Wall Street falls as "cliff" talks sour, but hopes remain

NEW YORK Wed Dec 19, 2012 5:06pm EST

1 of 2. Traders work on the floor of the New York Stock Exchange at the opening of the trading session in New York October 5, 2012.

Credit: Reuters/Mike Segar

NEW YORK (Reuters) - U.S. stocks sold off late in the day to close at session lows on Wednesday as talks to avert a year-end fiscal crisis turned sour, even as investors still expect a deal.

The S&P 500 slipped after a two-day rally that took the benchmark index to its highest close in two months. Defensive-oriented shares led the decliners, including health care and consumer staples.

General Motors (GM.N) bucked the overall weakness to surge 6.6 percent to $27.18 after the automaker said it will buy back 200 million of its shares from the U.S. Treasury, which plans to sell the rest of its GM stake over the next 15 months.

President Barack Obama and congressional Republicans are struggling to come up with a deal to avoid early 2013 tax hikes and spending cuts that many economists say could send the U.S. economy into recession.

House Speaker John Boehner, the top Republican in Congress, said in a one-minute press conference that his chamber will pass a proposal that Obama had already threatened to veto as it spares many wealthy Americans from tax hikes needed to balance the budget. Obama has already agreed to reductions in benefits for senior citizens.

"My guess is they're close to a deal, and right before, it looks like the deal is about to blow up either on manufactured or legitimate reasons," said Uri Landesman, president of hedge fund Platinum Partners in New York.

He said if the market thought a deal was in real danger, the S&P 500 would slide below 1,400. It stands now near 1,435, not far from a two-month high.

The CBOE Volatility Index .VIX surged 11.5 percent to 17.36, but has remained relatively stable. Its 14- 50- and 200-day averages are all within 1.1 points.

Landesman said the VIX's stability indicates "the bulls have control of this market still."

Banks and energy shares - groups that outperform during periods of economic expansion - have led recent gains, indicating a shift to focusing on a growing economy as Wall Street looks past the budget talks.

Defensive sectors led Wednesday's downturn, with the S&P health care sector index .GSPA down 1.1 percent.

The Dow Jones industrial average .DJI dropped 98.99 points, or 0.74 percent, to 13,251.97. The S&P 500 .SPX lost 10.98 points, or 0.76 percent, to 1,435.81. The Nasdaq Composite .IXIC fell 10.17 points, or 0.33 percent, to 3,044.36.

Herbalife Ltd (HLF.N) shares tumbled 12.1 percent to $37.34 after William Ackman, one of the world's biggest hedge fund managers, said he is shorting the stock of the weight management products company.

Oracle ORCL.O shares helped cap the Nasdaq's loss after the company reported earnings that beat expectations on strong software sales growth. Oracle jumped 3.7 percent to $34.09.

Knight Capital Group Inc (KCG.N) climbed 5.4 percent to $3.51 after it agreed to be bought by Getco Holdings in a deal valued at $1.4 billion. The stock, which nearly collapsed after a trading error in August, remains down about 70 percent so far this year.

Shares of Chinese display advertising provider Focus Media Holding Ltd FMCN.O jumped 6.7 percent to $25.52 after it agreed to be bought by a consortium of private equity funds led by the Carlyle Group (CG.O) for about $3.6 billion.

Data showed homebuilding permits touched their highest level in nearly 4-1/2 years in November. The PHLX housing index .HGX fell 0.8 percent, but has gained 66.4 percent this year as the housing market has turned the corner.

About 6.9 billion shares changed hands on the New York Stock Exchange, the Nasdaq and NYSE MKT, slightly above the daily average so far this year of about 6.45 billion shares.

Advancing and declining issues were almost even on both the NYSE and the Nasdaq.

(Reporting by Rodrigo Campos; Editing by Jan Paschal)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (2)
TommyPaine wrote:
Now that the market feels that uncertainty is less of a problem (particularly after the dangers of Europe, China and the Fiscal Cliff have lessened) stock prices have been rising and bond prices dipping. What few people have bothered to note is that this rise is taking place, even though there continues to be fewer and fewer retail investors. The only way that can occur is for a circle of professional investors to bid up prices despite decreasing over-all demand, based solely on the speculation that their gamble eventually will be borne out, and money will have to come pouring into the equity markets. Those bulls speculating that prices will rise point to a set of factors that they believe are of special significance. First, they note that trillions of dollars are sitting in bond funds where returns are at historic lows. Meanwhile equity prices – while higher than early in the year – continue to sit at low multiples to earnings when compared to the historic norm. The assumption, therefore, is that money will have to come pouring out of bonds into the equity markets in search of higher return and that multiples will return to the norm. There has even been talk that equities are cheap and that there is a “bubble” in bonds. There are two problems with those assumptions …

First, it is a mistake to think that historic multiples for equities will stand up when demographic factors have drastically changed; aging baby boomers nearing retirement have chosen to leave behind the risk of equity markets and opt for the safety of bonds. Theirs is not a choice which resulted from temporary conditions and can be altered by a promise of better returns if only they would take on more risk; it is a permanent change in their investment philosophy which has resulted from their reaching retirement age. They no longer can worry about what their return on investment will be over the next 5 or 10 years, but must concern themselves with income from their investments right now. With this shortening of the investment horizon by millions of aging baby boomers, historic multiples can be thrown out the window.

Second, even if one could apply historic multiples in calculating the appropriate price for stocks, applying them to last quarter’s earnings is a mistake; those multiples need to be applied to future earnings. So, when deciding whether stock prices are cheap one needs to include the impending impact on earning of the end of the payroll tax holiday on December 31, the increase in income tax rates on upper income earners, the likely increase in the capital gains rate, and cuts in spending. These will occur even if some deal is reached on the Fiscal Cliff. If no deal is reached, the impact on earnings will be even worse. One can already see some of that impact in the form of reduced capital investment, lowered retail spending, and dampened industrial production.

Taken together, these two sets of factors are likely to create a significant headwind for equity prices in 2013 and a tailwind for bond prices. That is not to say that equity prices are guaranteed to go down and bond prices rise. Many factors still could push up equities and increase bond yields. Among those factors are the lower cost of mortgage money and the reduced cost of energy. Most important of all, stock prices could rise DESPITE the fundamentals if speculators continue to be willing to bid up prices. After all, the market sets its own rules, and can set prices that bear little relationship to earnings or to the number of bidders.

Dec 19, 2012 2:28pm EST  --  Report as abuse
RobPorter wrote:
Don’t know about you BUT I’m blaming Boehner and the GOP period if a deal does not get done.

Dec 19, 2012 3:35pm EST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.