Stocks Turn Mixed After Ambac News
Stocks turned mixed Wednesday, with financials leading decliners, after Ambac unveiled a recovery plan that would raise capital through a stock offering.
The Dow Jones Industrial Average, Nasdaq and S&P 500 Index all moved firmly into negative territory immediately after the announcement before turning mixed.
A better-than-expected reading on the services sector, an encouraging outlook from Cisco's CEO and an upgrade on Fannie Mae had started the market off on an upswing for the day.
But the gains began to evaporate around noon, when shares of Ambac were halted pending an announcement.
Ambac announced plans to raise up to $1.5 billionin capital in an attempt to keep its crucial triple-A debt rating. The effort will include a public offering of common stock to raise up to $1 billion and a private offering of equity units to raise up to $500 million, the bond insurer said.
Investors had hoped for a larger contribution from global banks to help Ambac, whose plan will dilute its outstanding shares.
Ratings agencies Fitch and Standard & Poor's said, after the announcement, that their ratings on Ambac's bond-insurance arm remain on review for a downgrade.
Ambac stock was halted around noon ET, when it was up about 6 percent; when it resumed trading about an hour and a half later, shares fell sharply. Shares of rival MBIA also declined.
"We got some news that Ambac is going to do something to help keep themselves afloat, which of course, everybody takes as positive," Robert Heller, managing director of Chapdelaine Brokerage, told CNBC. The market was enthused about Ambac reissuing some stock, but Heller points out that shares are down around $9 from $90 last year, and the company will "have to sell an awful lot of shares this year to make up for same amount as last year ... I think it's not going to be enough."
The Dow's three biggest decliners were financials: Bank of America , J.P. Morgan and AIG .
The S&P 500 financial index fell about 1.3 percent, making it the biggest decliner among 10 key S&P sector indexes, as investors continue to be worried about how much more the global credit crisis will hurt financial companies.
Recent speculation about more write-downs at Citigroup only piled on to the concern.
Citigroup CEO Vikram Pandit sent a memo to employees Wednesday, responding to a Dubai investor's comment Tuesday that the banking giant still needed more capital from the outside.
"While we face a challenging economic environment in many segments of our operation, fundamentally we remain strong," Pandit wrote. "Citi is financially sound -- we are well capitalized and extremely focused on the strength of our balance sheet."
Elsewhere in the financial sector, Morgan Stanley upgraded its rating on Fannie Mae, the largest provider of funding for U.S. home loans, to "equal weight" from underweight," saying it expects results for both Fannie Mae and Freddie Mac to be "significantly stronger" in 2009. Still, the brokerage favors No. 2. Freddie because Fannie posts bigger derivatives losses than Freddie when interest rates decline and Freddie has been faster than Fannie in cutting back on purchases of delinquent loans.
Looking for Financial Plays
The beaten-down financial sector has been tossed around as a good place to find some bargains. The latest talk is that some regional banks, which had nothing to do with the current mortgage crisis but were dragged down by association, are good buys.
"We like the regional banks," David Dietze, chief investment strategist for Point View Financial Services, told CNBC. He recommends buying a package of regional banks through an exchange-traded fund such as KBW Regional Banking. He notes the yield on KRE has jumped from 5 percent in October to 7 percent recently. "The rubber band is stretching," Dietze said. "I'm not sure when, but eventually, that's going to be a profitable long-term investment."
While everyone else is talking about small banks, Christopher Zook, CEO of CAZ Investments, said he likes Bank of
America . The big bank has "massive earnings power" Zook said, and, thanks to its purchase of Countrywide, "it's a company that will be there to pick up the pieces that have been left over in the mortgage business."
In economic news Wednesday, all Federal Reserve districts reported decelerating economic growth in early 2008, even as most reported increased prices, according to the Fed's beige book, so named for the color of its cover. Businesses reported mixed success in raising prices to offset increased prices. Services-related industries slowed in nearly all districts, while manufacturing was sluggish in about half of the 12 Fed districts.
The ISM reported its nonmanufacturing index, which measures the performance of the services sector, rose to 49.3 for February from 44.6 in January; anything below 50 points to contraction in the sector. Factory orders fell 2.5 percent in January, the first decline since August, the Commerce Department reported. Private employers slashed 23,000 jobs from their payrolls in February, according to ADP. U.S. nonfarm productivity grew at a 1.9 percent annualized rate in the fourth quarter, up from the prior estimate of a 1.8 percent pace.
Energy stocks advanced as oil jumped above $104 a barrelfollowing a report that the U.S. crude supply declined.
The S&P 500 energy index gained 1 percent. BP, ConocoPhillips and Dow component Chevron were all up more than 1 percent.
U.S. crude stockpiles dropped by 3.1 million barrels last week, a stark contrast to the 2.4-million increase analysts had expected, the Energy Information Administration reported. Earlier, an OPEC delegate said the organization decided to leave output unchanged as expected.
Intel and Pfizer were in focus as both have analyst meetings today.
Pfizer , which is grappling with generic competition for many of its products, is turning to Asia and emerging markets to drive growth, the company said in a press release ahead of its meeting with analysts. The world's largest drug maker also plans to set up a new unit focusing on cancer drugs.
Intel rattled techs on Tuesday, lowering its gross margin forecast for the current quarter, citing falling prices of flash-memory chips used in portable electronic devices such as digital cameras and MP3 players. Several analysts cut their price targets on the stock.
Techs recovered by the end of the day after Cisco CEO John Chambers said there will be "bumps" for the networking-gear maker but they'll be short-lived. His outlook hasn't changed since the company's last conference call in early November.
Yahoo advanced after the company said it will extend the deadline for nominating board members, a move to buy more time and explore alternatives to Microsoft's $41 billion offer for the Internet company. Microsoft was the Dow's top gainer.
Retail Stocks Return Some Gains
Retail stocks were some of the morning's strongest gainers but turned mixed in afternoon trading.
Discount retailer Big Lots and BJ's Wholesale Club beat expectations. BJ's also offered an encouraging outlook for the first quarter.
Some of the only stocks to sit out the retail rally were Costco Wholesale and Staples .
Costco said before the bell that its second-quarter profit rose from a year earlier, in line with expectations.
Staples on Tuesday reported its quarterly profit was flat, as expected, as international sales helped offset a slowdown in North American stores.
February same-store sales reports are due out from major retailers on Thursdsay. Sales at specialty apparel chains are expected to have dropped 1.9 percent, down from a 5.4 percent increase in January, according to research by MasterCard's SpendingPulse. Sales of women's clothing, which tend to drop off first in a downturn, are expected to show a slip 0.2 percent, better than January's 2.2 percent decline.
Housing, meanwhile, received a bit of good news, with mortgage applications rising for the first time in four weeks as lower rates began to take hold.
WEDNESDAY: Pfizer and Intel analyst meetings
THURSDAY: Weekly jobless claims; Retailers' Feb. sales reports; ECB and BOE rate decisions; Disney shareholder meeting
FRIDAY: February jobs report
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