Markets & Finance

Stocks Tumble on Mortgage Worries


Bad news about subprime lenders and fourth-quarter foreclosures sparked selling, with the Dow shedding over 240 points

Wall Street's three-day winning streak didn't stand much of a chance Tuesday. Stocks finished broadly, sharply lower, as growing concerns about the subprime mortgage market and a disappointing retail sales report helped spark a sell-off. Volume spiked, likely indicating trading by institutions, says Standard & Poor's Equity Research.

On Tuesday, the Dow Jones industrial average dropped 242.66 points, or 1.97%, to 12,075.96. The broader Standard & Poor's 500 index slid 28.65 points, or 2.04%, to 1,377.95. The tech-heavy Nasdaq composite tumbled 51.72 points, or 2.15%, to 2,350.57.

NYSE breadth was decidedly negative, with 28 issues declining for every 6 advancing. Nasdaq breadth was 25-5 negative.

Economic worries and options expiration were helping to send stocks lower, analysts say. "Weak retail sales reignite the fear the economy may be slowing a bit more than anticipated, coupled with the still strong short-term inflationary pressures," says Peter Cardillo, chief market economist at Avalon Partners. "Adding to the decline today is that this week we have options expiration, and that may also be adding some selling pressure."

The sell-off was an extension of the market's volatility since Feb. 27, some analysts. "Over the next three months, we can expect lower lows and, eventually, higher highs," says Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics, in a report. "But to get to those better prices, we are going to have to become deeply oversold. Thats a process: rallies near highs that fail, and selloffs to deeper levels.

Others point to a healthy correction underway. "The recent rally occurred on improving volume," says Walter Murphy, senior international market analyst at Merrill Lynch, in a note to clients. "Now a correction has occurred on declining volume... This, plus a still generally constructive momentum and breadth background, suggests that the correction will prove to be a healthy effort to consolidate gains prior to another rally attempt."

In economic news, U.S. retail sales rose 0.1% in February, less than expected, following a flat January. Retail sales were down 0.1% in February excluding autos. "Weather may have weighed on sales, but nevertheless, traders will take the data and run," says Action Economics.

A report showing increases in foreclosures and late mortgage payments weighed on financial-services stocks. The Mortgage Bankers' Assn. said the rate of U.S. foreclosures rose to a record 0.54% in the fourth quarter of 2006, from 0.46% three months earlier. The delinquency rate on U.S. home loans advanced to 4.95% in the fourth quarter from 4.67% in the third quarter.

The National Assn. of Realtors said the the housing forecast is cloudy, with a recovery in the market not likely until late this year.

Separately, U.S. business inventories rose 0.2% in January, slightly more than expected, alongside a 0.7% sales decline.

The economic calendar Wednesday holds reports on February trade prices and the fourth-quarter current account deficit.

Among Tuesday's stocks in the news, the NYSE delisted subprime lender New Century Financial (NEWC), which plunged in pre-market trading Monday before trading in the shares was halted. In addition, New Century said the SEC was seeking documents as part of a probe into accounting errors.

Stocks with consumer banking operations like Citigroup (C), Washington Mutual (WM), and JPMorgan Chase (JPM) were solidly lower amid market worries about mortgage lending.

General Motors (GM) was lower after the automaker's former finance arm, General Motors Acceptance, said it would get another $1 million from GM and cited pressures from the subprime mortgage market.

Viacom (VIA.B) sued Google (GOOG) and its YouTube video unit for $1 billion over alleged copyright infringement.

Meanwhile, Texas Instruments (TXN) was lower after the chipmaker's forecast for first-quarter sales and profit disappointed some analysts.

Goldman Sachs (GS) was lower despite reporting a record first-quarter profit.

Fabric retailer Jo-Ann Stores (JAS) was sharply higher after the company said it expects to post a fiscal 2008 above Wall Street predictions.

On the M&A front, Citigroup (C) raised its bid for Japan-based brokerage Nikko Cordial by 26%, in a deal valued at up to $13.35 billion.

Medical device maker Boston Scientific (BSX) said it may spin off a minority stake in its endosurgery unit.

Oil prices extended a recent skid, weighing on corresponding stocks. In the energy markets, April West Texas Intermediate crude oil futures fell 98 cents to $57.93 a barrel, reversing early gains after tumbling in the previous session.

European markets finished lower. The FTSE-100 index in London fell 72.1 points, or 1.16%, to 6,161.2. Germany's DAX index dropped 91.5 points, or 1.36%, to 6,623.99. In Paris, the CAC 40 index was down 63.13 points, or 1.15%, to 5,432.94.

Asian markets ended lower. In Japan, the Nikkei 225 index shed 113.55 points, or 0.66%, to 17,178.84. In Hong Kong, the Hang Seng index lost 109.28 points, or 0.56%, to 19,333.14. Korea's Kospi index declined 5.28 points, or 0.37%, to 1,436.05.

Treasury Market

Treasury prices pushed higher amid the soft retail sales data and ongoing subprime worries. The 10-year note rose in price 15/32 to 101-01/32 for a yield of 4.49%, while 30-year bonds climbed 24/32 to to 101-16/32 for a yield of 4.66%.

Hogan is a reporter for BusinessWeek.com in New York.

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