Evening Update

Wall Street Short on Cheers on Continued Economic Fears

Stocks finished near the lows of the session, solidly below the flatline, as the bulls continued to be hamstrung by persistent concerns that the road to economic prosperity may be longer than originally thought, exacerbated by President Obama's economic advisor suggesting a possible need for a second stimulus package. Losses were broad-based with commodity issues taking the most severe blow amid the economic uneasiness, while the healthcare sector posted the smallest losses on steep gains in insurers following a report that the nation's hospitals have agreed to provide $155 billion to help with the costs of providing coverage to uninsured Americans. Treasuries remained mixed as there were no major economic reports due out today, and following a key auction of three-year notes. In other equity news, Lear Corp has filed for bankruptcy protection, Discover Financial Services announced it will raise capital, and Weyerhaeuser cut it dividend. Elsewhere, ConocoPhillips announced production increased in 2Q, and Boeing said it is buying a fuselage plant.

The Dow Jones Industrial Average fell 161 points (1.9%) to close at 8,164, the S&P 500 Index dropped 18 points (2.0%) to 881, and the Nasdaq Composite tumbled 41 points (2.3%) to 1,746. In moderate volume, 1.1 billion shares were traded on the NYSE, and 2.0 billion shares were traded on the Nasdaq. Crude oil fell $1.54 to $62.51 per barrel, wholesale gasoline decreased $0.02 to $1.72 per gallon, and gold rose $0.10 to $924.40 per ounce.

Auto parts manufacturer Lear Corp(LEAR $0.28), the world’s second-biggest manufacturer of car seats filed Chapter 11 documents after winning approval from a majority of creditors for a reorganization plan, officially filing for bankruptcy protection. The filing shows the company holds $4.5 billion in debt, against assets of $1.3 billion. Today’s announcement brings the total number of auto suppliers that have sought bankruptcy protection so far this year to over 20, according to the Original Equipment Suppliers Association trade group. The Michigan-based supplier also released a forecast for sales of $9.1 billion in 2009, a 33% decline from last year’s level.

Discover Financial Services(DFS $9) fell more than 10% after it announced that it will be raising additional capital. The credit card company that has received government loans totaling more than $1 billion said it plans to sell $500 million worth of common stock. DFS said the funds will be used for general corporate purposes and could be used to repay the government funding, although CEO David Nelms noted last month that the firm is in no rush to return the funds. The company also said it intends to offer senior notes in the near future. Additionally, DFS reiterated its 3Q forecast of net charge offs—the percentage of loans it does not expect to be repaid—to increase between 8.5-9%.

In related industry news, the American Bankers Association (ABA) announced that 1Q delinquencies on bank-issued credit cards rose from 4.52% in the previous quarter to 4.75%, and the balances of those delinquent credit-card accounts jumped 1.08 percentage points to a record 6.6% of total credit-card debt. The ABA said the number one driver of delinquencies is job loss.

Weyerhaeuser (WY $28) was down over 5% after announcing that its quarterly dividend will be cut from $0.25 to $0.05 per share. While WY kept its earnings guidance unchanged, management noted that the outlook remains “challenged and uncertain.” Weyerhaeuser, one of the world’s largest forest products companies, cited the dividend cut as just one of many measures the firm is taking to preserve long-term value, including deferring timber harvests and shutting production facilities—separately, it announced the permanent closure of a Louisiana mill today—as the housing downturn curtails demand for its products. WY said the dividend action enhances current liquidity and financial flexibility, including a possible conversion of the company into a real estate investment trust (REIT) should the board make that decision in the future.

Healthcare insurers, which include Aetna (AET $26) and Cigna (CI $25), found some support after the Washington Post reported that three major national hospital associations agreed last night to contribute $155 billion over 10 years toward the cost of insuring approximately 47 million Americans without health coverage, citing two industry sources. None of the entities involved have commented on the report. Adding to the support for the group, President Barack Obama released a statement while traveling in Russia endorsing a public health insurance plan, saying a public plan was one of the best ways to bring down costs and "force the insurance companies to compete and keep them honest."

ConocoPhillips(COP $40) came under pressure after giving an update of its progress during the second quarter. COP, the third-biggest US oil company, reported that its 2Q production was about 1.86 million barrels of oil equivalent, an increase over the level of 1.75 million barrels recorded in 2Q 2008. However, management warned that lower crude oil and natural gas prices, combined with lower refining margins, are expected to have a negative impact on results.

Boeing (BA $39 ¹) finished lower after announcing it will spend $580 million to purchase the South Carolina plant that produces fuselages used in its new 787 Dreamliner aircraft from privately-held Vought Aircraft Industries. Boeing, which has suffered almost two years of delays in production as it attempts to bring the new 787 Dreamliner model to market, had previously identified Vought as a problem partner due to failure to complete agreed-upon work.

Treasuries mixed after today’s auction

Treasuries were mixed as there were no major economic reports today, and after a government auction of $35 billion in three-year notes, which saw strong demand. The yield on the 2-year note rose 2 bps to 0.96%, while the yields on the 10-year note and the 30-year bond were down 7 bps to 3.44% and 4.29%, respectively. The auction was closely watched by traders to determine the level of investor demand for government-backed debt and Bloomberg said a group of investors including foreign central banks bought 54% of the notes offered, after buying 43.8% in the last auction of the securities.

In related news, Fitch Ratings yesterday cut its rating of California’s long-term general obligation bonds to BBB, which is just two notches above speculative grade. California’s debt is still on watch for further downgrades as the state struggles with a cash crunch including a $26.3 billion budget deficit this year. Talks between lawmakers to balance the budget are progressing slowly and the state has begun issuing IOUs in place of cash payments to taxpayers owed refunds. "After September 2009, absent any proposed budget and payment adjustments, cash deficits will expand dramatically,” Fitch noted in its report.

Tomorrow, the economic calendar will continue to be relatively light with the only major economic report being the release of weekly MBA mortgage applications. This release has been volatile on week-to-week basis, falling last week by 18.9% to a seven year low after gaining 6.6% in the prior period.