Stock futures, following yesterday’s negative session, signaled a heavy opening for the stock market on Tuesday. Shares of Fannie Mae (FNM) and Freddie Mac (FRE) were once again under selling pressure as fears of instability in the financial space continued to dominate the overall market sentiment. Besides financials, the retailing, industrial and consumer discretionary sectors also posted large losses.
After being off over 200 points in morning trade, the DOW and other major averages began regaining some ground as Fed Chairman Ben Bernanke, finished his prepared remarks before the Senate Banking Committee. Mr Bernanke, among other things, noted that the economy has continued to expand, but at a subdued pace. He said there are significant downside risks to economic growth, with inflation likely to move temporarily higher in the near term. Mr Bernanke also added – that he expected growth to pickup as the housing market bottoms and for inflation to tame as global growth slows.
Session – dynamics changed dramatically at midday as crude plummeted by more than $7 p/bl to $135.92 in trading. Even though there did not appear to be a specific cause in the abrupt decline of crude prices, a cut in the demand forecast by OPEC was perhaps a key factor behind the dip in crude. A plunge in oil prices prompted all the major averages to improve significantly, with the financial sector staging an impressive turnaround as bank stocks recovered some of yesterday’s large declines.
However, today’s session was extremely busy and volatile as investors had to factor in Fed Chairman Bernanke’s remarks and several economic and earnings reports.
The stock market fell more than 2% shortly after the opening bell, rallied to half a percentage gain in an afternoon surge, and then settled with a loss. The Dow Jones Industrial closed the session with more than 90 points negative as investors continue to find themselves into an environment of oversold market conditions, fear and extreme pessimism. However, these type of conditions more often than not signal market bottoms.
In other news
– General Motors (GM) laid out today a broad restructuring plan to boost cash by $15 billion through 2009 and return its operations to profitability. The co’s restructuring plan includes white collar job cuts in U.S. and Canada in 2008 through buyouts, early retirement offers and attritions. GM will suspend dividends on common stock, effective immediately.
– Johnson & Johnson (JNJ) reported earnings of $1.18 per share. The company beat by $0.06 in Q2’08 and slightly raised its ’08 EPS guidance.
– On the economic front. The Labor Department said Tuesday June PPI (Producer Price Index), rose 1.8% month/month, versus expected 1.4% increase. Most of the increase in the PPI was due to energy and food. Core PPI – which excludes food and energy – increased 0.2% month/month, which is lower than the expected 0.3% advance.
Inflation is an increasing problem for the U.S. economy. Producer prices are up more than 9% versus last year. This is the largest one-year increase since 1981. Needless to say the inflation problem must be addressed quickly.
– The Commerce Department reported Tuesday that retail sales rose by 0.1 percent compared to the consensus estimate of a 0.4% gain analysts expected in June. Total sales were dampened especially by plummeting sales at car dealerships. Stripping autos, retail sales rose 0.8%.