Markets & Finance

Stocks Tumble as Credit Fears Mount


Indexes were whipsawed by news of Fed liquidity injections and market rumors about mortgage firm Countrywide. The S&P 500 is now down for the year

Troubles in the mortgage and credit markets continued to take a toll on U.S. stocks Wednesday following Tuesday's slide. In a see-saw session, major indexes were boosted by news that the Federal Reserve pumped more money into the financial system, but then lost ground again as rumors swirled about troubles at mortgage llender Countrywide Financial (CFC).

Wall Street's summer correction hit some milestones Wednesday marked by gloom about the impact of a global credit crunch. On Wednesday, the Dow Jones industrial average dropped below the 13,000 mark -- closing down 167.45 points, or 1.29%, to 12,861.47.

The broader S&P 500 fell 19.84 points, or 1.39%, to 1,406.70 -- and is now down 1% for the year.

The tech-heavy Nasdaq composite index lost 40.29 points, or 1.61%, to 2,458.83.

Investors probably suffered some whiplash on Wednesday. The CBoE's volatility, or VIX, equity index -- a measure of market fear -- hit a new high of 31.38 as stocks skidded in the last hour, after trading as low as 26.16 when stocks were rising.

News that the Federal Reserve would pump more money into the markets provided only a brief respite from the selling. On Wednesday, the New York Fed used an overnight repurchase agreement, or "repo", to add $7 billion to financial institutions. In the last week, central banks in the U.S. and Europe have injected money into the markets to help stabilize the credit markets.

"The Fed pumping money into the system is positive, but the more money they pump in, the more the fear factor increases," explains Peter Cardillo, chief market economist at Avalon Partners in New York. "People think there are still a lot of problems out there."

Cardillo thinks the "fear factor is feeding on itself," as he watched the Dow average fall below the psychologically important 13,000 level. "Until credit woes wane, the negative technical aspects have a grip on the market," he says.

Standard & Poor's says stocks could be impacted by investors' unwinding of options positions before Friday's expiration.

Investors ignored some good news on the U.S. economy. The U.S. consumer price index, a key inflation gage, rose 0.1% in July, with the core index (excludes food and energy) up 0.2%. Gas prices fell 1.7%, while housing costs rose 0.2%. In June both rose 0.2%. The numbers were in line with Wall Street expectations.

The CPI annual gain moderated to 2.4% in July from 2.7% in June. The core CPI pace was unchanged at 2.2% for the third consecutive month, which keeps this measure stubbornly above the Fed's 2% soft target, says Action Economics.

The U.S. New York Empire State index which fell to 25.06 in August, from 25.75 in June. The general business conditions six-month outlook improved to 50.4 from 48.24. "The data are much better than expected and reflect the dichotomy of the strength in the real sector amid fears in the financial markets," says Action Economics.

And industrial production rose 0.3% in July after a revised 0.6% increase in June. Capacity utilization rose to 81.9% in July from 81.8% (revised from 81.7%).

"Though the data are always of interest, traders are preoccupied with the spread of subprime woes moving into other asset backed markets, with fears weighing heavily on stocks," says Action Economics.

S&P notes that traders are bracing for tomorrow's report on housing starts, which is expected to decrease to a 1.400 million pace from 1.467 the month before.

Among stocks in the news on Wednesday, Countrywide Financial (CFC) fell 13% to $21.19, and touched a new 52-week low of $19.25, as reports circulated that the company is having trouble accessing the commercial paper market. The stock was downgraded by a Merrill Lynch analyst one day after the company reported mortgage funding volume of $39 billion for July, a 6% increase from a year ago but a 14% decline from the previous month.

Thornburg Mortgage (TMA) shares rose, after plunging 46% to $7.65 on Tuesday before trading was halted after the company delayed its second-quarter dividend because of the credit crunch in the mortgage industry. S&P says the stock was higher Wednesday on news company has met all margin calls, but believes that growing uncertainty in the mortgage and credit markets pose risks; it reiterated a sell opinion on the stock.

KKR Financial (KFN) estimates it will need to charge up to $200 million of its investment in asset-backed notes. The firm cited "unprecedented disruption in the residential mortgage and global commercial paper markets."

Freeport-McMoRan Copper & Gold (FCX) dropped after the price of copper dropped to a seven-week low, sending other raw materials stocks down too.

Deere & Co. (DE) reported earnings of $2.37 per share for the quarter, vs. $1.85 a year ago. Sales were up 5.9%, and the company expects worldwide sales of its agricultural equipment rising 16% this year.

Macy's Inc. (M) reported earnings of 16 cents per share, vs. 57 cents a year ago. Same-store sales dropped 2.7% and total sales fell 1.7%.

Impac Morgage Holdings (IMH) reported a $2.05 per share loss in the second quarter, vs. earnings of 30 cents a year ago. The small lender reported a sharp increase in its loan loss provisions.

In Europe, stocks pared losses at the close of trading Wednesday. In London, the FTSE 100 index fell 0.56% to 6,109.3. Germany's DAX index rose 0.28% to 7,445.9. In Paris, the CAC 40 index lost 0.66% to 5,442.72.

But Asian markets finished sharply lower. In Japan, the Nikkei index dropped 2.19%, to 16,475.61. In Hong Kong, the Hang Seng index fell 2.87% to 21,375.72. The Shanghai composite index edged down 0.34% to 4,856.11.

Oil prices spiked again on Wednesday. September West Texas Intermediate crude oil futures climbed to $73.35, up 97 cents, as tropical storm Erin gears up in the Gulf of Mexico, and as tropical storm Dean gathers strength in the Atlantic. Weather concerns, along with the large inventory drawdown, have put oil bulls back in charge, though sources say gains have been tempered by the wobbly financial markets, says Action Economics.

Treasury Markets

Treasuries were higher on Wednesday in a continuing flight to safety trade. The 10-year note rose 06/32 to 100-14/32 for a yield of 4.70%, while the 30-year bond fell 09/32 to 99-01/32 for a yield of 4.99%. The CPI came in as expected, leaving the "fear trade" to dominate action in the session, says Action Economics.


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