MarketView for May 22

Summary 

The major equity indexes were mostly flat on Tuesday after volatility late in the session, with weakness in materials and energy shares offsetting strength in financials. Shares traded higher for much of the session on the back of an unexpectedly strong existing home sales numbers, which lifted banks. But those gains dissipated in the last half hour of trading, with Wall Street briefly turning solidly negative before staging a rebound.

The S&P 500 has bounced around for the last two days after a six-day slide that found support at the 1,290 level, which coincides with the benchmark index's 10-month moving average.

Facebook shares extended their slide and pressured the tech sector, giving investors few reasons to buy following a steep rally in Monday's session as they remained nervous about Europe, especially ahead of an informal leaders' summit on Wednesday.

Facebook lost 8.9 percent to close at $31, hurting tech shares as doubts over the company's valuation increased after Reuters reported that Morgan Stanley, the lead underwriter, cut revenue forecasts for the social networking site shortly before the IPO. At Tuesday's session low, the stock was down nearly 20 percent from its IPO price of $38 just two trading days after its market debut. Shortly after the opening bell on Tuesday, Facebook hit a session low of $30.98.

Sales of existing homes rose sharply in April and a falloff in foreclosures pushed prices higher - welcome signs after a string of discouraging economic indicators. The home sales data lifted banking and housing stocks. For example, Bank of America ended the day up 2.2 percent to close at $6.98.

After the closing bell, shares of Dell fell 6.5 percent in extended trading following the computer maker's release of its first-quarter results. However, PetSmart gained 6.6 percent after the bell on results. During the regular session, Dell rose 0.7 percent to close at $15.08, while PetSmart shed 0.2 percent to end at $55.62.

Best Buy reported better-than-expected quarterly results, bolstered by a lower tax rate and an extra week as the world's largest consumer electronics chain closes stores and searches for a new chief executive. Best Buy's stock rose 1.6 percent to $18.46.

Underscoring the debt problems that governments around the world are facing, Fitch cut Japan's sovereign credit rating on Tuesday as a political stalemate dims the chance that the country can curb its snowballing debt. Fitch lowered Japan's long-term foreign currency rating to A plus from AA. It cut the local currency rating to A plus from AA minus. Both were cut with a negative outlook.

The Paris-based Organization for Economic Co-operation and Development also forecast that global growth would ease to 3.4 percent this year from 3.6 percent in 2011.

Nasdaq OMX Group faces short-term costs from its botched handling of Facebook shares on their first day of trading on Friday, but longer-term repercussions could be more expensive as it struggles to restore its image. Nasdaq OMX shares fell 2 percent to close at $22.32.

About 7.25 billion shares changed hands on the three major equity exchanges, a number that was below last year's daily average of 7.84 billion shares.

Existing Home Sales Rise

The pace of sales for existing homes in April rose to its fastest in nearly two years and a falloff in foreclosures helped cause an unexpected jump in prices, hopeful signs for the country's economic recovery.

Existing home sales increased 3.4 percent to an annual rate of 4.62 million units last month, the National Association of Realtors said on Tuesday.

Housing has been one of the economy's weakest links as it recovers from the 2007-09 recession, but many economists think the sector will actually add to economic growth in 2012 for the first time since 2005.

The report on April existing home sales supports that view and helps to dampen fears the recovery was stagnating after a report earlier this month showed tepid job growth in April.

The annual sales pace was the fastest since May 2010. That was in line with expectations and pushed U.S. stock prices higher.

U.S. Treasuries prices fell as the Street awaited news on how Europe will tackle its debt crisis, which continues to loom over the U.S. economy.

Facebook IPO Being Reviewed by Regulators

Two key financial regulators said the issues around the initial public offering of Facebook should be reviewed, putting fresh pressure on the company, its embattled lead underwriter and the Nasdaq.

After Friday's nearly flat close and Monday's 11 percent plunge, Facebook shares closed 8.9 percent lower at $31 on volume of 101 million shares. At that price the company has shed more than $19 billion in market capitalization from its $38-per-share offering price last week.

Investors were still shaking their heads over the botched opening trading of Facebook when Reuters reported late Monday that the consumer Internet analyst at lead underwriter Morgan Stanley cut his revenue forecasts for Facebook in the days before the offering, information that may not have reached many investors before the stock was listed.

JPMorgan Chase and Goldman Sachs, which were also underwriters on the deal, each revised their estimates during Facebook's IPO road show as well. Furthermore, Morgan Stanley selectively disclosed the change in Facebook estimates, which drew the attention of the main regulator of U.S. brokerages.

"That's a matter of regulatory concern to us and I'm sure to the SEC," said Richard Ketchum, the Financial Industry Regulatory Authority's chairman and chief executive. "And without saying whether it's us or the SEC, we will collectively be focusing on it.

Securities and Exchange Commission Chairman Mary Schapiro said investors should be confident in investing, but she conceded there were questions to answer as well.

"I think there is a lot of reason to have confidence in our markets and in the integrity of how they operate, but there are issues that we need to look at specifically with respect to Facebook," she told reporters as she exited a Senate Banking Committee hearing.

With Facebook shares all but impossible to sell short, investors have sought out almost any related vehicle to bet against the social network. Brokers who over-ordered shares in the expectation that supply would be limited continued to complain they received too much stock to handle and were left in the dark about forecast changes.

As bad as the declines have been, though, a view persists that the stock remains overvalued. The company's price-to-earnings ratio remains lofty, even after the selloff. The $31 price implies a forward P/E of 60, compared with Google's 13.3 forward price-to-earnings ratio.

The one bright spot for Facebook was news late Tuesday that it had agreed to settle a proposed class-action lawsuit over its "Sponsored Stories" feature.

Besides the pressure on Facebook and on Morgan Stanley, there is also an intense focus on Nasdaq, which has shouldered much of the blame for the trading failures.

The exchange has set aside money to compensate customers, but some on Wall Street are warning its ability to snag future big IPOs is at risk. Meanwhile, a suit filed late Tuesday in Manhattan federal court seeks class-action status for anyone who lost money due to a mishandled order.

"It's dreadful for the markets," former SEC Chairman Arthur Levitt said of the IPO and its handling by banks and Nasdaq. "It's an event with long-lasting negative implications for an industry that can ill afford this kind of blemish, and the last chapter hasn't been written. Nobody looks good here."