Markets Decline on Rate Hike

123jump.com Staff
20 Sep, 2005
New York City

Fed's near unanimous decision to raise rates despite Hurricane Katrina related concerns only suggests to some that Fed may not stop in the next two meetings on Nov 1st and Dec 13th. Many believe that Fed will have to raise rates to 5% before it has caught up with market forecast. Home builders and retailers led the decline in averages. Circuit City, FactSet Data and Goldman Sachs delivered better-than-expected earnings.

U.S. MARKET AVERAGES

Markets early rise in the day turned into a quick sell-off after the Fed’s announcement of interest rate hike. Market wasted little time and drove retailers, home builders, industrials, and select tech stocks. The early narrow rally in tech stocks led by semiconductors and quickly melted in the late afternoon trading.

Hurricane Rita was upgraded to category-two storm as more than hundred miles per hour winds pounded Florida Keys and South Florida region. Crude oil and natural gas fell in the hope that the Gulf of Mexico energy fields will be spared from the hurricane related destruction. As of yesterday, 56% of Gulf of Mexico energy production is on halt till the hurricane passes.

For the fourth day in a row housing stocks declined, and today’s slide was the steepest. Lennar stock fell 7.5%, Toll Brothers fell 6.5%, Beazer Homes fell 5%. In general housing sector declined 4%.

Consumer discretionary, retailers, and leisure stocks declined in the afternoon sell-off. Casino stocks such as Harrah’s, Wynn, and Las Vegas Sands fell by more than 2%. American Eagle Outfitters dropped 12% as it trimmed its quarterly profit range by two pennies.


MOVERS AND SHAKERS

The retailer Wal-Mart ((WMT)) fell 1.7% at close after the company announced it was stepping into Central American market. The company bought a part of the Central American top retailer from Dutch retailer Royal Ahold ((AHO)).

Goldman Sachs ((GS)) added 0.5% after jumping as high as 2.2% after the company posted third-quarter revenue of $7.3 billion, up from $4.5 billion a year earlier. The earnings jumped 36% to $3.25 per share on 81% rise in revenue.

Circuit City Stores Inc. ((CC)) jumped 11.2% but settled at 5% higher after the company reported a second-quarter profit of $1.3 million. A year ago it has a loss of $11.9 million and analysts’ forecasts were about a loss again.

Entergy Corp. ((ETR)) said it expects between $750 million and $1.1 billion in reparation expenses from Hurricane Katrina. The company also warned Entergy New Orleans may bankrupt. Electric power distributor is likely to be active after the market opening.

Coca-Cola Enterprises ((CCE)), Pepsi Bottling Group ((PBG)) and PepsiAmericas ((PAS)) were downgraded at Lehman Brothers. The broker pointed a recent rise in energy prices as a reason for this move. Coca-Cola Enterprises dropped 0.7% in the early trading.

ECONOMIC NEWS

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3-3/4 percent. This was the eleventh rate hike in sixteen months from one percentage point to 3.75% rate. Fed believes that Hurricane Katrina effect on the national economy not likely to ‘pose a persistent threat’.

Tuesday morning, the Department of Commerce released its report on housing starts in the month of August, showing a notable decline compared to the previous month. Building permits, which offer an indication of future starts, also showed a notable decline.

The report showed that housing starts fell 1.3 percent to a seasonally adjust annual rate of 2.009 million units in August from a downwardly revised 2.035 million unit rate in July.

Economists had expected housing starts to fall to a 2.040 million unit rate from the 2.042 million unit rate originally reported for July.

Notable declines in the Northeast, the Midwest, and the South contributed to the decrease in housing starts. At the same time, housing starts in the West rose 13.3 percent in August.

As mentioned above, the report also showed that building permits fell 2.2 percent to a seasonally adjusted annual rate of 2.124 million units in August from a downwardly revised
2.171 million unit rate in July.

The decrease in building permits exceeded the expectations of economists, who expected a decrease to a 2.129 million unit rate from the 2.167 million unit rate originally reported for July.


INTERNATIONAL MARKET NEWS

Asian-Pacific benchmarks closed Tuesday session with solid gains. The Nikkei climbed 1.5%, reaching a four-year intraday high on the back of financial, automotive and commodity-related stocks. South Korea’s Kospi rose to an all-time peak of 1.4% to 1190 after North Korea agreed to abandon its nuclear weapons program. Among the leading gainers were Samsung Electronics, Korea Electronic Power and steelmaker Posco. Across the region, Hong Kong’s Hang Seng gained 1.7% and Thailand’s SET index jumped 2%. The dollar bought 111.55 yen.

European markets closed generally higher, supported by automakers ahead of U.S. Fed Reserve’s decision on interest rate The German DAX 30 rebounded from Monday’s sharp declines after the general election and rose 0.8% on the back of automakers like Volkswagen and BMW. The French GAC 40 gained 0.6%, while London’s FTSE 100 shed 0.2%.

ENERGY, METALS, CURRENCIES

Oil prices declined below $66 a barrel on profit-taking from yesterday’s spike in oil and on agreement of OPEC to release daily 2 million barrels of spare crude in order to ensure oil supplies, threatened by approaching storm Rita. At close in New York, crude oil October delivery fell $1.30 to $66.20 a barrel on the Nymex exchange. Heating oil lost two cents to $2.04 a gallon, while gasoline fell 5.5 cents to $1.9276. London Brent dropped $1.99 to trade at $63.62.

In New York trading gold closed lower by 50 cents to $466.80 per ounce. Gold advanced in European trading. In London the precious metal traded at the recommended price of $470.00 per troy ounce, up from $467.50. In Hong Kong gold rose $12.40 to close at $470.25. Silver was trading at $7.34 per ounce, down from $7.37.

The U.S. dollar fell against the euro ahead of Fed Reserve decision on interest rates. The euro was quoted at $1.2179, up from $1.2141. The dollar changed hands at 111.57 yen, up from 111.53.

EARNINGS NEWS

Goldman Sachs, ((GS)) investment banking company, posted 3Q profit OF $3.25 a share, driven by the best performance in four years in its investment banking business. The company’s total revenue increased 81% to $12.3 billion from the year-ago period of $8.9 billion. Analysts’ forecasts for the fiscal 3Q earnings were $2.38 a share. The company announced that investment banking revenue rose 14% compared to last year’s levels, to just over $1 billion from $890 million a year ago.

Circuit City Stores Inc., ((CC)) retailer of consumer electronics, reported 2Q net earnings from continuing operations amounted to 1 cent per share, compared with a net loss from continuing operations of 6 cents per share for the same period of fiscal 2005 results. Total sales rose 7.8 % to $2.56 billion from $2.38 billion in the same period a year ago, with consolidated comparable store sales increasing 5.3 % from the prior year.

Swift Transportation Co. ((SWFT)) announced it's lowering its profit outlook for 3Q to a range of 30 cents to 33 cents a share, excluding non-cash expenses for accelerating stock options and a charge to be taken by the trucking firm for the asset impairment. The company had forecasted earnings of 33 cents to 46 cents a share, prior to this announcement. The analyst estimate stands at 41 cents. Including the special items, Swift fixed quarterly earnings at 11 cents to 14 cents a share. The company said increased fuel costs will subtract 4 cents to 6 cents a share from earnings.

FactSet Research, ((FDS)) provider of financial and economic information, posted fiscal 4Q earnings of 37 cents a share, up vs. 30 cents a share in the year-ago period on revenue growth, beating analysts’ forecasts of 36 cents a share. Subscriptions increased 23% to $336.5 million. For its fiscal 1Q, the company expects revenue of $88 million to $90 million, which is above analyst projections of $83 million.