An Ugly Day for Stocks

Investors dump stocks as credit market disruptions threaten the buyout boom, while new home sales plunged

by Ben Steverman

The bears roamed freely on Wall Street Thursday as investors weighed a nasty brew of continued dreadful home sales, mixed earnings news, a jump in energy prices, and further retrenchment for the credit markets.

At one point in the afternoon, the Dow Jones Industrial average was down more than 400 points. That rivaled the biggest loss of the year on Feb. 27, when fears about China's overheated market and a trading glitch sent the index down 416 points.

Stocks recovered some ground late in the trading session, but still erased nearly all trading gains from the month of July. The Dow Jones industrial average was down 311.5 points, or 2.26%, to 13,473.57. Just last week, on July 19, the Dow closed a fraction above 14,000 for the first time.

The broader S&P 500 moved well below the 1,500 mark, down 2.33%, or 35.43 points, to 1,482.66. And the tech-heavy Nasdaq Composite was off 1.84%, or 48.83 points, to 2,599.34.

Losses were widespread, with 30 stocks lower for every three higher on the New York Stock Exchange. On the Nasdaq, the ratio was 24 to 5 negative.

Market analysts said worries about a looming credit crunch started the sell-off. On Wednesday, bankers postponed the sale of $12 billion in debt to fund the purchase of an 80% stake in Chrysler Group by Cerberus Capital Management. The deal may still go forward, but the move raised questions about the credit market's willingness to buy riskier corporate debt, and what that might mean for the ongoing boom in buyout activity (see BusinessWeek.com, 7/25/07, "Wall Street Reacts to Bad News").

Bill Larkin, portfolio manager of fixed income at Cabot Money Management warns of "a drastic re-pricing of risk, which is definitely going to have an impact on anyone who needs to borrow money."

Deepening the concerns was more bad news on housing. New home sales plunged 6.6% in June. Wall Street was expecting a 1.6% drop. May and April new home sales numbers were revised lower. Add that to Wednesday's news that existing home sales dropped 3.8% in June, and bad earnings figures from home builders. "Housing will provide a slow-burn source of economic damage well into 2008," Charles Dumas of Lombard Street Research wrote Thursday. There are renewed worries that housing could hurt consumer spending and the labor market.

Though the market is going through the busiest part of the second-quarter earnings season, profit reports seemed to have little impact. While Apple (AAPL) and Ford (F) reported strong earnings, other companies' earnings reports fell short or failed to wow the market.

More than a third of the S&P 500 report earnings this week. As of midday on Thursday, corporate earnings were coming in 6.8% above a year ago. That projection, from Reuters Estimates, is up from 6% at the start of the week. Earnings are expected to come in about 3% ahead of analysts' estimates, which is typical.

"This quarter is in line with what we expected," says Ashwani Kaul, a senior research analyst with Reuters Estimates. Technology and financial companies are doing well, while cyclical firms are showing weakness, he says.

It has been a volatile several days on Wall Street. The Dow has alternated between double-digit increases and triple-digit sell-offs every other day for a week.

In other economic news Thursday, U.S. durable goods orders Thursday were up 1.4%, less than many had expected, after a 2.3% decline in May. Action Economics says that despite the headline gain, many of the subcomponents fell.

U.S. jobless claims fell 2,000 to 301,000 in the week ended July 21 from 303,000 the previous week. The data indicate a solid labor market, Action Economics says, but probably won't have much impact on markets. Friday the markets will receive initial data on second-quarter U.S. gross domestic product (see our economic calendar).