Stocks Tumble on Citigroup Worries

Fears that more big subprime writedowns are waiting in the wings sparked a sell-off on Thursday

by David Bogoslaw

It may have been the day after Halloween but Wall Street had a full-scale fright-fest Thursday, with the markets looking fearfully for subprime-related monsters lurking in the shadows.

Major U.S. stock indexes fell out of bed on Thursday, led by further losses in the financial sector after a downgrade on Citigroup re-ignited worries about more bad loans on its books and further write-downs to come. Negative earnings news from Exxon Mobil and Credit Suisse Group also sapped any lingering optimism among investors. The benchmark index had its fourth-largest decline of 2007.

On Thursday, the Dow Jones industrial average plummeted 362.14 points, or 2.60%, to 13,567.87. The broader S&P 500 index sank 40.94 points, or 2.64%, to 1,508.44. The tech-heavy Nasdaq composite index dropped 64.29 points, or 2.25%, to 2,794.83.

Action in the broader market was resoundingly bearish. On the New York Stock Exchange, 28 stocks were down for every four that climbed higher, while breadth on the Nasdaq was 24 to 6 negative, amid fairly active trading, S&P MarketScope said. As on many of the market's darkest days in recent months, selling accelerated in the final hour of trading. Besides financials, retail, basic material and energy stocks also contributed to the equities plunge, with only technology stocks holding up.

The market will turn its attention on the October nonfarm payrolls figures due out on Friday for another sign of how the economy is faring. S&P MarketScope said it expects an increase of 95,000 jobs, while Action Economics is looking for a gain of 100,000, after a 110,000 bounce in September. Action Economics also anticipates that the unemployment rate held at 4.7% in October, given that the declines in continuing claims through September and early October, before this week's bounce, suggests reduced upward pressure on the rate.

Thursday's sharp sell-off prompted a re-evaluation of Wednesday's rally, which is now thought to have been caused by funds buying equities before closing their fiscal 2007 books rather than positive reactions to the Federal Reserve's quarter-point rate cut.

In fact, the market continues to digest the implications of the Fed's statement on Wednesday that it now sees the inflation risk balancing out the risk of a slowdown in economic growth, which likely means it's less inclined to cut interest rates again before the end of this year. There is still a lot of fear out there about further fallout from the subprime and credit crises.

The Fed is "pretty much saying loud and clear that they're done hiking rates," said Rick Campagna, managing director at Provident Investment Counsel in Pasadena, Cal. "After a night to think about it, people are saying if the Fed is really done, then the hurdle for getting bailed out is going to get higher."

He said he believes Bernanke & Co. made a mistake by saying the risk is now balanced between slowing growth and inflation. He pointed to layoffs in the financial industry as clear evidence that troubles in the housing sector are spilling over into the broader economy. He also cited New York City Mayor Michael Bloomberg's recent remarks about cutting back on hiring city workers due to concerns about the generation of income tax revenue out of Wall Street.

The Fed will end up eating its words, as more negative economic data in the weeks ahead confirm the knock-on effects of the housing slump, making the case for further easing of rates, he predicted.

Others observers interpreted the Fed's statement differently, seeing it as a declaration of independence from the demands of the market and a sign only that it intends to be more judicious in easy monetary policy rather than refusing to make more cuts in the near future.

Brian Gendreau, investment strategist at ING Investment Management, said that Thursday's rout had nothing to do with worries about less monetary support from the Fed. Rather, it was all about concern about the extent of losses on subprime and subprime-related instruments.

The market's been shocked not only by the size of the writedowns but the fact that they keep being added to, he said.