By Peter A. McKay
April 20, 2009
U.S. stocks suffered an across-the-board decline Monday as investors remained jittery
about the financial sector despite big profits at Bank of America.
Denting a six-week rally, the Dow Jones Industrial Average was recently off 285 points,
or 3.5%, to 7845. The Dow’s Monday decline has it poised to suffer its worst one-day
loss since it hit a 12-year low in early March, which many traders hope to see stand as the
low for the current bear market.
Weighing on the broad index was a 23% slide in Bank of America. The bank said its
first-quarter net income more than tripled, with the company’s recent Merrill Lynch
acquisition contributing more than $3 billion to its bottom line, but net charge-offs rose
and losses in its credit-card business ballooned.
Adding to some investors’ skittishness about the financial sector on Monday were reports
that the Obama administration may convert some of the preferred shares that it’s obtained
via bank bailouts into common stock once a round of stress testing is done next month.
Such a move would give the administration added flexibility to provide further aid to the
banks without allocating additional money, but it would also dilute existing shareholders
of the firms’ common stock.
In addition, the industry’s ability to extend credit is still constrained, according to a Wall
Street Journal analysis of Treasury Department data.
“The bank earnings so far just seem to be smoke and mirrors and the other companies aren’t reporting quality earnings. It’s just reducing expenses and dipping into reserves,”
said Harry Rady, chief executive officer of Rady Asset Management.
After leading the broad market higher for more than a month, financials paced much of
Monday’s decline. The S&P 500 was recently down 35 points, or 4%, at 835, including
an 8.9% decline for its financial sector.
Goldman Sachs was down 3.2% and J.P. Morgan Chase fell 6.8%. Citigroup was down
19% after being cut to a “sell” rating from “hold” by Argus Research. All three lenders
posted better than expected results last week.
The technology-focused Nasdaq Composite Index was down 3.7% at 1612, despite the
announcement of a high-profile merger deal.
Oracle said it plans to acquire Sun Microsystems for $7.4 billion. The deal followed the
unraveling of Sun’s talks to sell itself to International Business Machines. Sun’s shares
were recently up 37% while Oracle fell 1.6%. IBM, which reports earnings after the close
Monday, declined 1.1%.
Anthony Conroy, head trader at New York brokerage firm BNY ConvergEx, said while
the financial sector remains risky, many of the dangers were adequately factored in when
the market hit 12-year lows in early March.
“There are so many ’sell’ ratings out there already on the financials,” he said. “People
can’t go to ‘double sell.’ There’s no such thing.”
An expected release of the bank stress test results in the coming weeks is being highly
watched for, though few traders are positioning around the data.
“If the stress test results uncover something that hasn’t been talked about, that
could be an issue. But I’m not holding my breath one way or another,” said Rady.
Going into the session, stocks had staged a six-week rally that pushed the Dow up nearly
30%. But several market veterans remained cautious even in the face of the gains as the
bond markets were sending much more negative signals about the prospects for an
economic recovery and a stabilization of the financial system.
Jack Ablin, chief investment officer at Harris Private Bank in Chicago warned clients
Monday that he’s concerned the spread between yields on BBB-rated corporate debt and
10-year Treasurys remains stubbornly above five full percentage points since November,
not budging even as the stock market posted its furious rally.
In essence, that means bond investors are still charging companies a hefty premium to
borrow, reflecting deep skepticism that risk has dissipated enough to justify lower
borrowing costs. That message is starkly at odds with that of the most bullish stock
investors, who believe the crisis that struck last fall is now waning.
“Unfortunately, history tells us that it’s the bond investors who are usually right in
situations like this,” said Mr. Ablin, who’s maintaining a hold-steady approach on stocks
for now.
Treasury prices rose. The two-year note was up 4/32, pushing its yield to 0.92%. The
benchmark 10-year note climbed 28/32 to yield 2.851%.
The dollar strengthened versus the euro but fell versus the Japanese yen. The U.S. Dollar
Index rose 0.9%.
Worries about demand pushed crude prices sharply lower. Oil futures closed lower by
more than $4 to trade just below $46 a barrel in New York, weighing on the broader
commodities sector.