U.S. stocks sank on Monday as the
prospect of more losses from the mortgage crisis hurt the
shares of banks and the two biggest home finance providers,
pushing all three major indexes down about 1.5 percent.
Fannie Mae (FNM.N) and Freddie Mac (FRE.N) shed more than
20 percent each after Barron's reported that the U.S. Treasury
may need to bail out the home finance giants, which could wipe
out shareholders and effectively nationalize the
The Treasury Department responded by saying it had no plans
to use its authority to backstop either of the two companies,
which own or guarantee about half of outstanding U.S.
mortgages. Fannie Mae shares fell to their lowest level in
nearly 20 years.
Shares of Lehman Brothers fell 7 percent after the Wall
Street Journal reported analysts are bracing for the investment
bank to report a third-quarter loss of at least $1.8 billion.
U.S. crude oil futures fell 90 cents to settle at $112.87
per barrel, although investors said its price fluctuations were
taking a back seat to financial concerns.
"What we're learning is that the financial crisis is far
from over and that earnings estimates are probably too high,"
said Jim Awad, chairman of W.P. Stewart Asset Management in New
York. "When oil and the stock market go down together, you know
there's real reason to worry."
The Dow Jones industrial average tumbled 180.51 points, or
1.55 percent, to 11,479.39. The Standard & Poor's 500 Index
lost 19.60 points, or 1.51 percent, to 1,278.60. The Nasdaq
Composite Index slid 35.54 points, or 1.45 percent, to
For the Dow and the S&P, Monday was the worst day since
August 7, while the Nasdaq chalked up its biggest daily decline
since July 28.
The Standard & Poor's Financial Index was down 3.6 percent,
reversing two consecutive sessions of gains.
Fannie Mae shares slid 22.3 percent to $6.15, while Freddie
Mac shares plummeted 25 percent to $4.39, both on the New York
Stock Exchange. Merrill Lynch slashed its price target on
Freddie Mac to $5.75.
Adding to market anxiety was a report showing that home
builder sentiment remained at a record low in August, depressed
by ever-tightening lending conditions and a flood of foreclosed
"We are still in the throes of the credit crisis," said
Steve Goldman, market strategist at Weeden & Co in Greenwich,
Connecticut. "There's risk that Fannie Mae and Freddie Mac may
require capital from the government."
Lehman Brothers shares slid 7.1 percent to $15.03 on the
NYSE. According to the Wall Street Journal, if losses keep
piling up, Lehman could need to raise additional capital beyond
the $6 billion it got in June.
Shares of Bank of America (BAC.N), the No. 2 U.S. bank,
dropped 4.6 percent to $29.30 on the NYSE, while No. 1 U.S.
bank Citigroup (C.N) fell 5 percent to $17.62. Both were among
the top drags on the S&P.
Aluminum producer Alcoa (AA.N) was a top weight on the Dow,
falling 2.2 percent to $31.11.
On Nasdaq, shares of
company, fell 2.3 percent to $498.30.
Trading volume was light on the New York Stock Exchange,
with about 984.31 million shares changing hands, sharply below
last year's estimated daily average of roughly 1.90 billion,
while on Nasdaq, about 1.68 billion shares traded, also well
below last year's daily average of 2.17 billion.
Declining stocks outnumbered advancing ones by about 2.5 to
1 on the New York Stock Exchange, while on the Nasdaq,
decliners beat advancers by a ratio of about 2 to 1.
(Additional reporting by Ellis Mnyandu; Editing by Jan
General Motors Corp (GM.N), aiming to
boost sagging sales, rolled out a major promotion for U.S.
dealers on Monday that includes employee-level discounts on
almost all the Chevrolet cars and trucks in its showrooms.
The discount offer takes effect on Wednesday and marks GM's
return to a strategy it had abandoned in the last two years in
an effort to make its pricing more transparent and to wean
American consumers from fire-sale blowout deals.
But the downturn in U.S. auto sales has hit GM hard. Sales
through July were down almost 18 percent and the automaker has
faced pressure to cut costs amid signs that industrywide sales
would remain slack in August despite lower gasoline prices.
"Desperate times call for desperate measures, and that's
what we're seeing from GM," said Jesse Toprak, an analyst who
tracks incentives for automotive Web site Edmunds.
Earlier, people briefed on the promotion had told Reuters
about the new incentive plan. GM spokesman John McDonald
confirmed the automaker would offer the employee pricing and
said more details will be announced on Tuesday.
GM will offer employee discounts on all 2008 model year
Chevrolets in addition to cash-back offers on slower-selling
models such as the Chevrolet Silverado pickup truck, according
to a dealer briefed by GM on the plan.
The offer also will include employee pricing on some 2009
model-year vehicles, including the Cobalt sedan and HHR compact
wagon, two of the more fuel-efficient Chevy models, according
to the dealer, who was not authorized to discuss the plan.
GM shares closed down 7.3 percent on Monday, hitting their
low for the day just after the incentive announcement.
GM briefed dealers representing all of its U.S. brands --
including Cadillac, Saab, Buick, GMC and Saturn -- on the new
discount offer on Monday.
The top-selling U.S. automaker, which has faced pressure to
cut costs and shore up its cash position in the face of the
sharp U.S. sales downturn, has had some success with targeted
incentive programs in recent months.
"It's not a new theme, but, on the other hand, the track
record of GM's incentive programs has been very good," said the
dealer briefed on the new discounts.
Buyers for the Chevy Silverado will get $5,000 back in
addition to the $3,000 employee discount, while incentives
total $10,000 for the Chevy Tahoe SUV, the dealer said.
GM surprised analysts in June, as a zero-percent financing
offer for six years cushioned its results at a time when the
market hit a 15-year low.
The boost from that incentive offer was enough to allow GM
to keep its top spot in the U.S. market, heading off a threat
from Toyota Motor Corp (7203.T).
SHIFT IN MARKETING
The latest incentive offer comes as GM shifts away from
other high-profile marketing as part of an attempt to cut $10
billion in costs through 2009.
GM said last month it was cutting back on its spending on
motor sports sponsorships. A spokeswoman said on Monday it also
would stop buying commercial spots during the Emmy award
broadcast and the Academy Awards -- two major television events
of the year.
GM, like smaller rival Ford Motor Co (F.N), has also been
throttling back on leasing offers in response to tighter credit
and the plunging resale prices of larger vehicles.
In recent years, cheap lease offers subsidized by the
automakers have allowed American consumers to afford larger and
more expensive vehicles than they could have otherwise.
But the double-digit percentage decline in the resale value
of big SUVs and pickup trucks in recent months drove GM and
Ford to realize combined losses near $4 billion on vehicle
leases in the second quarter.
GM has been offering rebates of up to $6,000 on big SUVs
like the Tahoe, along with some zero-percent financing, as it
works to clear out a 2008 model-year inventory overhang.
Such incentives and discounts are closely tracked by
analysts and investors as an indication of profitability and
the pressure major automakers face to move unsold inventory.
GM incentives for July averaged $4,214 per vehicle, above
those of Ford and Chrysler LLC and more than 3-1/2 times the
spending by Toyota, according to Edmunds.
Toprak said GM's last round of employee pricing offers in
2005 worked because they eliminated customer uncertainty about
negotiating a good price. Employee discounts are below the
invoice amount dealers would normally pay.
"It's a good deal for customers," Toprak said. "From GM's
perspective, it's key to clear out the (2008) models before the
'09's start to roll out."
(Reporting by Soyoung Kim and Kevin Krolicki; Editing by
Brian Moss, Gerald E. McCormick and Carol Bishopric)
Retailer Lowe's Cos (LOW.N) reported a
higher-than-expected quarterly profit on Monday as U.S.
consumers spent tax rebate checks on spring projects, but it
forecast third-quarter results below Wall Street estimates.
Lowe's stock, which initially rose as much as 4 percent,
was barely higher at mid-afternoon as the cautious outlook
offset the strong second-quarter performance and market share
"It was a very strong quarter," as Lowe's managed costs
well, said Standard & Poor's Equity analyst Michael Souers. But
he added, "it's not a strong outlook."
The second-largest home-improvement chain behind Home Depot
Inc (HD.N) also raised its profit forecast for the year
Walter Todd, a principal and portfolio manager with
Greenwood Capital in Greenwood, South Carolina, said that
Lowe's full-year outlook could actually indicate a slower
second half, given the stronger second-quarter results.
"They effectively lowered the guidance for the second
half," Todd said.
Home-improvement retailers have posted weak results as
consumers face a slumping U.S. housing market, tighter credit
and rising gas and food costs.
The second quarter marked the fourth straight quarterly
profit decline for Lowe's, while earnings at Home Depot have
fallen for the last seven quarters.
Lowe's earnings fell 8 percent to $938 million, or 64 cents
a share, for the quarter ended August 1, from $1.02 billion, or
67 cents a share, a year earlier. Analysts on average forecast
earnings of 56 cents a share, according to Reuters Estimates.
Total sales rose 2.4 percent to $14.5 billion, higher than
the $14.1 billion analysts expected, as consumers spent their
U.S. government tax rebate checks on lawns and gardens.
SALES DROP LESS THAN EXPECTED
Sales at stores open at least a year, an important retail
measure, fell 5.3 percent, hurt by weakness in big-ticket
projects in areas hardest hit by the housing downturn. Some
analysts had expected a same-store sales drop of as much as 9
"Lowe's bucked the trend of its linkage to housing
turnover, as same-store sales recovered nicely at a moment when
historical trends suggested they should have been troughing,"
Goldman Sachs analyst Matthew Fassler said in a research note.
Analysts are expecting Home Depot to report a
second-quarter profit of 61 cents a share on Tuesday, compared
with 77 cents a year earlier, according to Reuters Estimates.
The industry leader has said per-share earnings could fall as
much as 24 percent this year.
Lowe's said market share gains from competitive store
closures helped its performance. Though Home Depot has closed
some underperforming stores this year, Lowe's said much of its
share gain came from independent retailers which went out of
"The further you get into the economic downturn, the more
pressure that puts on less well-capitalized competitors,"
Lowe's Chairman Robert Niblock told Reuters.
Lowe's, based in Mooresville, North Carolina, said it now
expects a full-year profit of $1.48 to $1.56 a share, compared
with the $1.45 to $1.55 a share it forecast in May.
For the third quarter, Lowe's expects a profit of 27 cents
to 31 cents a share.
Analysts expect a profit of 33 cents a share for the third
quarter and $1.50 a share for the year.
Lowe's shares edged up 8 cents to $24.58 on the New York
Stock Exchange, after rising as high as $25.47. Home Depot fell
70 cents, or 3.2 percent, to $26.83, also on the NYSE.
Lowe's stock has fallen about 9 percent in the past year,
while Home Depot is down 19 percent.
(Editing by Dave Zimmerman, Richard Chang)