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Markets & Finance

Stocks: A Terrible Thursday

Major U.S. indexes each tumbled nearly 3% as worries intensified over the health of the economy. All eyes are on Friday's jobs report

Market players were probably wondering Thursday why they bothered to come back from their summer vacations.

U.S. stocks suffered an all-out rout on Thursday as the market's mood turned quite dark. Investors dumped stocks amid jitters about prolonged economic pain deepened on weaker labor-market data, generally negative retail sales reports for August, and a stark warning on sinking asset values from bond-market guru Bill Gross. Major equity indexes each finished lower by nearly 3%.

Oil prices gave up early gains to trade lower as the dollar gained upward traction.

On Thursday, the Dow Jones industrial average plunged 344.65 points, or 2.99%, to finish at 11,188.23. The broader S&P 500 index fell 38.16 points, or 2.99%, to end at 1,236.82. And the tech-heavy Nasdaq composite index dropped 74.69 points, or 3.20%, to 2259.04.

The selloff in stocks accelerated after the S&P 500 broke below the 1262 level on mounting worries that more hedge funds might be in trouble and growing uncertainty about the economic outlook with a changing of the guard in Washington, S&P MarketScope said. On the New York Stock Exchange, 25 stocks traded lower for every five that posted gains, while on the Nasdaq the ratio was 22-5 negative amid slow trading. Boeing Co. (BA) shares were down on a strike threat, with financial stocks also falling.

Investors may have been digesting the comments made in the Federal Reserve's Beige Book, released on Sept. 3, and thinking that, after a 3.3% growth rate in U.S. Gross Domestic Product, the second half of 2008 is starting to look weaker, says Brian Gendreau, an investment strategist at ING Investment Management in New York.

In addition, there's a rotation between sectors occurring due to the turnaround in the dollar, with the globalized sectors -- energy, materials and technology -- which benefited from the weaker dollar, getting whacked, while more domestically oriented sectors such as financials and consumer discretionary stocks in general have been rising since the market lows of mid-July, Gendreau says.

The Philadelphia Semiconductor Sector Index dropped more than 3.0%, breaking below its 52-week range, as technology names got battered on worries that spending on technology will be severely curtailed due to the global economic slowdown. Intel (INTC), Advanced Micro Devices (AMD) and Texas Instruments (TXN) were all down more than 4%.

There are fresh signs that financial firms won't find it so easy to replenish the capital on their balance sheets. Merrill Lynch & Co. (MER) has hit a snag in its talks to sell a significant portion of its bad loans to Korea Asset Management Corp. due to disagreement over price, the Korean firm's CEO told Bloomberg News. Failure to reach a deal may suggest that Merrill, the third-largest U.S. securities firm, and Lehman Brothers Holdings (LEH) might have to cut prices for the assets they're trying to sell in order to raise capital as mortgage-related losses widen.

That and related remarks by PIMCO bond fund manager Bill Gross in his September Investment Outlook, were also likely helping to deepen investor pessimism toward the markets. Gross said in his monthly letter on the PIMCO website that with liquidity drying up and private investors getting more wary of risking their own capital, substantial new sources of buying are needed in order to prevent much more destructive asset deflation. He called for policies that would lead to the U.S. Treasury funding not only the mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) but also "Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the [Federal Housing Authority] and other government institutions."

Jack Ablin, chief investment officer at Harris Private Bank in Chicago, attributed the drop in confidence among investors to a combination of economic data and talking points from company executives that provided scant hope of an imminent recovery.

"You have management talking things down like Toll Brothers (TOL), and Wal-Mart (WMT) issuing some pretty downbeat forecasts," he says. "The convergence of lousy [economic] conditions with poor expectations threw a wet blanket over a market that was trying to be optimistic."

Among the retailers to release disappointing sales figures, Target (TGT) reported a 2.1% drop in sales in stores open at least one year for August and a 3.1% increase in total sales. The company said same-store sales performance in August was in line with its planned range.

Abercrombie & Fitch (ANF) posted 11% lower same-store sales for August and a 5% decline in total sales. The TJX Companies Inc. (TJX) reported no change in same-store sales from July, but said they were slightly below plan, driven by the unanticipated negative impact of foreign exchange rates. TJX posted a 4% gain in total sales for August.

While he's not certain to what extent the markets were reacting to Bill Gross's comments, Ablin agrees that credit conditions need to improve before stock prices can move appreciably higher. The stock market is coming closer to fair value, which he defines as the S&P 500 trading at 1,167.52, but it's still 6% overvalued at this point. In order for it to reach fair value without stocks falling further, credit spreads between 10-year Treasury bonds and riskier triple-B rated bonds need to narrow significantly, he adds.

Leading the day's new economic data, nonfarm private employment fell 33,000 from July to August on a seasonally adjusted basis, according to the ADP National Employment Report. The estimated change in employment from June to July was revised down from a gain of 9,000 to a gain of 1,000 jobs.

Initial jobless claims for the week ending Aug. 30 climbed 15,000 to an annualized rate of 444,000, much higher than the median forecast of 425,000. Initial jobless claims averaged 439,000 in August, well above prior averages of 406,000 in July, 388,000 in June, and 369,000 in May.

The trend in initial and continuing claims so far this year implies a much softer labor market than last year, though distortions in July and August have made it difficult to get a good read on underlying trends, said Action Economics, which still expects a 70,000 decline in payrolls and a steady unemployment rate of 5.7% for the August employment report that comes out Friday.

The Institute for Supply Management's non-manufacturing index increased to 50.6 in August, slightly higher than expected, from 49.5 in July.

Second-quarter nonfarm productivity was revised sharply higher to 4.3%, more than expected, from the initial 2.2%, while unit labor costs fell 0.5%. The hours-worked series was revised down to a decline of 0.8% from a 0.5% decline in the advanced report, marking the fourth straight quarterly decline.

Oil prices, which initially were rising as Hurricane Ike gathered strength in the Atlantic, came back down as the dollar index resumed its move upward, apparently shrugging off more bullish supply data from the Energy Information Administration. The EIA report showed a 1.9 million barrel drop in crude inventories, a 1.0 million barrel decline in gasoline supplies and a 400,000 barrel fall in distillate stockpiles.

Refining margins have improved with 96% of oil production and 92% of natural gas production in the Gulf of Mexico remaining shut down in the aftermath of Hurricane Gustav, according to CNBC Business News.

Crude oil for October delivery settled $1.50 lower at $107.89 a barrel.

Among other stocks in the news on Thursday, Guess Inc. (GES) posted second-quarter earnings of 57 cents a share, vs. 40 cents a year ago, on a 8.1% rise in same-store sales and 33% higher total sales. The retailer sees fiscal 2009 earnings of $2.47 to $2.53 a share on revenue of $2.06 billion to $2.11 billion. S&P reiterates its buy rating.

Ciena Corp. (CIEN) shares were down after the supplier of communications networking equipment posted 37 cents a share in non-GAAP earnings for the third quarter, vs. 41 cents a share a year ago as higher operating expenses offset a 24% rise in revenue. The results were in line with analysts' forecasts. The company sees revenue of $190 million to $210 million in the fourth quarter. S&P cut its earnings estimate and target price but maintained its hold rating.

Hibbett Sports Inc. (HIBB) announced that effective immediately, the company and Nissan Joseph, its president and chief operating officer, have agreed to part ways due to philosophical differences. Hibbett will begin a search for his replacement. Raymond James downgraded the stock to market perform from outperform.

Major European indexes were trading lower Thursday. In London, the FTSE 100 index fell 2.50% to 5,362.10. In Paris, the CAC 40 plunged 3.22% to 4,304.01, while Germany's DAX index sank 2.91% to 6,279.57.

In Asia, Japan's Nikkei 225 lost 1.04% to end at 12,557.66, while Hong Kong's Hang Seng index shed 0.95% to close at 20,389.48.

Treasury market

Treasury bonds traded higher as a safe haven bet by nervous investors watching equity losses. The 10-year note moved up to 103-03/32 for a yield of 3.62% and the 30-year bond climbed 29/32 to 103-29/32 for a yield of 4.27%.

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