Markets & Finance

Stocks Slump amid Economic Jitters


Trading was slow Monday as markets awaited results of the Fed's $20 billion credit auction

Major stock indexes were slumping in slow year-end trading Monday amid worries about the economy and skepticism about the Federal Reserve's efforts to add liquidity to a stressed financial system.

The Fed offered $20 billion in credit to commercial banks through an auction on Monday. The move was aimed at alleviating the credit crunch by encouraging banks to continue lending to customers. The Fed will not announce the results of the auction until Wednesday.

Comments from former Fed chairman Alan Greenspan also seemed to be worrying the markets. Greenspan warned in a Sunday speech of the threat of "staglation," an uptick in inflation as the economy slows. Data last week showed prices increasing more than expected.

Also, Moody's (MCO) warned it might downgrade the AAA ratings of four leading bond insurers. The ratings agency apparently later affirmed the AAA status of insurers MBIA (MBI) and Ambac (ABK), reports Action Economics.

On Monday, the Dow Jones industrial average was off 132.25 points, or 0.99%, to 13,207.60. The broader S&P 500 index was down 16.15 points, or 1.1%, to 1,451.80. The tech-heavy Nasdaq composite index fell 45.72 points, or 1.74%, to 2,590.02.

For every 23 stocks falling in price on the New York Stock Exchange, eight were moving higher. At the Nasdaq, the ratio was 21-8 negative.

One factor in lower stock prices Monday is worry that higher inflation and stronger-than-expected consumer spending will prevent the Federal Reserve from cutting rates at its January meeting, according to Standard & Poor's MarketScope.

In economic news Monday, the U.S.'s current account deficit narrowed to $178.5 billion in the third quarter, down from a $188.9 billion shortfall in the second quarter, a number that was revised lower. That's the smallest gap in two years.

The New York Fed's Empire State index fell 17 points to 10.3 in December, after reaching 27.4 in November. The December reading was the lowest since May, and was below the more modest drop to 20.0 that markets had expected.

U.S. NAHB homebuilder index held at 19 in December compared to November, and matching the record low set in October. The current single family index edged up to 19 from 18, while the future index rose 2 points to 26 from 24. The index of prospective buyer traffic fell to 14 from 17. The steadiness in the data over the last three months offer some hope that the housing market may be bottoming, according to Action Economics.

The Fed is slated to propose broad new curbs Tuesday on subprime loans, according to a Dow Jones report, potentially limiting the kinds of mortgages that can be issued and the types of items borrowers will need in order to obtain a loan. The Fed's proposal would likely only be aimed at future mortgage originations, and not the subprime adjustable-rate mortgages that proliferated during the recent housing boom, Dow Jones said.

Oil prices were falling Monday. In NYMEX trading, oil for January delivery was down $1.37 to $89.90 per barrel.

Among other stocks in the news Monday, Ingersoll-Rand (IR) will buy Trane (TT) in a $10.1 billion deal. If approved, the combined company would be one of the world's largest air conditioner makers. The cash and stock deal values Trane shares at a 29% premium.

Aon Corp. (AOC) plans to sell two units and use most of the proceeds to buy back its stock. It will sell its Combined Insurance Company of America for $2.4 billion to ACE Limited, and its Sterling Life Insurance Co. to Munich Re Group for $352 million. The share buyback program will be increased $2.6 billion to a toal of $2.78 billion.

ArcelorMittal (MT) won't sell a Baltimore steel plant to E2 Acquisition Corporation because the buyer wasn't able to secure financing. ArcelorMittal is required to sell the facility by an agreement with the Department of Justice.

Amgen (AMGN) reported positive initial results from denosumab, a drug designed to increase bone density in patients being treated for breast cancer.

Priceline.Com (PCLN) was downgraded by Citigroup analysts from "buy" to "hold." The stock was up more than 35% since November.

UBS (UBS) was trading lower after being downgraded by CIBC analysts from "sector perform" to "underperform."

Loews Corp. (LTR) plans to spin off ownership of the Lorillard tobacco company, creating a separate, publicly traded company by distributing Lorillard stock to its shareholders.

Illinois Tool Works (ITW) dropped more than 5% Monday morning after lowering investor expectations by cutting its full-year earnings guidance by 4 cents per share.

Sallie Mae (SLM) announced that its executive chairman, Albert Lord, will also take over as chief executive. The previous CEO will become the student loan provider's president.

Stocks were falling around the world. In London, the FTSE 100 Index was down 1.86% to 6,277.80. Paris' CAC 40 Index dropped 1.61% to 5,514.88, and in Germany the DAX index fell 1.55% to 7,825.44.

In Asia, Tokyo's benchmark index, the Nikkei 225, was off 1.71% to 15,249.79. In Hong Kong, the Hang Seng index plunged 3.51% to 26,596.58, while on the Chinese mainland, the Shanghai Composite was down 2.62% to 4,876.76.

Treasury Market

Bond prices were pushing higher as global stocks fell. Ten-year Treasury notes were up 11/32 to 100-15/32 for a yield of 4.197%; and the 30-year bond was up 19/32 to 106-01/32 for a yield of 4.626%.

Steverman is a reporter for BusinessWeek's Investing channel.

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