Investors were in a somewhat better mood on Monday after the Federal Reserve and other central banks added more cash to their banking systems to ward off a global credit crunch, but Wall Street ultimately sold off positions just before the closing bell to close marginally lower.
After enduring sharp swings last week, there continues to be a great deal of uncertainty in the markets over the extent of problems in the subprime mortgage sector and how far afield the contagion might spread. Defaults among subprime mortgage holders — borrowers with weak credit — began the chain of events that led to the turmoil on Wall Street and other stock markets in recent weeks.
On Monday, Goldman Sachs Group Inc. said its funds using quantitative strategies, or computer modeling, “are currently under pressure” after global markets sold off on worries about debt and credit. The investment bank said it and certain large investors, including Maurice “Hank” Greenberg and Eli Broad, have committed to a $3 billion equity investment in its Global Equity Opportunities Fund, which has “suffered significantly.”
The fund had a net asset value of about $3.6 billion before the equity investment.
Goldman stock fell $3 Monday to close at $177.50 on the New York Stock Exchange.
In another sign of wariness, Kohlberg Kravis Roberts & Co., the private-equity firm that plans to raise $1.25 billion in an initial public offering, said the recent jump in borrowing costs for leveraged buyouts may hurt its funds’ performance.
The cost to issue high-risk, high-yield debt has “recently increased significantly” and the New York-based firm may need to rely on investment banks to fund transactions, KKR said in a filing with the U.S. Securities and Exchange Commission. Blackstone Group LP, manager of the world’s largest private-equity fund, also cited “more challenging financing” when it announced earnings Monday.
“More costly and restrictive financing may adversely impact the returns of our leveraged-buyout transactions and, therefore, adversely affect our results of operations and financial condition,” KKR said in its filing.
Investors, wary of risk after the collapse of the subprime mortgage market, are shunning bonds and loans used to pay for buyouts, including KKR’s planned takeover of U.K. pharmacy chain Alliance Boots Plc. The extra yield investors demand to own non-investment-grade corporate bonds rather than Treasuries has climbed to 412 basis points from a record-low 241 on June 5, Merrill Lynch & Co. data show. A basis point is one one-hundredth of one percent.
About $330 billion in bonds and loans for announced deals remain unsold, according to an Aug. 8 estimate from Citigroup Inc. analyst Prashant Bhatia.
The Dow Jones industrial average fell Monday 3.01, or 0.02 percent, to 13,236.53.
Broader stock indicators also fell. The Standard & Poor’s 500 index fell 0.72, or 0.05 percent, to 1,452.92, and the Nasdaq composite index retreated 2.65, or 0.10 percent, to 2,542.24.
Despite any lingering concerns about the health of the consumer, investors appeared pleased with the Commerce Department’s report that retail sales edged up 0.3 percent in July, slightly ahead of market expectations. Wall Street has been closely monitoring consumer spending, as it accounts for two-thirds of the nation’s total economic activity.
Responding to market jitters, the New York Fed, which carries out the central bank’s market operation, minutes after the opening bell announced $2 billion in overnight repurchase agreements.
The Fed’s “repo” follows a move by the Bank of Japan to put $5 billion into the markets and an addition by the European Central Bank of $65.3 billion. The ECB added more than $200 billion last week.
The moves, following similar injections by the Fed last week, appeared to placate Wall Street for now and allowed it to focus on a week of fresh economic data. Since Thursday, the Fed has added $62 billion in liquidity.
Monday’s injection, however, was smaller than normal, perhaps reassuring some investors that the central bank doesn’t yet feel the need to pump more liquidity into the market.
The central bank moves seem to be calming a market that has been torn by volatility for weeks.
But Ryan Detrick, senior technical strategist for Schaeffer’s Investment Research, said trading on Monday was very tepid. In fact, he said, Monday’s decline was a sign that investors remain nervous — that the markets gave up their gains wasn’t surprising given how volatile trading has been.
“We got off to a good start in the morning but people are still kind of on edge here and are unwilling to jump in and do a lot of buying,” he said.
Overseas Monday, Japan’s Nikkei stock average gained 0.21 percent. European stocks showed sharp gains after a sell-off Friday. Britain’s FTSE 100 jumped 2.99 percent, Germany’s DAX index added 1.78 percent, and France’s CAC-40 rose 2.21 percent.
