Monday, April 02, 2007

US stocks soften after manufacturing data

US stocks soften after manufacturing data
By Michael Mackenzie
Copyright The Financial Times Limited 2007
Published: April 2 2007 13:53 | Last updated: April 2 2007 15:56

Wall Street was under pressure by mid-morning on Monday, as a flurry of deal activity failed to offset a weaker-than-expected survey of manufacturing activity.

After a tough first quarter, worries over the economy remain a dark cloud as equity investors prepare for first quarter earnings results later this month.

Less than an hour after the opening bell, the S&P 500 index was 0.3 per cent lower at 1417.18, and had pushed the index back into negative territory for the year to date.

The Nasdaq Composite was down 0.4 per cent at 2,412.86 and the technology benchmark had reversed its modest gain for the first quarter.

The Dow Jones Industrial Average was down 0.2 per cent at 12,328.59.

After modest gains in early trade, the mood in stocks softened when the Institute for Supply Management said its manufacturing survey for March was 50.9, below an expected reading of 51.1, and down from 52.3 in February. Readings above 50 indicate an expansion in activity.

“The economy is slowing, but the important element is how that ultimately affects earnings growth,” said Jack Ablin, chief investment officer at Harris Private Bank. “So far, the consumer seems to be holding up.”

The data took the glow off a surge in merger and acquisition activity led by a $29bn purchase of First Data, the credit card and payment company, by Kohlberg Kravis Roberts. The private equity firm will pay First Data shareholders $34 a share, and that was 26 per cent above the stock’s closing price on Friday. First Data shares were up 21.2 per cent at $32.60, down from a high of $32.90 set in earlier trade.

In other deal news, Tribune media group, which owns the Chicago Tribune, Los Angeles Times and various television stations accepted an $8.2bn buyout offer from Sam Zell, a Chicago based real-estate investor. Shares in Tribune rose 2.5 per cent, to $32.92 , and the company had been the subject of twin bids, from Zell and Eli Broad and Ron Burkle, investors based in Los Angeles.

Xerox announced it would purchase Global Imaging Systems for around $1.5bn. Shares in Global jumped 47.4 per cent to $28.74, while Xerox was 0.2 per cent higher at $16.92.

Meanwhile, AirTran Holdings had raised its offer for Midwest Air Group to $15 a share, up from an $11.25 price last year. Shares in AirTran were 0.2 per cent lower at $10.25, while Midwest was 8.4 per cent higher at $14.64.

Shares in Starwood Hotels & Resorts rose 4.7 per cent to $67.90, after Steven Heyer, the company’s chief executive, had resigned.

Beyond deals, investors are focused upon forthcoming earnings results for the first quarter. Investors expect year-on-year growth in corporate profits during the quarter will fall well below 10 per cent for the first time after 14 consecutive quarters of double-digit earnings growth.

According to Thomson Financial, the average rise in profits for the first three months of the year is forecast at 4.4 per cent. That is down from a forecast 8.7 per cent made at the start of January and follows an 11.4 per cent rise in profits for the fourth quarter of 2006.

Mr Ablin said: “Earnings expectations are on a downtrend, and any upside surprises should help the market.”

The earnings season comes after a tough first quarter for the major benchmarks. Last week, stock benchmarks closed out the first quarter of the year, well off their highs set back in mid-February, as sentiment for homebuilders and financials soured amid growing problems in the subprime mortgage market. The S&P closed at 1,420.86, a rise of 0.2 per cent so far in 2007. The Nasdaq closed out the quarter at 2,421.64, for a gain of 0.26 per cent since the start of the year.

The Dow closed at 12,354.35 and is down 0.9 per cent for the year. It was the Dow’s worst quarterly performance since the second quarter of 2005 and the blue chip is well off its record high of 12,786.64 set on February 20.

Leading the laggards in the Dow are Johnson & Johnson, off 8.7 per cent, Home Depot, down 8.5 per cent, Citigroup, lower by 7.8 per cent and American Express with a fall of 7 per cent so far in 2007. By contrast, Alcoa with a gain of 13 per cent, AT&T up 10.3 per cent and Caterpillar higher by 9.3 per cent are the leaders within the Dow so far this year.

After a tough first quarter, stocks now face first quarter earnings season which begins in mid April.

While the Dow suffered a loss for the quarter, transport and utility shares were some of the better performing sectors. The Dow Transportation Average gained 5.6 per cent, and the Dow Utilities Average rose 9.5 per cent during the first quarter.

Bonds also prospered during the first quarter. The Lehman Aggregate index, containing Treasuries, corporate bonds, agency and mortgage securities and other securitised products, returned 1.5 per cent during the last three months. It was the best quarterly performance since the third quarter of last year when the index produced a gain of 3.81 per cent.

For all of 2006, the Lehman Aggregate index returned 4.33 per cent, while the leading stock benchmarks posted double-digit gains.


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