In what was the worst-single day performance for stocks since February, slumping consumer credit and a familiar concern in the form of Greece weighed on U.S. indexes. Another one of those 2 PM sell-offs had the Dow Jones Industrial Average off by triple-digits, but the Dow finished the day down about 72.5 points to close at 10,897.52. The S&P 500 shed seven points to settle at 1182.45 and the Nasdaq lost less than six points to close at 2431.16. Much as the gains on the up days are nothing extraordinary, Wednesday's losses were tolerable and volume was, as is the case on the up days, fairly weak.
After Wednesday's trade, investors are probably quite ready for issues related to Greece to finally subside and quit being a thorn in the side of equity market bulls. To be fair, it feels like it has been a couple of weeks since Greece was a problem, but that theme ended on Wednesday on news that Greece's financing costs have markedly increased in the near-term. In turn, that problem raises the specter of a sovereign debt default, which has been the heart of the matter regarding Greece all along.
Greece has the dubious distinction of holding the largest budget deficit in the Eurozone and those concerns were exacerbated today when the yield on Greek 10-year bonds increased by 405 basis points over German bunds, the highest level since the Euro debuted in 1999, according to Bloomberg News. Yields on Greek bonds topped 7.2% on Wednesday, not good news considering that when bond yields rise, bond prices fall.
Greece, the 28th largest economy in the world, now faces higher borrowing costs than Iceland, which you may remember had some fiscal issues of its own last year. The bottom line is if you want to insure the equivalent of $10 million in five-year Greek debt, it will cost you $415,000. Credit default swaps on Iceland now look more bullish than their Greek counterparts. To that I say ''Wow.''
Greek Bond Spreads
Comments from the Federal Reserve also played a leading role in equities' decline today. The Fed said consumer borrowing fell by $11.5 billion in February, indicating that consumers are reluctant to incur more debt. That is not good news for credit card companies, so it was not surprising to see American Express (AXP) fall 75 cents, or 1.74%, to $42.37 making it the biggest loser in the Dow. Then again, it should be noted is rare to see stocks move up in a straight line and American Express was the Dow's best performer in 2009. And hey, the stock was up 6% year-to-date before today's drop, again outperforming the Dow.
American Express Chart
Federal Reserve Chairman Ben Bernanke gave a speech in Dallas today in which he said the U.S. economy is ''far from out of the woods.'' Investors also reacted to what Bernanke did not say. He did not mention plans to keep interest rates low for an ''extended period'' and stocks reacted to that omission in negative fashion.
Another marquee name that was weak on Wednesday was agriculture seed maker Mondsanto (MON). The company released disappointing fiscal second-quarter results that showed a decline in profits of 19%. Monsanto said it earned $887 million, or $1.60 a share, compared with $1.09 billion, or $1.97 a share, a year earlier. Revenue fell to $3.89 billion from $4.04 billion. Analysts were expecting a profit of $1.73 a share on sales of $1.9 billion.
Keep in mind that it was just three years ago that Monsanto said it would double its profits by 2012 by making bigger bets on biotech seeds. Now the company is saying that market is proving harder to navigate than previously expected and is forecasting profit growth in the mid-teens through 2012. The problem is genetically engineered seeds costs twice as much as their traditional counterparts and farmers, already faced with rising fertilizer prices, are not willing to pay for pricier seeds. Another way of saying this is that farmers need fertilizer, but they do not need biotech seeds when a legitimate, cheaper alternative exists.
Monsanto's chemicals business saw its sales fall 35% in the second quarter and analysts are saying this division will continue to be a drag on the company's profits. Monsanto gave a tepid affirmation of 2010 EPS guidance, saying it expects its full-year earnings to be at the low end of a $3.10 to $3.30 a share range.
Speaking of not moving up in a straight line, oil prices took a breather today, ending a six-day winning streak that had carried crude futures to 17-month highs. NYMEX-traded crude for May delivery fell $1.20 a barrel to $85.64 after the Energy Information Administration said inventories rose by 2 million barrels last week. That is double the amount the American Petroleum Institute said inventories rose by yesterday.
The news hampered oil equities on Wednesday as 37 of the 40 energy stocks in the S&P 500 declined on the day, according to Bloomberg. That compares with 39 of those names making gains on Monday. One of the biggest losers among that group was Occidental Petroleum (OXY), which slid $2.19, or 2.47%, to close at $86.30 on volume that was roughly 50% higher than the daily average. Occidental is one of the ''oilier'' names out there as more than three-quarters of its production comes from crude, so the stock price is tightly correlated to oil prices. The shares were up almost 9% year-to-date prior to today's decline and it appears that Wednesday's drop may lured some buyers back into Occidental as the stock is back above $88 in after-hours trading.
Occidental Petroleum Chart
There was bigger news to emerge in the after-hours session today as some fodder for the ''two wrongs do not make a right'' crowd emerged. The New York Times is reporting that United Airlines (UAUA) and US Airways (LCC) are in merger discussions. Citing people close to the talks, the Times said an announcement is not imminent and should not be expected for several weeks. Of course, the talks could fall apart and neither airline commented on the rumors.
The news has US Airways trading up by over 25% in the after-hours session and United is up by more than 8% as of this writing. Based on market cap, United is nearly triple the size of US Airways, so it might be logical to assume that United will be the acquirer here. It also might be reasonable to say that old habits die hard and the airline industry really has not learned from past mistakes. These companies are constantly looking to acquire and partner with each other, but along the way they create little in the way of shareholder value. US Airways in its current form is the combination of US Air and AmericaWest and it is difficult to claim that was a rewarding move for shareholders.
United and US Airways went down this road in 2000 and the deal fell apart due to antitrust concerns and labor opposition. If the two companies are successful this time around, the combined company would surpass Delta (DAL) as the largest U.S. carrier, but size has proven to be less than rewarding for long-term investors in the airline sector. At the end of the day, a bigger airline is just that: Bigger. Customer service is not likely to improve, nor are returns to shareholders. This news will probably give a very short-term boost to airline stocks, which have performed surprisingly well recently, but an airline, no matter its size, still has to contend with high oil prices, a very real problem in the current market. (Go to OilSlick.com for more on the oil issue as it pertains to airlines.)
Airline ETF Chart
Even with today's decline, the Dow is still locked in the 10,825-10,950 range. The 11,000 mark is merely round-number resistance, but a more legitimate hurdle can be found over 11,100, a level last seen in fall 2008. It can certainly argued that the Dow is looking overbought at this point and I would not contend with that point, but it will be interesting to see if today's drop represents enough of a dip to induce some fresh buying for the rest of this week.
Likewise, one could argue that the S&P 500 is overbought, but Wednesday's down move did not even challenge support at 1170. The intraday low was 1177.25 and resistance remains at 1200. As Jim noted yesterday, 1200 and above have been common price targets for more than a few analysts. Assume that earnings season is strong and that means the S&P 500 could be at 1200 before the end of April. That is almost engraved invitation to ''sell in May and go away'' before stocks regroup for another move higher later this year.
S&P 500 Chart
The Nasdaq, also known as the index where Apple (AAPL) makes its home, took a small loss today, but is still a fair bit removed from support at 2420 and even further removed from what is likely a firmer floor at 2400. Apple continues to move in parabolic fashion and if you look at analyst price targets, many of which range from $265-$300, the low end of that range could be reached in a few months if Apple keeps up its current pace. Still, the Nasdaq needs more help and that means Intel (INTC) had better deliver another blow-out quarter next Tuesday.
I am not going to become a bear because of one down day, but I am anxious to see what earnings season holds. The market realizes the comparisons to the first quarter of 2009 are going to be easy to beat and there will be little to no tolerance for companies that disappoint or beat profit targets through cost-cutting. Full-year guidance had better be robust as well or we could be in for a cruel summer for stocks.