Financial stocks were under pressure Tuesday and they could feel the heat again Wednesday when several major bank CEOs testify before a government commission investigating the financial crisis.
The financial sector lost 1.6 percent Tuesday as traders weighed two reports that suggest new taxes or fees on banks.
The first report started circulating Monday that the Obama Administration was considering a tax on financial institutions. The news gained more traction in the market Tuesday. The White House may include a bank fee in its 2011 budget proposal and could raise as much as $120 billion, according to news reports. Secondly, the FDIC proposed raising deposit insurance for financial companies that tie compensation plans to excessive risk taking.
"As long as there's uncertainty, it's a hard group to get excited about," said Art Hogan, managing director at Jefferies. Citigroup and Bank of America were down more than 3 percent. Goldman Sachs fell more than 2 percent, sliding below its 50-day moving average.
"Goldman is sort of the poster child for Wall Street fat cats. They're just in a difficult situation," said Hogan, noting Goldman has been vilified because it is highly profitable.
The bank ceos - from Goldman, J.P. Morgan, Morgan Stanley and Bank of America - will testify before the Financial Crisis Inquiry Commission, starting at 9 a.m. . The commission is headed by Phil Angiledes, former California state treasurer. A second day of hearings will be held Thursday and will feature Securities and Exchange Commission chairman Mary Schapiro, FDIC Chairman Sheila Bair, and U.S. Attorney General Eric Holder.
"Obviously, the stocks are not going to do well when these people are in the limelight, but it really depends on whether this commission does anything but humiliate them," said Milton Ezrati, senior economic strategist at Lord Abbett.
Besides the financial crisis hearing, markets are anticipating the Fed's 2 p.m. release of the Beige Book on economic activity. Rep. Barney Frank is also expected to announce hearings on executive compensation, another hot topic for financials.
What's Up in China!
Google warned in a very detailed and candid statement late Tuesday that it is reviewing the feasibility of continuing its business operations in China, due to serious cyber attacks. The company said it was the victim in December of a highly sophisticated and targeted attack on its corporate infrastructure, which originated in China.
Google said the attack resulted in the theft of intellectual property and coincided with attacks on 20 large companies from various businesses, including the financial, technology, media and chemical industries. Google said it was in the process of informing the companies and is working with U.S. authorities.
Google also said it has evidence that the attackers tried to access gmail accounts of human rights activists and succeeded in accessing information about two accounts. It also found phishing schemes to monitor gmail content.
Google said it is no longer willing to censor the results on Google.cn, as a result of these attacks, surveillance and efforts over the past year to limit free speech on the web. Google said it will discuss with the Chinese government whether it can operate an unfiltered search engine within the law. It recognizes it may have to shut down Google.cn and its offices in the country as a result.
Chinese search engine Baidu shares rose late Tuesday after the Google statement.
Stocks and commodities Tuesday slumped globally after the People's Bank of China surprised the markets with a statement that it would raise the reserve requirement to fight inflation. The move was seen as an effort by Beijing to curb China's rapid growth, which is seen as a driver of the global economic recovery.
Traders said the worry about new bank taxes pressured the broader stock market Tuesday, as did the overnight China news.
"It was a very sloppy day. The biggest piece of the downdraft was concerns over China's growth," said Hogan. Earnings news also nagged at investors, after Alcoa's negative earnings surprise late Monday.
Not all earnings news was negative Tuesday. Cheesecake Factory, for one, surprised investors with a forecast for higher revenues when analysts thought they would decline in the fourth quarter. That stock moved higher. Tiffany raised its profit forecast after better-than-expected holiday sales though its stock slumped.
Ezrati said investors though could be in for more earnings disappointments this quarter, particularly in the industrials and consumer names. "I think there may be some disappointments because the market is a little bit more enthusiastic about the recovery than deserved," he said. However, he does expect the economic news to support the market until mid year when concerns about Fed policy may take over.
The Dow Tuesday lost 36 to 10,627, while the S&P 500 slid 10 to 1136. The materials sector was the worst performer, down 1.9 percent and consumer staples was the best, up 0.5 percent.
Oil was down 2 percent at $80.79 per barrel, largely on the China news.
Treasurys found buyers, as the government successfully auctioned $40 billion in 3-year notes. There is an auction of $21 billion in reopened 10-years at 1 p.m. Wednesday.
William O'Donnell, head of rates strategy at RBS, said the 3-year auction went very well and he expects another successful auction in 10s. The 10-year was yielding 3.713 in later afternoon.
"Today's technical breakout is significant and sets us up for lower yields no matter what the auction does tomorrow...I think what the market is telling us is there's plenty of bidders around and now that prices are going up, more bidders are appearing," he said.
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