Wednesday’s Market Recap: Stocks Drop On Higher Treasury Yields

Many of the gains that we saw yesterday in the markets due to the Consumer Confidence report were erased today as the Dow (^DJI) dropped 2.05% to close at 8,300.02 and the S&P 500 (^GSPC) lost 1.90% settling at 893.06. The NASDAQ (^IXIC) fared the best on the day dropping 1.11% to 1,731.08. The dip in the markets was mainly due to jump in the yields of government bonds as we saw the 10-year Treasury note falling, increasing its yield to 3.72% from 3.55% on Tuesday. Higher rates on these notes will hinder an economic recovery as these Treasuries serve as a benchmark for other loan rates such as home mortgages.

Some mixed reports on the housing markets also caused some downward pressures on the markets. The existing home sales report for April was in-line with expectations as sales rose 2.8% to an annualized rate of 4.68 million. However, the bad news came from inventories jumping 8.8% to 3.97 million. If you used the current sales pace, it would take about 10.2 months to sell those homes, up from 9.6 months in March.

Taking a look at oil, prices hit a 6 month high around $64 a barrel. Saudi Arabia came out on Wednesday saying crude may touch $75 by the end of the year. Mark Shenk of Bloomberg wrote, “The Saudis are saying that they are confident that the economy can withstand oil at $75 so they will be in no rush to break this market.”   Nauman Barakat, senior vice president of energy at Macquarie Futures USA Inc. in New York said, “We are seeing increasing signs that the worst of the recession is over.”

Monsanto (MON), the agricultural giant, dropped 6.3% to close at $79.88 after management lowered its outlook. Management forecasted earnings of around $4.40 a share this year, which is its lowest point in the original forecast range of $4.40 to $4.50. The main concern hampering its earnings is stronger than expected competition for its Roundup herbicides business. Roundup was originally anticipated to contribute about $1.15 per share for third quarter earnings, considerably short of analyst projections of $1.56 per share.

GM (GM) stated that it did not receive enough bondholder support to execute its needed debt for equity swap, pushing General Motors that much closer to bankruptcy. GM lost 20.14% settling at $1.15. Also in the news today was who will be replacing General Motors as a component in the Dow once they file for bankruptcy.

Disclosure: The Fund the author is associated with is long MON.

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