After three days of gains in the stock market investors decided to take some money off the table. Wednesday's decline was very widespread affecting every stock and sector specific index. Wall Street doesn't seem happy unless it has something to worry about and today it fell back to its old favorite - interest rates. It is no longer a matter of if and when the FOMC will raise rates but a matter of how much and how fast. Everyone knew rates were going higher from their 40-year lows but now there are concerns that the Fed may hike them faster than previously expected to combat any perceived rise in inflation.
The concerns over inflation sent the bond market lower, which in turn sent yields higher and that affects mortgage rates. This was not lost on the homebuilders who fell sharply for the second day in a row. Tech stocks also took a beating as traders worried that higher rates would impact corporate profits. The semiconductor sector took the brunt of the selling with a 3.24% decline after failing at resistance for the second time in two weeks. Networking, Internets, software and disk drives were all down close to 2% or more on the session.
Chart of the SOX semiconductor index:
Market pundits were blaming Greenspan's comments yesterday for the rise in the U.S. dollar today. That sent gold futures slipping. Gold finally settled at $384.50 an ounce, down $6.50 on the session. Gold stocks followed suit with a 5.02% loss in the XAU index and a 4.9% loss in the GOX index. Metals in general were weaker and copper futures melted for a 5.77% loss that broke through support at $1.20 and closed at $1.166 per pound.
Wall Street was eagerly anticipating the May Producer Price Index (PPI) gauge on inflation. The PPI was originally scheduled to release on Friday but was moved to Thursday afternoon due to Reagan's funeral and the market's closure on Friday. Yet as of this afternoon the PPI has been delayed. If you visit the U.S. Department of Labor's website (Bureau of Labor Statistics) you'll see their notice that says the May PPI has been postponed "until further notice". This isn't new. The January, February and March PPI's were all delayed due to new challenges converting data under a new classification system. It is expected to be released sometime next week but not before Tuesday and they will announce it a day ahead before the data is released but don't be surprised if they push the announcement back again. As of today economists are expecting the PPI to rise 0.5% in May on top of April's 0.7% climb.
Crude oil prices remained in the spotlight as world leaders discuss rising energy costs and its affects on the global economy at the G8 summit going on in Georgia this week. Crude oil futures initially fell this morning to new six-week lows but rebounded to close up 26 cents at $37.54 a barrel. News out this afternoon from the Department of Energy showed a rise in oil reserves and analysts are pointing to this and other factors suggesting the peak is behind us for oil prices. News that the U.S. strategic oil reserve would be full again in July or August should cool speculation since demand would slow down a bit.
Speaking of slowing down the U.S. markets were not the only ones to cool off a bit today. The Japanese NIKKEI slipped 72 points to 11,449 while the Hang Seng inched down 4 points to 12,339. European stocks also traded lower. The English FTSE dropped 15 points to close under the 4500 level. The German DAX declined 21 points to breakdown down under the 4000 level. The French CAC slid almost 25 points to breakdown under the 3700 level. It looks like a "let's break support" party. Of course the NASDAQ was invited and showed up with a 33-point drop to close under the 2000 level again. The Dow Industrials dropped 64 points to close at 10,368 and the S&P 500 lost almost 11 points to close at 1131.
Overall market internals in the U.S. exchanges were negative. Wednesday's action was almost a bearish mirror to Monday's gains. Declining stocks outnumbered advancers 3-to-1 on the NYSE and the NASDAQ. Down volume overshadowed up volume by more than 3-to-1 on the NYSE and by more than 4-to-1 on the NASDAQ. Overall volume came in just above 3 billion shares on both exchanges.
Chart of the Dow Jones Industrials:
Chart of the NASDAQ Composite:
Chart of the S&P 500 Index:
It is easy to point fingers at the semiconductor sector for today's declines. The SOX did lead the way down and there were plenty of headlines to help it along. First and foremost was OmniVision Technologies (OVTI). This specialty chipmaker not only issued an earnings warning for the current quarter but also said it would delay some of its filings because management was mulling over potential restatements for 2004 and 2003. Shares gapped lower and fell more than 30% to $17.63. If that wasn't enough Goldman Sachs decided to jump in and downgrade two foundry stocks, Taiwan Semiconductor (TSM) and United Microelectronics (UMC). GS lowered its rating on the two from "out perform" to "in line". TSM is the largest semiconductor foundry on the planet so this undermined confidence in the whole group. TSM slipped 4.3% to $9.24 while UMC fell 4.6% to $4.48. Advanced Micro Devices (AMD) tried to issue some good news by announcing that Lenovo Group, a Chinese PC maker, had chosen AMD's Athlon 64 and Athlon XP chips to make their PCs with but traders weren't listening. Shares of AMD fell 4.14% and painted an ominous bearish engulfing candlestick.
There was plenty of action among the Dow-components as well. Boeing (BA) continued its winning ways and hit another new two- year high after Lehman Brothers upgraded the stock to "overweight". Meanwhile Coca-Cola (KO) proved to be a drag on the Dow with a 1.6% decline after announcing its No 2 executive, Steven Heyer, was leaving. Heyer is KO's president and COO but after being passed up for the CEO's job many believed he would leave for other opportunities. Last but not least were the telecoms SBC Communications (SBC) and Verizon (VZ). Both stocks traded higher today after the U.S. Justice Department announced that it would not seek to reverse an appeals court ruling that threw out the FCC's directive to force local telephone companies to lease their networks to competitors at low rates. Whew! That's a mouthful. In essence SBC and VZ will not have to share their landlines with the competition.
Retail stocks are expected to see some action tomorrow as investors speculate on more M&A activity in the group. After the bell this evening Target (TGT) announced it was selling its Marshall Field's stores and nine of its Mervyn's stores to May Department Stores (MAY). TGT had been under pressure to sell off some of its under performing department stores so it can focus on its discount chain and better compete with larger rival Wal-Mart (WMT). The deal with MAY is worth $3.2 billion. TGT also announced it would spend $3 billion to buy back stock over the next two to three years.
Looking ahead to tomorrow I am not expecting much. Let me rephrase that. I'm not expecting much from the bulls. Investors are still a little nervous about any potential terrorist event with the G8 Summit finishing tomorrow and the Reagan funeral on Friday. It's become normal for the markets to turn cautious ahead of any long weekend but if the weekend is quiet we can look for a relief rally on Monday. Tomorrow does bring a few small economic reports with the import/export data and the weekly initial jobless claims. Next week is options expiration so we could see some volatility as traders adjust positions ahead of Friday. Overall investor's seem to be focusing on the June 30th FOMC meeting and the Iraq handover. There doesn't seem to be a lot of impetus to buy stocks before these events. Fortunately, the latter could take on more of positive influence for stocks now that the U.N. Security Council just approved the latest resolution on Iraq's changeover.