Markets & Finance

Stocks Crash, Dow Sinks 679


Investor panic reaches new heights as S&P 500 plunges 7.6% and Dow finishes below 9,000 for the first time in five years

U.S. stocks plunged in the final hour of trading, logging another devastating session with the Dow industrials plunging almost 679 points -- or 7.3% -- to below 9,000.

It doesn't seem to matter what the central banks and lawmakers do to stop the bleeding from the credit crisis. Fear has taken over Wall Street. "It's beyond a panic," says Dave Rovelli, managing director of equity trading at Canaccord Adams. "As soon as we start to rally, sellers come back into the marketplace."

Stocks started higher Thursday morning thanks to a strong earnings report from technology bellwether IBM Corp. (IBM). But news in the afternoon turned the market sour for the seventh session in a row.

Some market watchers think the selling accelerated in the last hour of trading Thursday after S&P Ratings Services placed both General Motors (GM) and Ford Motor (F) on CredtiWatch with negative implications. JD Power and Associates reported that market uncertainty has led to a downward revision of its 2009 U.S. light-vehicle forecast. (JD Power and Associates, Standard & Poor's and BusinessWeek are owned by McGraw-Hill (MHP).) Jeff Schuster, executive director of automotive forecasting for JP Power, said, "the global market in 2009 may experience an outright collapse." The shares of GM plunged 31% to 4.76 -- a level not seen in more than 50 years as concerns over raising capital and a global auto market collapse weigh heavily on investor sentiment. Ford shares tumbled 21% to 2.08.

Bank stocks stayed under pressure news that talks between Citigroup (C), Wells Fargo (WFC) and the U.S. government regarding the future of Wachovia(WB) have stalled. Some also say financials got hit because the short-selling ban was lifted.

Insurance stocks also suffered amid news from AIG (AIG), which said it entered into a securities lending agreement with the New York Federal Reserve Bank covering $37.2 billion of securities. With regard to the AIG news, S&P Equity Research said: "it is our understanding the Fed action was necessitated by a decline in the value of collateral backing of a securities lending transaction."

By the end of Thursday's session, the blue-chip Dow Jones industrial average tumbled 678.91 points, or 7.33%, to 8,579.19 -- the lowest level in five years. The broader S&P 500 index shed 75.02 points, or 7.62%, to 909.92. The tech-heavy Nasdaq composite index declined 95.21 points, or 5.47%, to 1,645.12.

Thursday's declines bring the Dow's loss for 2008 to 35.3% -- worse than 1937's decline of 32.8%. The S&P 500 is now down 38% -- also the worst drop since 1937, while the Nasdaq has also lost 38% this year. The markets still have a ways to go to beat the worst year of the Great Depression, 1931, when the Dow fell 52.7% and the S&P 500 plunged 47.1%.

Biggest Point Drops in the Dow

Date

Close

Point Drop

Percent Decline

Sept. 29, 2008

10,365.45

777.68

-6.98%

Sept. 17, 2001

8,920.70

684.81

-7.13%

Oct. 9, 2008

8,579.19

678.91

-7.33%

Apr. 14, 2000

10,305.77

617.78

-5.66%

Oct. 27, 1997

7,161.15

554.26

-7.19%

Aug. 31, 1998

7,539.07

512.61

-6.37%

Oct. 19, 1987

1,738.74

508.00

-22.61%

The last time the S&P 500 dropped seven days in a row was June 1996. For the Dow, the last seven-day drop goes back to July 2002.

The volatility index (VIX), a measure of fear, moved above 60 for the first time ever on Thursday. The VIX jumped to a new high of 64.92 before settling with a gain of 11% to 63.92.

Treasuries fell sharply Thursday on the back of concern that supply will increase dramatically as the Treasury Dept. funds its efforts to stabilize the commercial paper market. The 10-year note sank 41/32 to 101-19/32 for a yield of 3.80%, while the 30-year bond dropped 49/32 to 106-15/32 for a yield of 4.12%.

Crude oil futures also dropped due to speculation that the global economy will slow due to the financial crisis, which would hurt demand for energy. November WTI crude oil futures were off $1.60 to $87.35 a barrel at 2:04 pm EDT.

What's behind this never-ending selloff in stocks? Investors are suffering from a lack of confidence that the financial rescue package will work and keep the economy from sliding into a deep recession. "The market needs to get a sense that this rescue package will start working," says Reena Aggarwal, professor at Georgetown University's McDonough School of Business. "Once there's the slightest sense that that is working, people will jump back in."

The Treasury Dept. and U.S. government have been pulling out all the stops to try fix the problems. However, Wednesday's coordinated 50 basis-point interest rate cuts announced by the Federal Reserve, the European Central Bank, the Bank of England, Bank of Canada, Swiss National Bank, and the Swedish Riksbank didn't do much to soothe investors.

S&P chief economist David Wyss remains worried that the recent steps by policymakers have failed to revolve the global liquidity crisis. Thursday's rising Treasury and Libor rates point up the difficulties faced by global policymakers as the attempt to stimulate lending. Officials from the Group of Seven industrialized nations will meet this weekend to work on easing the crisis.

U.S. Treasury sources cited by Action Economics

confirmed direct capital injections into banks are part of Treasury Secretary Henry Paulson's current plan and could take place by the end of the month, providing cover for the Treasury while it gears up its reverse auctions to buy toxic assets from banks as part of the TARP plan.

In a speech Thursday, Minneapolis Federal Reserve President Gary Stern indicated he was fairly confident the Paulson plan will work.

In Asia, South Korea, Hong Kong and Taiwan lowered their interest rates after coordinated cuts on Wednesday from major central banks including the U.S. Federal Reserve.

Nevertheless, attention is turning to a G7 meeting in Washington tomorrow of finance ministers. Reuters says investors want politicians from the G7 and European Union to show they can cooperate more effectively rather than rely on piecemeal national initiatives. The U.S. signaled it could consider buying into banks to help get frozen funds flowing again and governments in Europe moved to try to restore confidence in financial firms hit by the worst crisis since the 1930s. British Prime Minister Gordon Brown has urged the G7 and EU to guarantee lending between banks, in line with measures Britain has introduced domestically.

Japan's August machine orders, excluding volatile items, fell 14.5%, much lower than the 2.8% fall expected. This was the third consecutive monthly decline and left orders down 13.0% compared to a year earlier.

The Icelandic FSA Thursday morning placed the nation's largest lender into receivership. Kaupthing's domestic deposits are fully guaranteed, and the aim of the takeover is to provide a "functioning domestic banking system". The Icelandic Prime Minister indicated that he may be forced to approach the IMF for a loan after failing to obtain aid from European states.

European indexes finished lower Thursday. In London, the FTSE 100 index fell 1.2% to 4,313.80. In Paris, the CAC 40 index dropped 1.55% to 3,442.70. Germany's DAX index lost 2.53% to 4,887.00.

Asian markets finished mixed. Japan's Nikkei 225 index lost 0.5% to 9,157.49. In Hong Kong, the Hang Seng index gained 3.31% to 15,943.24. Shanghai's benchmark index fell 0.84%.

In U.S. economic news Thursday, U.S. initial jobless claims fell 20,000 to 478,000 in the week ended Oct. 4, from a revised 498,000 last week (497,000 previously). The prior week's figure was the highest since September 2001, though claims have been distorted recently by the hurricanes on the Gulf Coast last month. Continuing claims rose 56,000 to 3,659,000 in the week ended Sept. 27.

U.S. wholesale sales declined 1.0% in August, while inventories rose 0.8%. The initially reported 0.3% dip in July sales was revised lower to -0.8%; the initially reported 1.4% surge in July inventories was revised up to a 1.5% gain. The inventory-sales ratio climbed to 1.10 from a revised 1.08 in July (1.07 previously). The weakness in August sales was largely a function of autos, down 2.2%, and the continued slide in oil prices, with petroleum sales tumbling 2.0% after a 7.2% drop in July.

Bond market strategist Tony Crescenzi at Miller Tabak notes that the total amount of commercial paper outstanding plunged $56.4 billion to $1.551 trillion in the week ended Wednesday following a record decline of $94.9 billion the previous week. "The slower pace of decline reflects the Federal Reserve's announcement on Tuesday that it is creating a special purpose vehicle to purchase 90-day commercial paper directly from eligible issuers," wrote Crescenzi in a note Wednesday.

Unfortunately, very few market experts can pinpoint a bottom for stocks. In this market, "valuations don't matter," says John Merrill, chief investment officer at Tanglewood Capital Management. Hedge funds and other institutional investors are being forced to sell assets to raise cash. And, "apparently there are a lot of things that have to be sold," he says.

Among Thursday's stocks in the news, IBM Corp. (IBM) posted third quarter earnings per share from continuing operations of $2.05, vs. $1.68 one year earlier, on a 5% revenue rise. Wall Street was looking for ESP of $2.01. IBM continues to expect full-year 2008 EPS of at least $8.75, year-to-year growth of 22%.

According to a Wall Street Journal report, National City Corp. (NCC) is in talks with a number of banks about a possible sale, citing people familiar with the situation. PNC Financial (PNC) and Bank of Nova Scotia are among the potential bidders, the paper added.

Quest Software (QSFT) says it authorized a modified "Dutch auction" tender offer to repurchase $135-$400 million of its common stock at an expected price of $13.25-$15.50 a share. Based on the midpoint of the price range, the planned buyback is 9%-26% of Quest's outstanding shares. Separately, the company appointed President Doug Garn as CEO and a director, and Vinny Smith as executive chairman of the board of directors.

Limited Brands (LTD) posted 6% lower September same-store sales and a 5.6% total sales decline.

Men's Wearhouse (MW) cut its 36-40 cents third quarter adjusted EPS view to 24-28 cents. The company says retail operations in the U.S. have experienced reduced traffic levels from previous expectations, largely a direct reflection of the recent turmoil in the credit markets which appears to be impacting consumer buying patterns and levels.

Bebe Stores (BEBE) posted 11% lower first-quarter same-store sales and 0.7% lower total sales. The company sees first quarter EPS of 9-13 cents, vs. its earlier forecast of 12-16 cents, citing continued weakness in the macroeconomic environment.

Ruby Tuesday (RT) posted first quarter EPS of one cent, vs. 21 cents one year earlier, on 11% and 7.9% lower same-store sales at Company-owned and domestic franchise Ruby Tuesday restaurants, respectively. Total revenue decreased 6.6%. The company sees 30-35 cents fiscal 2009 EPS on a same-restaurant sales decline in the mid-single digits. It also expects restaurant operating margins to be down, reflecting higher labor and other operating costs.

Walgreen Co. (WAG) withdrew its proposal to acquire all of the outstanding shares of Longs Drug Stores (LDG) for $75 per share in cash. The offer was originally proposed on Sept. 12, 2008, and declined by the board of directors of Longs in favor of the proposed acquisition by CVS/Caremark (CVS) announced on Aug. 12.

Ben Steverman also contributed to this article


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