US Stocks Remain Lower With Investors Wary Of Hedge Funds

Date: Friday, February 13, 2009
Author: Market Watch.com

Stocks resumed a deep slide Thursday as investors shrugged off an uptick in retail sales and lawmakers' progress toward passing a massive stimulus bill.

The Dow Jones Industrial Average was down about 154 points in recent trade, falling by 2% to 7785, hurt by declines in 29 of its 30 components. The lone exception was Coca-Cola, which gained 6% after posting a better than expected 10% rise in fourth-quarter profit.

The market has been volatile this week, highlighted by a 382-point slide in the Dow on Tuesday. Investors have focused keenly on various proposals pending in Washington, but worry whether action will come soon enough, or in the right form.

"Things have become very politicized, and that has investors worried," said Michael Farr, president of the portfolio-management firm Farr, Miller & Washington, based in Washington. "The process has dragged out already and could yet take awhile longer to resolve."

The S&P 500 was down 1.9%, trading below 820, hurt by declines in every sector. Financials led the way lower, off 5% as a group. The Nasdaq Composite Index fell 0.9% to 1516.

Retail sales for January were much better than expected, rising 1%, the first increase in seven months. While a pleasant surprise amid the recession, the solid increase seemed to be a correction for plunges during the holidays rather than the start of a recovery in consumer spending. Sales in December decreased 3.0%, which was a revision down from an originally estimated 2.7% decline.

Consumer stocks were weak despite the retail report - the S&P 500's consumer discretionary sector was off more than 2%. Wal-Mart Stores dropped 1.4% and Home Depot slid 3.7%.

Market participants are again on guard against another round of forced selling among hedge funds and other players who need to raise cash. Such activity drove many of the market's big daily declines late last year, although traders say it hasn't surfaced so far in 2009, even during big declines like the one earlier this week.

But with many hedge-fund withdrawal requests due 45 days before the end of the quarter - which would be Sunday for the quarter ending March 31 - some traders are acting under the assumption this week that funds are once again increasingly strapped for cash.

The acceleration of price moves and trading volume that regularly occurred during the last 20 or 30 minutes of daily trading sessions during the late-2008 swoon hasn't been replicated recently. Last year, fund managers using algorithmic, or programmed, trading systems would often jam last-ditch stock sales through late in the session.

Michael McCarty, chief options strategist with Meridian Equity Partners, said recent options activity has also looked little like it did late last year, especially in bellwether contracts linked to the S&P 500.

Nevertheless, the mere perception among some players that others may land in hot water using such instruments can become a self-fulfilling prophecy in the market, with traders unloading shares to guard against a possible downturn later. By deploying that strategy, they then cause a drop in the market themselves.

"It's a matter of thinking this might be going on rather than the actual fact that's it's going on that we were victim to," said Mr. McCarty.

Treasury prices rose Thursday as investors continued to seek out government debt as a safe-haven despite a massive new supply of bonds being brought to the market to fund federal rescue efforts. The two-year note was up 2/32, yielding 0.883%. The 10-year note was up 4/32, yielding 2.782%.

Economists hope that the $789 billion stimulus measure nearing passage in Congress can help to spur consumer demand, but severe headwinds remain, as other data Thursday made clear. Initial jobless claims declined by 8,000 last week to 623,000, but are still near quarter-century highs. Total claims lasting more than one week hit a fresh record, inching closer to the five-million mark.

Gold futures, which have been pushing closer to the $1000 an ounce milestone amid the increased anxiety about the outlook and volatility in stocks, were up again, near $948. The jump has spurred gains for gold exchange-traded funds such as SPDR Gold Shares, up 1.1% in recent trading, and rallied miners like Newmont Mining and Barrick Gold, which were mixed in recent trade.

Oil futures have meanwhile been moving in the opposite direction amid demand fears fueled by the global recession. The front-month crude contract, which suffered heavy losses Wednesday, recently shed another $1.05 to trade at $34.89 a barrel in New York.