The bulls took a breather on Wednesday as new home sales data failed to impress and a downgrade of Portugal's debt weighed on stocks. The declines, while not welcomed, were manageable with the Dow Jones Industrial Average shedding almost 53 points to close at 10,836.15. The S&P 500 lost less than 6.5 points to settle at 1167.72 while the Nasdaq dropped about 16.5 points to close at 2398.76. Declining issues outpaced advancers on both the Nasdaq and New York Stock Exchange by margins of roughly two-to-one.
News out of Europe continues to be a thorn in the side of equity bulls as Fitch Ratings downgraded Portugal's debt rating, saying the country may face problems in repaying its debts. This really should not have come as a surprise to many market observers as only the most optimistic of views believed that Greece's problems were isolated. Speculation has been widespread in the wake of Greece's fiscal issues that Portugal would be among the next proverbial shoes to drop.
Still, the Euro was battered on the news, dropping as much as 1.3% to its lowest level since May 2009. That helped the U.S. Dollar turn its best single-session percentage gain since December. The greenback was up against 15 of the 16 major currencies. Obviously, Euro weakness is good for the Dollar, but not the best of news for stocks. Unfortunately, a UBS analyst said today that Greece will in fact default at some point and Portugal's problems serve to further call the Euro's future into question.
As I mentioned several weeks ago with Greece, we are talking about the 28th largest economy in the world and the UBS analyst correctly noted that if the European Union cannot solve the Greek quagmire, how will it successfully deal with bigger problems that may arise from the likes of Italy and Spain? In an indication of how equity investors hate this kind of news, stocks suffered at the hands of the Portugal news. Portugal is merely the 38th largest economy in the world, smaller than the likes of Argentina, Finland, Iran, Thailand and Venezuela.
To be sure, the economic data coming out of the U.S. today was not all good news as highlighted by the decline in February new home sales. The Commerce Department said new home sales fell for a fourth consecutive to a record annual low. New home sales fell 2.2% in February to 308,000 units compared with 315,000 sales in January. Economists were expecting the February number to come in at 315,000. Analysts noted that bad weather can be blamed for some of the decline, but that storms and what not do not cover up weakness in the U.S. housing market. On the bright side, the median home price rose 6.1% in February from January and 5.2% year-over-year.
Home Sales Chart
There was some positive economic news in the form of durable goods orders, which rose 0.5% in February, good for the third straight month of increased orders. Excluding transportation-related fare, orders rose by a better-than-expected margin of 0.9% after a 0.6% decline in January, according to the Commerce Department. Orders for non-defense related items, excluding aircraft, rose 1.1% last month as factories boosted their durable goods inventories by 0.3%, the biggest gain since December, Bloomberg News reported.
This should be good news for industrial companies as it indicates the economy is getting back on the right track, but the news out of Europe tempered most of the enthusiasm investors had for stocks on Wednesday.
Durable Goods Chart
Somewhat surprising was the strength of financials on Wednesday, led by Bank of America (BAC), the largest U.S. bank. Bank of America was far and away the biggest gainer in the Dow in percentage terms, gaining 44 cents, or 2.57%, to close at $17.57. The Charlotte-based bank said it will forgive up to 30% of some customers' mortgage balances if those customers are at least two months past due and owe at least 20% more than the current value of their home.
The new initiative is part of an agreement Bank of America reached with various state attorneys general to settle charges related to high-risk loans made by Countrywide, which Bank of America acquired, according to the Associated Press. Bank of America said 45,000 customers with a total of $3 billion in principal are likely to qualify for the plan. The effort follows a similar move by Wells Fargo (WFC), modified 52,000 adjustable-rate mortgages through its acquisition of Wachovia.
Citigroup (C) did not say whether it has similar plans and JPMorgan Chase (JPM), another Dow member, did not comment at all. Wells Fargo was down on the day while Citi and JPMorgan were both up slightly. BofA's chart (below) is looking pretty strong and it is hard to deny Citi has had a nice run as of late while the durability of JPMorgan Chase and Wells Fargo has also been noteworthy. On the other hand, it would be encouraging to see, one or more members of this quartet do something meaningful regarding their dividends later this year.
Bank of America Chart
Speaking of dividends, coffee house giant Starbucks (SBUX) announced its first-ever quarterly dividend today at its analyst meeting. This is news that was widely expected and to its credit, Starbucks delivery of a 10-cent per share payout beats the six cents many analysts were expecting. A 40-cent annual dividend gives Starbucks a yield of about 1.6% based on Wednesday's closing price of $25.29.
The company also added 15 million shares to a repurchase plan that still has 6.3 million shares remaining, but the stock closed lower on the day and maybe the dividend was the reason why. For nearly its entire existence, Starbucks has been viewed as a growth company and the fact that the shares have doubled in the past year would do little to convince many investors otherwise, but dividends are often viewed as a tool used by more mature, even stodgy companies, to reward their shareholders in the absence of rapid capital appreciation. So it might be fair to assume some investors do not like the fact that Starbucks is evolving to a more of a value play than a growth stock.
Then again, there is something to be said for those mature value stocks. Today's example: General Mills (GIS). The owner of some of the most ubiquitous cereal brands as well as the Pillsbury, Progresso, Haagen-Dazs and Betty Crocker labels among others, said its fiscal third-quarter earnings soared to $332.5 million, or 96 cents a share, from $288.9 million, or 85 cents, a year earlier. Excluding items, General Mills earned 97 cents a share, beating the Street estimate of 94 cents.
Sales rose 3% to $3.63 billion, led by a 6% increase in the cereal line and a 15% increase in the snack business. Gross profit margin jumped to 38% from 36.1%. Minnesota-based General Mills did what the good companies do and what investors should look for and that is beat, beat and guide. The company said it expects to earn $4.57 to $4.59 a share in fiscal 2010, up from previous guidance of $4.52 to $4.57 a share. This is the second time since September the company has upped its guidance.
Do not forget that General Mills offers a fair yield at 2.7% and that in 2009, one of the worst years ever for dividends, the company raised its payout not once, but twice. Showing what a pain Portugal and Greece are, General Mills shares closed lower by $1.39 at $72.18.
General Mills Chart
Looking at the charts, the Dow's decline today is not too alarming. After all, the index is up about 5% this month and large-cap blue chip names have played a big role in the recent rally, so a one-day pit stop to take a breather is nothing to fret about. Support is in place at 10,700, though it is unlikely that we see that level again this month with just five trading days left. The next hurdle remains 11,000.
The S&P 500 certainly has enjoyed the aforementioned large-cap rally and I still think support is strong around 1150, though 1160 might we worth looking at as well. Again, it would take a large-scale negative surprise to get us back to 1150 before the end of the month. There are still a lot of shorts out there that need to do some covering and that could be the catalyst that gets the S&P 500 closer to resistance at 1200. Best Buy's (BBY) earnings report before the bell tomorrow is worth watching. Analysts are expecting the retail giant to post earnings of $1.79 a share.
S&P 500 Chart
It is difficult to surmise why the Nasdaq was down today beyond broader market weakness. Apple (AAPL) touched another 52-week high, Adobe (ADBE) was higher on a strong earnings report, both Baidu (BIDU) and Google (GOOG) enjoyed solid gains, but Research In Motion (RIMM) was down, helping the Nasdaq close below the all-important 2400 level. The index is just a few points away from support at 2395, but a catalyst in the form of Oracle's (ORCL) earnings report after the bell tomorrow is there to potentially help the Nasdaq close above 2400 by the end of the week.
The next two days are light regarding economic data points and save for the Best Buy and Oracle earnings updates, there are not any other marquee names scheduled to deliver quarterly reports, so it will be interesting to see if Wednesday's trade qualifies as a dip and if that dip is subsequently bought through the end of the week.