Wall St Retreats

Akamai Technologies Inc. slid 12 percent after saying its profit margin shrank, while Nvidia Corp. and Symantec Corp. lost more than 9.5 percent after issuing profit forecasts. Colgate- Palmolive Co. sank 7.9 as its sales missed analyst estimates. Financial shares erased gains as New York Attorney General Andrew M. Cuomo said his office served subpoenas on Prudential Financial Inc. and MetLife Inc. in a probe of military life insurance.

The S&P 500 lost 0.9 percent to 1,096.33 at 11:32 a.m. in New York after climbing as much as 0.9 percent earlier. The Dow Jones Industrial Average sank 63.72 points, or 0.6 percent, to 10,434.16. More than two stocks fell for each that fell on U.S. exchanges.

“Tech is not doing great and that’s enough to drag the index,” said Michael Mullaney, who manages $9 billion at Fiduciary Trust Co. in Boston. “We need to get a better economic picture in order to get a sustainable stocks rally. We need to get job creation and the consumer back on board”

The S&P 500 has fallen 1.6 percent over the past three days after orders for durable goods unexpectedly decreased and the Federal Reserve said economic growth slowed in some areas. The gauge has climbed 6.5 percent in July, headed for its best monthly advance in a year, after earnings topped estimates at about 78 percent of its companies that have reported second- quarter results so far.

Technology Shares Slump

Akamai Technologies sank 12 percent to $38.88. The largest supplier of software to make websites and digital media load faster said its profit margin shrank as it added business from customers like Netflix Inc. at lower prices.

Nvidia slumped 9.7 percent to $9.15. The second-largest maker of graphics chips lowered its second-quarter sales forecast to a range between $800 million to $820 million. That compares with a prediction of $950 million to $970 million given May 13. Analysts had projected sales of $944.7 million, according to the average from a Bloomberg survey.

Symantec fell 9.9 percent to $13.23. The world’s largest maker of computer security software forecast second-quarter sales and profit that missed analysts’ estimates, citing weakness in the euro and “cautiousness” among customers.

Colgate-Palmolive led a gauge of consumer staples stocks to the second-biggest decline among 10 industries in the S&P 500. The world’s largest toothpaste maker reported second-quarter sales of $3.81 billion, missing the average analyst estimate in a Bloomberg survey of $3.94 billion. Colgate slumped 7.9 percent to $77.21.

Remember yesterday I said

Shayne Heffernan is of the opinion the markets are moving higher, but it will be a bumpy ride. Thee are conflicting signals in the market and the rally will see big drops from time to time, possibly today.

Equity derivatives indicate that although the stock market is turning in its best monthly performance of the year, investors are still fretting about the potential for another drop.

It’s not just equity options that are raising red flags.

U.S. Treasury yields reached new lows last week, signaling investors are willing to accept paltry returns on safe-haven securities.

But puzzlingly, credit markets, which were early indicators of trouble in 2000 and 2007, seem relatively unfazed.

Given the conflicting signals, it makes sense that America’s top economist, Federal Reserve Board Chairman Ben Bernanke, warned last week the economic outlook remains “unusually uncertain.”

Some U.S. portfolio managers argue that investors with an insatiable appetite for yield may be paying too little attention to the risks in stocks and corporate bonds.

Consider implied volatility skew from equity options. Skew indicates the difference in demand for put options, which investors use to bet on the market falling, and call options, which allow investors to bet on the market rising.

A standard measure of three-month volatility skew is around 11.39 percentage points, signaling much higher demand for puts than calls. Over the last five years, that figure has trended closer to about 9 percent, and skew has only been higher about 9 percent of the time.

“There’s a real market out there for protection against the market dropping,” said Scott Weiner, U.S. head of equity derivatives and quantitative strategy at Deutsche Bank in New York.

To be sure, three-month volatility skew has edged lower in recent weeks after reaching a record high in May, but it is still high by historical standards.

LIMITS ON GROWTH

The Treasury bond market would argue that it has known about the United States’ “unusually uncertain” economic outlook — and other markets will play catch up.

The U.S. government is due to report on Friday that growth slowed to a 2.5 percent annual rate in the April-June period from a 2.7 percent pace in the first three months of 2010.

For many companies in the second quarter, profit growth came from cutting costs rather than rising revenue.

Industrial conglomerate General Electric Co (GE.N) posted its first quarterly profit increase in more than two years, but its revenue fell.

In recent weeks, yields on U.S. government bonds have dropped to alarmingly low levels, reflecting a growing concern of falling economic growth rates and inflation expectations.

Billionaire George Soros said at a conference less than two weeks ago that the Treasury bond market is suggesting “no inflation” and indicates “no growth.”

Last week, the yield on the two-year Treasury note hit a record low 0.56 percent and the yield on the benchmark 10-year note slid below 3 percent.

Treasuries have been investors’ favorite safe haven during periods of turmoil, as was the case during the depth of the credit crisis in Greece a few months ago, even overwhelming the $2 trillion of new government debt flooding financial markets.

More recently, they have become the security of choice for another reason: investors’ sinking feeling that U.S. economic growth has lost momentum.

“There is no growth to speak of and aggregate demand is falling — this is what the bond market is telling you,” Koski of Transparent Value said.

By contrast, junk bond spreads — a measure of the extra return that investors demand for taking credit risk from riskier companies — are hovering near levels more typical of late 2007 or early 2008, according to Merrill Lynch indexes. To this market, it is almost as if Lehman Brothers and Bear Stearns never failed.

It may be that both markets are right. Companies might generate enough cash to meet their obligations to creditors but not enough to generate profit growth.

But one hedge fund manager said he is shorting junk bond credits because the market seems to have minimal potential upside and significant possible downside.

CASH NOT NECESSARILY KING

Mom and pop investors may be less concerned about the downside, having poured a total of net $138 billion into bond mutual funds during the first six months of 2010, with taxable bond funds taking in $120 billion, according to Strategic Insight.

Overall, some investors have taken comfort that a double-dip recession won’t occur because of Corporate America’s solid balance sheets.

U.S. corporations, not counting financial companies, have socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26 percent from a year earlier, according to the Federal Reserve.

Monday, the Dow Jones Industrial Average closed up 100.81 points, or 0.97 percent, to 10525.43, pushing the index back into positive territory for the year.

Shayne Heffernan www.livetradingnews.com

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