Stocks Plunge, Dow Drops 733

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U.S. retail sales fell 1.2% in September, and were down 0.6% excluding autos. August's 0.3% decline in sales was revised lower to -0.4%. The 0.7% drop in August's ex-auto component was revised to -0.9%. Excluding autos, gas, and building materials, sales were down 0.7% last month. Vehicle sales plunged 3.8% and are down 15.8% year-over-year vs. -17.2% previously. The data are worse than expected and will give a boost to Treasuries, while weighing on the dollar and equities.

"Today's dismal retail sales report implies an even weaker consumption profile over the next several quarters," wrote Michelle Meyer at Barclay's Capital in a note Wednesday morning. She sees continued weakness in consumer spending given the market conditions in October with even tighter lending standards and depressed consumer sentiment. "We expect consumption to decline through the middle of next year as the economy falls deeper into recession," she wrote.

The U.S. Empire State manufacturing index plunged to 24.6 in October as manufacturing in the region fell more deeply into contraction. The index was -7.4 in September. The employment index improved to -3.7 from -4.6 as the labor market continues to sink. New orders crashed to -20.5 from 4.4. Prices paid slowed to 31.7 from 44.8. Prices received slipped to 20.7 from 24.1. The 6-month business conditions index was virtually halved to 24.2 from 43.1, with the future employment index at 1.1 from 18.8, and capital expenditures falling to 6.1 from 16.1. The data are much worse than expected.

In a speech in New York Wednesday, Bernanke said the credit markets will take some time to "unfreeze," but he added that the tools needed to respond to the crisis are now in place. Bernanke discussed the "too big to fail" problem and risk of excessive financial market concentration, which can lead to a breakdown in market discipline. He said the problem could be addressed partly through closer supervision in addition to strengthening infrastructure. The problem is that over-the-counter instruments like CDS can lead to a firm to become systemically significant, which suggests strengthening of infrastructure and central clearing houses for derivatives and swaps could be a solution, along with oversight and a more defined resolution regime. He said the bursting of the housing market bubble was the trigger behind the financial crisis, with declining house values initiated a negative feedback loop. Breaking that cycle will be a key to resolving the current crisis.

In a speech Wednesday morning, Boston Federal Reserve President Rosengren said the U.S. is not where the Fed wants it to be in terms of inflation and employment.

The Associated Press reports the leaders of the Group of Eight major industrial countries said they will meet "in the near future" to map strategies to deal with the global financial crisis. In a joint statement released by the White House, the G-8 leaders said they were united in their commitment to resolve the crisis by strengthening their financial institutions and restoring confidence. The statement said the leaders of the eight countries -- the U.S., Japan, Germany, France, Britain, Italy, Canada and Russia -- would meet "at an appropriate time in the near future."

London stocks fell 7.16%, Frankfurt fell 6.49%, and Paris fell 6.82% on Wednesday. Tokyo stocks rose 1.06%, Hong Kong stocks fell 4.96%, and Shanghai stocks fell 1.12%.

Two of the financial firms slated to receive direct investment from the government under Treasury Secretary Henry Paulson's bank rescue plan released results Wednesday. JPMorgan Chase (JPM) reported third-quarter EPS of 11 cents, vs. 97 cents one year earlier, on an 8.5% revenue drop. The company noted that results included estimated losses of $640 million (aftertax), or 18 cents per share, for Washington Mutual merger-related items. JPMorgan also noted markdowns on mortgage trading positions and leveraged loans, and higher credit costs due to continued deterioration in its home-lending portfolio.

State Street Corp. (STT) reported third-quarter EPS of $1.09, vs. 91 cents one year earlier, on a 24% revenue rise. The company continues to expect growth in operating EPS approaching the high end of 10%-15%; growth in operating revenue to be above the high end of the 14%-17% range, and operating return on equity to approach the high end of the 14-17% range.

Aluminum stocks were among the biggest losers Wednesday after Fitch Ratings lowered Alcoa's (AA) Issuer Default Rating (IDR) to BBB from BBB+, its senior unsecured debt to BBB from BBB+, its $3.25 billion revolving credit facility to BBB from BBB+, and its preferred stock to BBB- from BBB. The rating outlook is stable. Fitch cited Alcoa's higher-than-expected debt levels and financial leverage.