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Wall Street suffered a sluggish day after two consecutive days of gains as the US dollar hit a record low against the euro and amid a mixed set of brokerage results.
Attention was focused on Ben Bernanke, Federal Reserve chairman, and Hank Paulson, Treasury secretary, as they gave testimony before Congress on the subprime mortgage crisis.
The S&P 500 closed 0.7 per cent lower at 1,518.74. The Nasdaq Composite was off 0.5 per cent at 2,654.29, while the Dow Jones Industrial Average was down 0.4 per cent at 13,766.70.
Appearing before the House financial services committee, Mr Bernanke said delinquencies and foreclosures in the subprime mortgage market “are likely to rise further”.
“Global financial losses have far exceeded even the most pessimistic estimates of the credit losses on these loans,” Mr Bernanke said.
But Mr Paulson told the House that in spite of a recent reappraisal of risk and weaknesses in the housing sector, “the fundamentals point to continued US economic growth”.
He also said Fannie Mae and Freddie Mac, the government-chartered companies that own or guarantee about 40 per cent of US mortgages, should temporarily be allowed to securitise loans exceeding $417,000 – so-called “jumbo” mortgages.
His comments failed to lift the S&P homebuilder index, which endured another torrid day, closing 6.3 per cent lower at 453.53.
Transport stocks also showed weakness after a disappointing earnings forecast from FedEx.
In the three months to August 31, FedEx increased net income from $475m to $494m but said 2008 earnings would decline by as much as 4.3 per cent. Shares in the company closed 2.9 per cent lower at $104.45.
“Recent financial market volatility and high energy costs have increased the uncertainty surrounding the near-term economic outlook,’’ the company said in a statement.
The Dow transport index fell 1.8 per cent and has fallen about 11 per cent in the past two months.
Crude oil prices again climbed to record levels, closing $1.39 higher at $83.32, providing a further support to energy stocks.
Bear Stearns and Goldman Sachs completed the week’s round of brokerage earnings updates for the fiscal third quarter but achieved differing results.
Bear reported a 61 per cent decline in earnings for the quarter from a year ago. Net income declined from $438m to $171m, while fixed-income revenue plummeted 88 per cent to $118m.
Bear’s shares fell as low as $113.88 but the stock closed only 0.2 per cent lower at $115.46.
“Earnings for the third fiscal quarter confirm that Bear Stearns has been hurt disproportionately relative to its bulge-bracket peers by the downturn in the mortgage markets, and by the BSAM hedge fund implosion,” said Kathleen Shanley, credit strategist at Gimme Credit.
In contrast, Goldman delivered a 79 per cent rise in third-quarter profits to $2.85bn, compared with $1.55bn the previous year, beating expectations, as revenue rose 63 per cent to $12.3bn.
Its shares have climbed almost 10 per cent this week but yesterday afternoon slipped 1 per cent to $203.53. The S&P investment bank index shed closed 2 per cent lower
“Revenues increased across the board, as robust customer activity and solid risk management procedures offset losses on non-prime loans and loan commitments,” said Matthew Albrecht, brokerage industry analyst at Standard & Poor’s Equity Research.
“Credit writedowns totalled $1.5bn, net of hedges, but mortgage exposure was covered by hedging positions, netting a gain for the period.”
Elsewhere there was mixed news for the economy. Weekly jobless claims fell 9,000 to 311,000 and the four-week moving average fell 3,500 to 320,750.
The Philadelphia Federal Reserve Bank’s manufacturing index, a measure of regional factory activity, climbed to 10.9 in September, after a flat result the previous month.
However, the Conference Board’s index of leading economic indicators fell 0.6 per cent in August, exceeding the 0.5 per cent fall anticipated by analysts.