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MarketView
Events defining the day's trading activity on Wall Street
Lauren Rudd
Wednesday, April 30, 2008
Summary Stock prices ended the day lower on Wednesday
despite a brief rise that sent the Dow Jones industrial average back
into the 13,000 level after the Federal Reserve trimmed interest
rates. Nonetheless, the S&P 500 index ended its best month since
December 2003. The Fed's failure to deliver an unequivocal statement
that the worst was over for the economy caused investors to sell their
best performers in the recent rally, led by tech stocks and Research in
Motion. Stock prices were higher early in the trading session, after
quarterly results from General Motors and Procter & Gamble exceeded Wall
Street expectations and stronger-than-expected economic data eased
recession fears. But the three major indexes shed their gains after
the release of the Fed's statement, which left the outlook for further
cuts clouded. Short-term rate futures suggested a 1-in-4 chance of a
future cut, up from no chance before the end of the Fed meeting. Nonetheless, stock prices rebounded this month from a
miserable March, as the Fed flooded the financial system with cash in
the wake of Bear Stearns' collapse and amid signs that the frozen credit
markets are beginning to thaw. For the month, the Dow gained 4.5 percent, the NASDAQ
was up 5.9 percent and the S&P was up 4.8 percent. Research in Motion was the largest drag on the Nasdaq
100, falling $4.66, or 3.69 percent, to close at $121.63. The shares had
chalked up an 8.4 percent gain this month. Apple, which was up more than
21 percent in April, fell $1.10, or 0.63 percent, to close at $173.95
and was also a major hindrance to the NASDAQ. Citigroup weighed on the S&P after it said it sold
$4.5 billion of common stock. The offering, necessary to the bank's
capital position, also diluted the holdings of current shareholders.
Citigroup ended the day down $1.05, or 3.99 percent, to close at $25.27. General Motors was the top gainer on the Dow after
the automaker said overseas sales helped to alleviate weakness in its
domestic market. The company's first-quarter loss was smaller than
expected. GM ended the day up $2.00, or 9.43 percent, to close at
$23.20, its highest level in about eight weeks. Procter & Gamble also reported greater than expected
earnings, sending its share price up $1.15, or 1.75 percent, to close at
$67.05. Starbucks reported a drop in earnings after the
closing bell. The coffee chain last week reduced its earnings outlook
for the year and warned that quarterly earnings would miss Street
expectations, blaming the decline in economic activity, which it said
was the worst in the company's history. Starbucks closed down 3 cents,
or .09 percent, at $16.23. A Commerce Department report on gross domestic
product showed the economy growing at a faster-than-forecast 0.6 percent
annualized pace, but it was buildup in inventories that kept the economy
afloat in the first quarter. The report showed consumer spending at its
weakest level since 2001, compounded with a decline in business
investment. Meanwhile, business activity in the
As Expected Fed Cuts Fed Funds Rate
The Federal Reserve lowered interest rates by a
quarter percentage point on Wednesday, as expected, and hinted the move
could be the last in a series meant to buffer the economy from a credit
crunch and housing downturn. Yet, the Fed kept its options open and
nodded to ongoing financial market stress, tight credit and the
deepening housing contraction, thereby Wall Street in a quandary as to
whether or not rates could still move lower. The central bank's action takes the bellwether
federal funds rate target, which banks charge each other for overnight
loans, to 2 percent, its lowest point since December 2004. It was the
seventh cut in a campaign that has brought the key lending rate down by
3.25 percentage points since mid-September. The Fed also on Wednesday cut the discount rate it
charges on direct loans to banks by a matching quarter point. "The substantial easing of monetary policy to date,
combined with ongoing measures to foster market liquidity, should help
to promote moderate growth over time and to mitigate risks to economic
activity," the central bank said. Two voting members, Dallas Federal Reserve Bank
President Richard Fisher and Philadelphia Fed chief Charles Plosser,
dissented from the decision, preferring to hold rates steady. In addition to citing the "substantial" rate
reductions now in place, the Fed took note of rising prices for energy
and other commodities and dropped a phrase contained in its last
announcement that "downside risks to growth remain." It also shifted
away from a promise to "act in a timely manner" to a softer commitment
to "act as needed." Taken together, the Fed’s position now suggests it is
willing to take the time to allow for the effect of its actions work
their way through the economy, thereby taking into account the lag
factors. At the same time, with U.S. gasoline prices heading toward $4 a
gallon and strong global demand pushing up food prices, some Fed
officials have worried openly that a desire to bolster the economy could
divert the central bank's attention from inflation pressures. The Fed also specifically noted that energy and
commodity prices were rising and inflation expectations were up, all
reasons to avoid reducing rates again unless forced to do so. The Fed
said there was some evidence core inflation, which strips out volatile
food and energy costs, was easing and it still believed inflation would
moderate over time. However, it also said the uncertainty regarding the
inflation outlook remained high, noting the rise in energy and other
commodity prices. Even though the Fed dropped language about downside
risks to growth, it said economic activity was weak, with business
spending subdued and labor markets softening.
GDP Growth Surprises Many
A buildup in inventories kept the economy afloat in
the first quarter despite the weakest consumer spending since 2001 and
reduced business investment, the Commerce Department reported on
Wednesday. Gross domestic product grew at a 0.6 percent annual
rate in the first quarter, thereby matching the fourth quarter's advance
and topped forecasts for 0.2 percent growth. However, the latest figures
did not end the debate on whether the country was sliding into
recession. You could make the argument that the report suggested
the economy was on a bit firmer ground than had been thought. At the
same time, it is just as easy to extrapolate out that worse times are
ahead as businesses ratchet back production further in an effort to try
and sell off their now bloated inventories. Businesses whittled down
inventories in the fourth quarter but they were rebuilt in the first
quarter. Without the positive 0.8 percentage point contribution from
inventories, the economy would have contracted in the first quarter. The GDP report indicated that final sales to domestic
purchasers weakened in the first three months this year at the steepest
rate in 16 years, which raises odds that businesses will have to lower
output to sell those inventories off. The economy is also burdened by a
crisis-stricken housing sector that has dimmed consumer optimism and
fueled worry that spending will shrivel in coming months, raising risks
of a recession. GDP is the broadest measure of total economic
activity within Consumer spending, which fuels two-thirds of economic
activity through consumption of goods and services, grew at its weakest
rate since the second quarter of 2001, when the economy was last in
recession. The weakening in an already distressed housing sector was
even more striking. Spending on residential construction plunged at a
26.7 percent rate, the biggest quarterly drop since the end of 1981.
Higher Earnings at Kellogg Kellogg posted higher-than expected profits on
Wednesday as price increases helped offset soaring commodity costs.
However, the company also stood by its full-year forecast, rather than
raising it, and its stock dipped. Kellogg said it now expects commodity,
energy, fuel and benefits costs to rise by an amount equal to about 80
cents per share for the year, versus its prior forecast of 65 cents. Kellogg said first-quarter profit was $315 million,
or 81 cents a share, compared with $321 million, or 80 cents a share, a
year earlier. The company had an average of 12 million fewer shares
outstanding during the 2008 quarter. Like most food companies, Kellogg has been hit by
soaring costs for wheat and other ingredients and energy. The company
has raised prices and looked for ways to cut costs to try to offset
rising commodity costs and more than 80 percent of its commodity costs
are hedged this year. Sales rose 10 percent to $3.3 billion, helped by
price increases and the weaker dollar, which boosts the dollar value of
sales overseas. Internal sales, which exclude the effects of currency
fluctuations and acquisitions, rose 5 percent. North American internal
sales rose 5 percent, with a 4 percent increase in retail cereal sales.
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MarketView for April 30
MarketView for Wednesday April 30
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