’t have that sort of backing?”

Oil futures rose after the Organization of Petroleum Exporting Countries opted not to cut production quotas over the weekend, as many expected. OPEC said they would focus instead on compliance with earlier cuts. Crude contracts rose $1.30 to settle at $47.35 a barrel in New York. Futures fell earlier in the day.

The dollar was mixed, climbing against the Japanese yen but weakening against the euro.