FED CUTS RATES, STOCKS RISE
Byline: Evan Clark / With contributions from Vicki M. Young, New York / Joanna Ramey, Washington
NEW YORK — Interest rates dropped and Wall Street moved in the opposite direction Tuesday as officials in Washington pressed on for a short-term economic stimulus package to bolster consumer spending.
The Federal Open Market Committee lowered the federal funds interest rate by 50 basis points to 2.5 percent — the ninth reduction this year — and the Board of Governors brought down the discount rate to 2 percent, also a 50-basis-point cut.
The move helped the Dow Jones Industrial Average to rise 113.76 points to 8,950.59, while the Nasdaq Composite index picked up 11.87 points to 1,492.32.
Retail issues mostly rose with the tide. Shares of Saks rose 48 cents to $5.63 while Wal-Mart picked up $2.24 to $52, Federated was up 71 cents to $29.38 and Stein Mart dropped 30 cents to $7.71. Specialty stores, for the most part, saw increases as well with Bebe up $1.50 to $15.25; Chico’s up $1.82 to $27.50 while Gap slid 2 cents to $11.90.
Robert Reich, an economist who served as Secretary of Labor during President Bill Clinton’s first term and is now a professor at Brandeis University, said Tuesday that even the half-point reduction in interest rates is likely “not enough” to ensure that consumers will keep on spending. Also necessary, he said at The Robertson Stephens Consumer Conference at The Pierre hotel here, is a fiscal stimulus package — possibly tax cuts of limited duration — to boost consumer confidence.
White House officials and congressional leadership Tuesday agreed that some type of short-term economic stimulus package was needed to jump-start sagging consumer, as well as business, spending.
“There is agreement that we’ve got to come together with a vision about how big the package ought to be,” President Bush told reporters.
The Fed noted that “the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate.”
Senate Finance Committee Chairman Max Baucus (D., Montana), told reporters he expected a decision in a week or two about what type of provisions would be contained in a package. He stressed the need for any government economic boost to be directed as much at consumers as businesses.
Baucus noted that many tax-break ideas, like a reduction of the payroll tax and acceleration of depreciation, were on the table, as is a minimum wage increase. However, he said “it’s unlikely” there would be a decrease in the capital gains tax, a favorite of business.
However, questions about consumer confidence contributed to continuing reviews of retail stocks and credit. Saks Inc.’s debt was placed on review for possible downgrade by Moody’s Investors Service. In August, the bond-rating agency took Saks’s senior implied debt rating down a notch to Ba2 — two steps below investment grade — due to poor operating performances at both its department stores and Saks Fifth Avenue. According to a Moody’s statement, Saks is “more highly leveraged than a number of its competitors and its debt protection measures are therefore impacted disproportionately by lower sales and related markdowns.”
Having painted a grim third-quarter picture early in the day Tuesday, Stein Mart Inc. was downgraded by Wedbush Morgan analyst Elizabeth Pierce to “hold” from “buy.” Comps slid 4 percent for the quarter. Same-store sales from Sept. 11 through the end of the month, though, dropped 17 percent. The drop in consumer activity has weighed on the bottom line, which is now expected to show a loss of 20 cents a share for the quarter. Wall Street consensus estimates earlier had placed the loss at 6 cents a share.
Pierce said she didn’t link Stein Mart’s announcement to assortment problems and believes the firm has “the ability to position themselves to take advantage of significant changes in consumer buying habits” should the public become more price-conscious.
Running counter-trend, Bebe Inc. was upgraded to “buy” from “market perform” by First Union analyst Joseph Teklits. “
Additionally, SunTrust Robinson Humphrey upgraded a number of teen retailers to “outperform” from “neutral”: American Eagle Outfitters, Charlotte Russe, Gadzooks and Pacific Sunwear.