Stocks Fall as Financial Rally Ebbs - 08/06/09

August 6, 2009

Stocks Fall as Financial Rally Ebbs
By PETER A. MCKAY and DONNA KARDOS YESALAVICH , Wall Street Journal Online

The Dow Jones Industrial Average fell 24.71 points, or 0.3%, at 9256.26, hurt by a decline in Procter & Gamble, which fell 4.6%. Investors are worried about its sales outlook and shifts in its pricing strategy.

The Standard & Poor's 500-stock index fell 5.64 points, or 0.6%, at 997.08. The Nasdaq Composite Index shed 19.89 points, or 1%, to 1973.16.

Caution prevailed ahead of Friday's report on July employment.

"Everybody's real, real nervous about the unemployment number tomorrow," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams. "We've had an incredible move, so there's some profit taking as we head into that number tomorrow."

A separate report Thursday showed the number of workers filing new claims for state jobless benefits fell 38,000 to 550,000 last week and the four-week average of new claims fell to the lowest level since Jan. 24.

Harold Lavender, an independent trader in the Chicago Board of Trade's bond-futures pits, said that participants there are still on guard against nasty surprises.

"That's the way these markets have been trading lately, with everything revolving around that one number," Mr. Lavender said. "You might get some activity around things like claims throughout the month, but everyone wants to know what that bottom line is on Friday morning."

Financial stocks have been strong all week despite a lackluster move in the broader market. Strategist Bill King, of M. Ramsey King Securities in Burr Ridge, Ill., said short sellers have been under heavy pressure lately to unwind bearish bets, many of which have steadily lost value during the summer's rally.

American International Group, which jumped more than 60% Wednesday, rose another 2.4% Thursday. Many bond insurers also gained. Ambac Financial Group rose 13%, while MBIA jumped 12% and Assured Guaranty gained 16%.

Despite those gains, the broader financial sector turned lower after rising early in the session. Big banks like Goldman Sachs Group, Morgan Stanley and J.P. Morgan Chase declined.

Neil Hennessy, president and portfolio manager, Hennessy Funds in Novato, Calif., said financial stocks are beginning to benefit from an improvement in lending conditions following last fall's crisis.

"People wanted instant improvement after the crisis broke, but you have to remember, it takes awhile to get money out the door on a loan application, even under normal circumstances," said Mr. Hennessy. "Last fall, that lag got even more extreme. Now, it's finally getting back to normal."

But some money managers are viewing financials' latest gains with a grain of salt, especially after a summer rally that lifted major indexes to their highest levels since late last year. After such big gains, some investors who waited too long on the sidelines may be doing some last-ditch buying, the skeptics argue.

"Traditionally, these sort of speculative moves in speculative stocks are the signs of a market that is overheating," said hedge-fund manager Doug Kass, of Seabreeze Partners Management in Palm Beach, Fla.

Telecom stocks dropped. MetroPCS Communications shares fell 29% after the company reported its second-quarter earnings fell 48%. Rival Leap Wireless sank 6.5%.

Investors on Thursday also digested same-store sales data from major retailers for July. Overall activity suffered the sharpest decline of the year as consumers continued to cut costs and shy away from big shopping sprees.

Retail stocks put in a mixed performance, helped by generally upbeat guidance from major chains for August, which which will include the key back to school shopping season. American Eagle Outfitters was up 6.7%, while Macy's gained 5.6%. Aeropostale and TJX fell 3.3% and 4%, respectively.

The bigger question for the sector remains how the late-year holiday shopping season will shape up. A strong back-to-school season wouldn't necessarily translate into a strong fourth quarter, said Jharonne Martis, consumer sector analyst for Thomson Reuters in New York.

"We really need to see how the unemployment rate looks through the end of the year," said Ms. Martis. "That's really what correlates the most with spending."