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FOX Business:

Ugly End Week of Gains on Wall Street

by Matt Egan

Wall Street suffered another pullback on Friday from its recent hot streak but the Dow still eked out its first back-to-back weekly rally since May.

Today’s Markets

The Dow Jones Industrial Average sank 122.42 points, or 1.65%, to 7278.38, the S&P 500 fell 15.50 points, or 1.98%, to 768.54 and the Nasdaq Composite Index lost 26.21 points, or 1.77%, to 1457.27. The consumer-friendly FOX 50 dropped 10.20 points, or 1.74%, to 575.48.

Friday’s losses came as little surprise to market participants who have seen the Dow soar almost 1,000 points since plummeting to 12-year lows earlier this month. Taking advantage of the gains from this recent hot streak, some traders took profits while other said it was time to for the markets to take a breather.

“We’ve had a very good week and a very good run. So I think everybody expected a pullback,” NYSE trader Doreen Mogavero told FOX Business.

While banks like JPMorgan Chase (JPM: 23.19, -1.53, -6.19%) and Bank of America (BAC: 6.17, -0.73, -10.58%) led Friday’s dive, the losses didn’t appear to be sparked by any new negative economic or financial developments.

“It’s just been a protracted selloff. There is nothing really new,” said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. “It’s not bad that it’s pulling back like this. It had to make a stop sooner or later. As long as the pullback is not too deep, then I think you are positioned to continue the rally.”

Bank of America and General Electric (GE: 9.5, -0.61, -6.03%) helped lead the way down on the Dow on Friday, offsetting gains for Johnson & Johnson (JNJ: 51.6, 1.52, 3.04%) and General Motors (GM: 3.0005, 0.1187, 4.12%).

“The big question is: Does this rally have any legs, technical or otherwise?” NYSE trader Ted Weisberg of Seaport Securities told FOX Business. “I’m not sure I’m a believer because I think politics continues to trump the economics. If we can get beyond the politics, perhaps the market has a shot.”

Friday’s volatility may have been caused by the fact the day was considered a “quadruple witching” session, which is a phenomenon where stock options contracts, single stock futures, stock index options and stock index futures all expire on the same day. Options expirations often allow for “moves that are inconsistent with rational thoughts,” said Saluzzi.

There weren’t any major economic or earnings reports for the markets to analyze but the stocks were clearly weighed down by a second-straight selloff in the financial sector, which sank almost 5%.

General Electric (GE: 9.5, -0.61, -6.03%) saw its shares tumble as a trio of analysts slashed their price targets and 2009 earnings forecasts for the conglomerate despite GE saying Thursday its embattled financing unit will turn a profit.

The commodity markets were once again in focus as gold held onto its $70-rally from Thursday by falling just $2.50 per ounce to settle at $955.80. Crude tumbled 55 cents, or 1.07%, to settle at $51.06 but still ended with its fifth straight weekly gain. Considered inflation hedges, the commodities have received a boost from those worried about the side effects of the Federal Reserve’s decision to pump an additional $1.1 trillion into the money supply.

While the dollar rebounded Friday from its two-day plunge that was sparked by the Fed move, the greenback was still poised to take its biggest one-week plunge against a basket of rival currencies since 1985.

Corporate Movers

IBM’s (IBM: 92.48, -0.33, -0.36%) potential buyout of Sun Microsystems (JAVA: 8.1, -0.53, -6.14%) has been held up by extensive due-diligence but the process isn’t expected to prevent a takeover worth $6.5 billion to $8 billion, The Wall Street Journal reported.

Citigroup (C: 2.579, -0.051, -1.94%) said Gary Crittenden, previously the bank’s chief financial officer, will take over the newly-created role of chairman of Citi Holdings. Citi said Edward “Ned” Kelly, previously head of global banking, will replace Crittenden as CFO.

Bank of America (BAC: 6.17, -0.73, -10.58%) was influential in determining writedowns for CDOs and leveraged loans at Merrill Lynch before BofA acquired the brokerage firm, the Financial Times reported.

Xerox (XRX: 4.34, -1, -18.73%) lost almost one-fifth of its market value after the company slashed its first-quarter earnings guidance below the Street’s view and said it plans to cut an additional $300 million in spending.

Ford (F: 2.7074, 0.2074, 8.3%) ended sharply higher after UBS started coverage of the auto maker with a “buy” rating and a price target of $5. UBS predicted Ford will avoid seeking a bailout, making the risk/reward tradeoff compelling.

American Express (AXP: 12.21, -0.82, -6.29%) could post losses in 2009 and 2010 and is likely to cut its dividend to 5 cents from 18 cents in the second quarter, analysts at Friedman, Billings, Ramsey predicted in a research note.

Apollo Management is considering taking a large stake in Paul Allen-controlled Charter Communications (CHTR: 0.049, -0.0034, -6.49%) in exchange for its control of the cable company’s debt, the Journal reported. Allen will hold onto voting control of Charter, which said last month it will file for Chapter 11 bankruptcy protection.

Stiefel Laboratories, a privately-held pharmaceutical company, is considering selling itself for $3 billion to $4 billion and has already drawn interest from a number of big-name drug makers, including Johnson & Johnson (JNJ: 51.6, 1.52, 3.04%) Novartis and Glaxo Smith Kline (GSK: 29.14, 0.08, 0.28%), the Journal reported.

Lennar (LEN: 8.11, -0.39, -4.59%) is nearing a deal to create a new company that would acquire at a discount much of the land from LandSource Communities Development LLC, which it sold its interest in for $707 million in cash in 2007, The Wall Street Journal reported.

Global Markets

European stocks capped off their second straight week of gains with a solid rally Friday. London’s FTSE 100 rose 0.68% to end at 3842.85 and Germany’s DAX rallied 0.63% to 4068.74.

Asian markets ended in the red overnight as Hong Kong’s Hang Seng plunged 2.26% to 12833.51 but Japan’s Nikkei 225 tumbled 0.33% to 7945.96.

WSJ:

Bank Stocks Drag on Market

By ROB CURRAN, PETER A. MCKAY and GEOFFREY ROGOW

Stocks fell after sobering comments about bank failures from Federal Deposit Insurance Corp. Chairman Sheila Bair and as traders continued to digest the Federal Reserve’s latest tactic to revive the economy.

The Dow Jones Average declined 122.42 points, or 1.7%, to 7278.28. But the blue-chip benchmark advanced 0.8% on the week, leaving it with its first two-week run of gains since May 2008. For the month so far, the Dow is up 3.1%.

The S&P 500-stock index declined 15.50 points, or 2%, to 768.54, but ended up 1.6% for the week. The Nasdaq Composite Index declined 26.21 points, or 1.8%, to 1457.27. It rose 1.8% on the week.

Ms. Bair, defending her agency’s move to levy a hefty special charge on banks to replenish its deposit-insurance fund, reiterated her expectation that the FDIC will be drained of $65 billion over the next five years because of bank failures. The remarks sent bank stocks and markets more broadly lower, traders said.

“That tipped us over,” said Costel Goga, chief market strategist with JonesTrading in California.

The Financial Select Sector SPDR, an exchange-traded fund that tracks the financial sector of the S&P 500, fell 5.1%. After reaching a low ebb in early March, bank stocks led the market in a rally that some attributed to traders buying stocks to cover short positions.

“We had a major rally, almost 20%, and institutions won’t chase stocks in this environment where large investors are still picky and happy with just small profit taking,” said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams.

Markets are awaiting details from the Treasury Department’s latest stabilization plan for the sector and digesting the implications of the Federal Reserve’s plan to buy more mortgage securities and $300 billion in longer-term Treasurys. The disclosure of that plan this week lowered bond yields, pushed the dollar sharply lower and elevated gold prices, amid investor fears that the moves could stoke inflation.

In a speech to a community bankers’ conference on Friday, Fed Chairman Ben Bernanke discussed possible regulatory reforms and said he’s been pleased at the market’s repsonse so far to the Fed’s new lending programs. He added that the central bank will quickly reverse course whenever the economy recovers, to prevent a bout of serious inflation.

The dollar enjoyed a partial rebound on Friday, but fears of an oversupply of dollars sloshing through the global economy could linger for months, said analyst Joe Trevisani, of the currency brokerage FX Solutions in Saddle River, N.J.,

“I don’t think these expectations of a quick turnaround by the Fed are very realistic, based on history,” said Mr. Trevisani, who added that the central bank may also have to make up for the excesses of Congress, which has effectively been printing money to spend on fiscal stimulus.

“They love to spend, which is popular with constituents, even if they have to borrow to do it,” said Mr. Trevisani. “It’s going to be very difficult to pull all that money back at some point, even if things get better.”

The expiration of futures and options — a process that requires traders to buy or sell shares to settle earlier bets using the contracts – added volatility on Friday. The Chicago Board Options Exchange Volatility Index climbed 5.5%.

Randy Frederick, director of derivatives at Charles Schwab, said he expected more than 30 million options contracts to change hands Friday — about double the daily activity from earlier in the week.

He said that the market’s strength over the last two weeks hasn’t done much to discourage an options strategy that had grown popular among his firm’s clients as a safeguard against the bear market. Known as a “covered call” strategy, it involves a trader selling bullish call options against shares he already owns to generate cash.

“What we’re seeing at the moment is that some of the covered-call traders are buying back their options and rolling over, selling the options for the next month’s expiration to keep their position going,” said Mr. Frederick. In a bull market, covered-call trades are unpopular, since participants prefer to let their profits run up as the market ticks higher.