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Stocks Fall on Earnings Worries

Alcoa started the first quarter earnings season by disappointing Wall Street, while investors grew more pessimistic on tech firms

Stocks fell Tuesday as the first quarter earnings season got off to a disappointing start.

Also, Washington Mutual (WM) said mounting mortgage losses forced it to seek $7 billion in new capital and slash its dividend, while the International Monetary Fund said losses from the mortgage crisis could approach $1 trillion.

Analysts are predicting the recent economic slowdown will make for a gloomy earnings season, and Alcoa (AA), traditionally the first company to report profits, started the quarter with a disappointment.

The aluminum giant posted lower-than-expected earnings of 44 cents per share from the first three months of the year, vs. 79 cents a year ago. Revenue fell 6.7%. Higher input and energy costs hurt results.

Alcoa "casts a little bit of a pall on things," says Gary Wolfer, chief economist at Univest Wealth Management. Alcoa's weakness might have more to with its own problems than the broader economy, but Wolfer adds, "I still believe the first quarter is going to be very, very tough."

According to Reuters Estimates, analysts now predict S&P 500 companies' earnings to fall 11.8% from a year ago, worse than the 8.1% drop they predicted a week ago. However, much of the fall in earnings can be blamed on the financial sector, which is expected to see profits plunge 61%.

On Tuesday, the Dow Jones Industrial Average fell 35.99 points, or 0.29%, to 12,576.44. The S&P 500 index lost 7 points, or 0.51%, to 1,365.54. The Nasdaq composite index fell 16.07 points, or 0.68%, to 2,348.76.

The IMF said in a new report Tuesday that total losses on the mortgage market and from related securities and loans may hit $945 billion worldwide. Only $232 billion in losses have been posted so far.

In economic news Monday, the U.S. pending home sales index fell 1.9% to 84.6 in February from 85.9 the previous month. The index is down 17.4% from the year before.

Falling home prices might help stabilize home sales by improving housing's affordability, says Aaron Smith of Moody's However, working against a housing recovery is restricted access to credit and the slowing job market. "If labor market weakening is more severe than expected, the floor forming under home sales could begin to cave in," Smith wrote Tuesday.

In the afternoon Thursday, the Federal Reserve released minutes from its Mar. 18 meeting. Traders read the minutes closely for clues to the willingness of the Fed to continue cutting interest rates despite worries of inflation. "With the uncertainties in the outlook for both economic activity and inflation elevated, members noted that appropriately calibrating the stance of [interest rate] policy was difficult," the minutes said.

Action Economics said "there were not strong signals that the Fed is nearing completion of this easing cycle. Based on the minutes, Action still predicts a deep half-point cut in the federal funds rate at the Fed's meeting later this month.

Oil prices surged higher by almost $3 on Monday, but on Tuesday May WTI crude oil was falling in price on the NYMEX, down 23 cents to $108.86 per barrel.

Among stocks in the news, Washington Mutual (WM) said it is receiving $7 billion in new capital from investors including private equity firm TPG. The bank, stung by mortgage losses, will slash its quarterly dividend from 15 cents to 1 cent per share and report a $1.1 billion loss in the first quarter. Also, WaMu will close all freestanding home loan offices. Standard & Poor's Ratings Services is keeping WaMu's debt rating on credit watch negative, warning that it could still cut the company's BBB rating despite its recapitalization.

Advanced Micro Devices (AMD) plans to cut 10% of its workforce. Also, the semiconductor firm warned that first-quarter sales would be lower than expected.

Apple (AAPL) was downgraded from market perform to underperform by an analyst at Morgan Keegan, who cited evidence of broad weakness in spending on consumer technology in both the U.S. and Europe.

Novellus Systems (NVLS) says first quarter revenue will be at the low end of the range it previously predicted. Earnings are expected to be 15 to 17 cents per share, down from 21 to 24 cents in previous projections.

Major European indexes were mostly lower Tuesday. In London, the FTSE 100 index fell 0.41% to 5,990.20. Paris' CAC 40 index dropped 0.65% to 4,912.69, and Germany's DAX index lost 0.72% to 6,771.98.

Stocks also fell in Asia, with Japan's Nikkei 225 down 1.49% to 13,250.43 and Hong Kong's Hang Seng index off 1.09% to 24,311.69.

Treasury market

Treasuries were mixed Tuesday. The two-year notes were up 03/32 to 99-24/32 for a yield of 1.87%; ten-year Treasuries were down 06/32 for a yield of 3.56%; and the 30-year bond gained 20/32 to 99-27/32 for a yield of 4.38%.

Steverman is a reporter for BusinessWeek's Investing channel.

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