Stocks closed lower Thursday as concern about the implications of Oracle's weak sales outlook rippled through the market.
The Dow Jones Industrial Average and S&P 500 had initially ticked higher as traders breathed a sigh of relief that GDP and jobless-claim reports weren't as bad as expected, but the pop quickly fizzled. The Dow shed 1 percent, while the S&P lost 1.2 percent. The tech-heavy Nasdaq finished down nearly 2 percent.
Oracle said its quarterly profit increased 25 percent but reported disappointing software sales. The company said its customers have become increasingly cautious, raising concerns about business spending and poking a hole in the theory that the software sector would be more resistant to economic turmoil.
Fellow software maker Microsoft was one of the biggest decliners on the Dow, along with chip maker Intel .
The S&P information-technology index dropped 2.3 percent making it the biggest decliner among 10 key S&P sector indexes.
Oracle's report "suggests that there's still a lot of difficulty out there," said Bruce McCain, head of investment strategy at Key Private Bank in Cleveland. A lot of tech companies like Oracle have strong overseas exposure and there are increasing indications that there is more weakness overseas than is currently factored into the U.S. market, McCain said.
You have to wonder, "Is this something specific to Oracle or is this a broader indication of a deterioration overseas?" McCain asked.
In fact, McCain's team at Key Private Bank is so concerned about worsening conditions outside the U.S. that they advise -- and have begun themselves -- paring back overseas holdings.
Google shares skidded after Lehman Brothers cut its price target on the stock to $580 from $644 and slashed its earnings forecast to $4.46 a share from $4.67 a share.
Energy stocks retreated after an earlier rally. Crude oil closed above $107 a barrel.
Financial stocks declined, with the S&P financial index off 1.7 percent, after another bleak prognosis for the sector.
A day after downgrading the four largest U.S. banks, Oppenheimer analyst Meredith Whitney warned late Wednesday that Merrill Lynch and UBScould suffer write-downs of $6 billion and $11 billion, respectively, as credit problems worsen.
"Many expected the fourth quarter to be the 'kitchen sink' for the industry," Whitney wrote in a separate report dated Thursday. "First-quarter results (will) be a rude awakening."
Indeed, Sanford Bernstein now expects Merrill to post a loss in the first quarter instead of a profit as it had initially projected, citing write-downs.
Whitney's move to cut estimates for Citigroup , Bank of America , JPMorgan Chase and Wachovia sent the sector into a tailspin on Wednesday.
Whitney's calls have been right in the past. In October, she correctly predicted that Citigroup would cut its dividend and raise $30 billion of capital.
Lehman Brothers was once again the gazelle of the financial sector, with shares falling more than 10 percent amid pressure from shorts and rumors that there will be a run on the bank similar to Bear Stearns . A Lehman spokeswoman called the rumors "totally unfounded."
In economic news, the Commerce Department held its reading on U.S. economic growth at 0.6 percentin its third and final reading on fourth-quarter GDP. The consumer spending component of the GDP report was revised upward to 2.3 percent growth, while core PCE inflation slipped to 2.5 percent. Corporate profits declined 3.3 percent, though that measure doesn't include write-downs. A separate report showed jobless claims fell by 9,000 last week.
Among other news of interest to Wall Street is today's Fed's Term Lending Facility Auction that will allow brokerages to exchange mortgage assets for government securities.
And, the Chicago Mercantile Exchange raised corn and soybean margins by 50 percent and 30 percent, respectively, in an attempt to curb speculative interest and help traders from losing their shirts amid wild swings in the grain markets.
Stocks were mostly lower throughout day, but there were pockets of strength in the homebuilding and pharmaceutical sectors.
The U.S.'s number two homebuilder Lennarposted a quarterly loss but beat estimates, another tepid sign of a turnaround for the struggling industry.
That builds on the February new-home sales report, released Wednesday, that showed sales fell less than expected and inventories declined slightly.
Jim Paulsen, a strategist for Wells Capital Management in Minneapolis, said the growing list of encouraging signs suggest that housing may find a bottom in the second quarter.
Shares of DR Horton, KB Home and Pulte Homes all posted solid gains.
Merck shares posted a modest gain -- and were one of only three Dow stocks to finish higher -- even as the FDA warned that it is investigating a possible connection between Merck's popular allergy drug Singulair and suicide.
Several airline stocks hit new lows amid analyst downgrades, even as the Amex Airline index rose 2.2 percent due to gains in discount carriers.
American, owned by AMR, and Delta reported that they were canceling hundreds of flights for further safety inspections.
Northwest hit its lowest price since the carrier emerged from bankruptcy after Calyon slashed its earnings forecast for the airline, citing fuel prices. The firm also downgraded AMR and US Airways. AMR shares hit a more than three-year low.
ConAgra Foods reported a higher-than-expected quarterly profit and raised its fiscal 2008 forecast. The company, whose brands include Healthy Choice meals and Chef Boyardee, also said it would sell its commodity trading and merchandising operations for $2.1 billion in cash and debt.
Clear Channel Communications said it has won a ruling from a Texas judge that may advance its efforts to force a group of six banks led by Citigroup to finance a $20 billion buyout of the U.S. radio operator.
Netflix said it expects to lead the market for movies delivered over the web despite growing competition from web giants like Apple and Amazon.
Shares of upscale home goods retailer Williams-Sonoma fell 5 percent after the company's finance chief said a drop in consumer spending -- even at high-income levels -- has made the company approach its 2008 outlook with an unprecedented level of caution.
Still to Come:
FRIDAY: Personal income and spending; consumer sentiment; KB Home earnings; Fed's Plosser speaks
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