With few significant earnings to report and the widening of the U.S. trade deficit being the only real economic news, there was little to pressure stocks in either direction Tuesday. But bargain hunters pounced on stocks that they thought were undervalued following Monday’s sell-off only to be smacked with a broader front of selling that by the end of the first hour of trading saw the Dow Industrials (DJI) down about 25 points.
Stocks sagged for most of the day with the major story being General Motors’ (GM) latest bout with bankruptcy. GM closed at $1.15, the lowest level in years, as GM execs dumped their shares.
The financial sector again took the brunt of the selling with many large banks announcing plans to raise capital through common stock offerings. Bank of New York Mellon (BK) sold $1.2 billion of stock in a secondary offering and the stock fell by 3.79%. And other non-bank companies announced offerings: Ford (F) through common stock, and Microsoft (MSFT) will issue $3.75 billion of senior unsecured notes.
Many defensive stocks rose as cyclicals fell: Consumer staples were up 1.3%, health care climbed 1.4%, telecom was up 1.1%, and utilities closed 0.6% higher. Precious metals gained 1.63% and energy was up with natural gas again higher. NG futures are up almost 28% since May 1.
At the close, the Dow Jones Industrial Average (DJI) was up 50 points at 8,469, the S&P 500 (SPX) fell a point to 908, and the Nasdaq (NASD) lost 15 points to close at 1,716.
The New York Stock Exchange traded 1.6 billion shares with decliners ahead of advancers by 4-to-3, while the Nasdaq traded 799 million shares with decliners ahead by almost 2-to-1.
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What the Markets Are Saying
On Monday, NYSE Euronext (NYX) reported that short interest in NYSE-traded stocks had fallen to 15.17 billion shares as of April 30. This compares with 15.64 billion shares just two weeks before. And on the Nasdaq (NASD), similar findings were reported by the OMX Group (NDAQ).
This confirms my warning of the impact of the various leaks to the press from both the government and banks that pressed short-sellers into covering (buying) and thus artificially driving the financial stocks higher. As properly pointed out by Nick Godt of MarketWatch, the drop in short interest puts more pressure on the stocks as potential buyers (short holders) have vanished from the market.
With regard to the seven-week rally that began in March, Barry Ritholtz, CEO of Fusion IQ, said: “A good percentage of this move (since March) was short covering. But now, what replaces short covering as the motivator to continue this rally?”
At a time when buying in short positions could serve to stabilize the market, the banks and others are flooding the market with new stock that dilutes the holdings of the present owners with offerings below current market prices. There has been a surge of secondary offerings at prices that average 11% below market price.
Conclusion: Eventually the new capital being raised should benefit the banks. But in the near term, with little incentive for the public to enter the auction process of the exchanges to buy and with billions of dollars of new stock diluting shareholders’ interests, the direction of the financial stocks must be down.
Today’s Trading Landscape
Earnings to be reported include: Acorn Int’l, Acxiom, Aegean Marine Petroleum Network, Allianz SE, American Defense Systems, American Science and Engineering, American Shared Hospital Services, Antares Pharma, Aurizon Mines Ltd, Bitstream, CA, Clearwire Corp, CommVault, Companhia Energetica de Minas Gerais, Companhia Paranaense de Energia, CPFL Energia and CPI Int’l.
Dr. Pepper Snapple Group, E. ON AG, Gammon Gold, Great Basin Gold, Helen of Troy Ltd, Hexion Specialty Chemicals, ING Groep NV, International Royalty Corp, Jack in the Box, Kongzhong Corp, Kubota Corp, Liz Claiborne, Macy’s, Maidenform Brands, New Gold, Nippon Telegraph and Telephone Corp, NIS Group, Novacea, Opnet Technologies and Orckit Communications.
Pioneer Behavioral Health, Rubios Restaurants, Sorl Auto Parts, Spartan Stores, Stanley, Supreme Industries, Telefonica S.A., Tidewater, Top Image, Tucows, Turkcell Iletsim Hizmetlieri A.S., Ultrapar Participacoes S/A, Universal Power Group, VanceInfo Technologies, Vimpel Communications, Webzen, White Electronic Designs, and Whole Foods Market.
Several economic reports are due today including April Import Prices (the consensus expects 0.7%), April Retail Sales (the consensus expects 0%), April Retail Sales excluding autos (the consensus expects 0.2%), and March Business Inventories (the consensus expects a 1.2% drop).
Late news: Intel (INTC) has been fined a record $1.4 billion by the European Union for breaking antitrust laws.
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