It may have been the day after Halloween but Wall Street had a full-scale fright-fest Thursday, with the markets looking fearfully for subprime-related monsters lurking in the shadows.
Major U.S. stock indexes fell out of bed on Thursday, led by further losses in the financial sector after a downgrade on Citigroup re-ignited worries about more bad loans on its books and further write-downs to come. Negative earnings news from Exxon Mobil and Credit Suisse Group also sapped any lingering optimism among investors. The benchmark index had its fourth-largest decline of 2007.
On Thursday, the Dow Jones industrial average plummeted 362.14 points, or 2.60%, to 13,567.87. The broader S&P 500 index sank 40.94 points, or 2.64%, to 1,508.44. The tech-heavy Nasdaq composite index dropped 64.29 points, or 2.25%, to 2,794.83.
Action in the broader market was resoundingly bearish. On the New York Stock Exchange, 28 stocks were down for every four that climbed higher, while breadth on the Nasdaq was 24 to 6 negative, amid fairly active trading, S&P MarketScope said. As on many of the market's darkest days in recent months, selling accelerated in the final hour of trading. Besides financials, retail, basic material and energy stocks also contributed to the equities plunge, with only technology stocks holding up.
The market will turn its attention on the October nonfarm payrolls figures due out on Friday for another sign of how the economy is faring. S&P MarketScope said it expects an increase of 95,000 jobs, while Action Economics is looking for a gain of 100,000, after a 110,000 bounce in September. Action Economics also anticipates that the unemployment rate held at 4.7% in October, given that the declines in continuing claims through September and early October, before this week's bounce, suggests reduced upward pressure on the rate.
Thursday's sharp sell-off prompted a re-evaluation of Wednesday's rally, which is now thought to have been caused by funds buying equities before closing their fiscal 2007 books rather than positive reactions to the Federal Reserve's quarter-point rate cut.
In fact, the market continues to digest the implications of the Fed's statement on Wednesday that it now sees the inflation risk balancing out the risk of a slowdown in economic growth, which likely means it's less inclined to cut interest rates again before the end of this year. There is still a lot of fear out there about further fallout from the subprime and credit crises.
The Fed is "pretty much saying loud and clear that they're done hiking rates," said Rick Campagna, managing director at Provident Investment Counsel in Pasadena, Cal. "After a night to think about it, people are saying if the Fed is really done, then the hurdle for getting bailed out is going to get higher."
He said he believes Bernanke & Co. made a mistake by saying the risk is now balanced between slowing growth and inflation. He pointed to layoffs in the financial industry as clear evidence that troubles in the housing sector are spilling over into the broader economy. He also cited New York City Mayor Michael Bloomberg's recent remarks about cutting back on hiring city workers due to concerns about the generation of income tax revenue out of Wall Street.
The Fed will end up eating its words, as more negative economic data in the weeks ahead confirm the knock-on effects of the housing slump, making the case for further easing of rates, he predicted.
Others observers interpreted the Fed's statement differently, seeing it as a declaration of independence from the demands of the market and a sign only that it intends to be more judicious in easy monetary policy rather than refusing to make more cuts in the near future.
Brian Gendreau, investment strategist at ING Investment Management, said that Thursday's rout had nothing to do with worries about less monetary support from the Fed. Rather, it was all about concern about the extent of losses on subprime and subprime-related instruments.
The market's been shocked not only by the size of the writedowns but the fact that they keep being added to, he said.
The high dividend yield on the financial stocks is virtually the only thing that was attracting buyers, and now the sustainability of that is being called into question, he added.
"It's difficult for the banks to signal credibly to investors that the worst is over and all the bad news is out because we don't really know what's on their balance sheets," he said.
Fed watchers were also monitoring the central bank’s moves to ease the functioning of still-tight credit markets. The Fed injected $41 billion in temporary reserves into the U.S financial system Thursday, according to an Associated Press report. The cash infusion came in three separate operations.
Heading the stream of new economic data was September personal income, which rose 0.4%, while consumption increased 0.3%, after a upward-adjusted 0.4% income rise in August and downwardly revised 0.5% jump in spending in August. Boosting September income was a solid 0.6% gain in the heavily-weighted wage & salary component, but a 0.7% decline in proprietors' income held back the aggregate, Action Economics said. In personal consumption for September, a 0.6% rise in nondurables outpaced 0.2% gains in the durable and service components. The PCE deflator accelerated to a year-over-year pace of 2.4%, compared to 1.8% in August.
Initial jobless claims fell 6,000 to 327,000 for the week ending Oct. 27, close to October's month-average of 328,000, which is up from 313,000 in September, 324,000 in August and 307,000 in July. There is still "surprisingly little variation in claims since the credit turmoil began, however," Action Economics noted.
The U.S. Institute for Supply Management manufacturing index slipped to 50.9 in October from 52.0 in September.
Foreclosure filings rose more than 30% in the third quarter to 446,726 nationwide from 333,731 in the second quarter and were up 100% from 223,233 properties in the year-ago period, according to RealtyTrac in Irvine, Cal.
October vehicle sales fell to 16.0 million units, down 0.6% from September. Despite lingering credit market concerns in the markets, there is still little evidence of much change in underlying trends in consumption, with the auto sales rate surprisingly stable over the last three months, Action Economics said. Nissan was among the best performers, up 13% from a yeaer ago, while Ford was again among the worst, with sales dropping 10%. Chrysler LLC said Thursday it plans to cut up to 12,000 jobs, or up to 15% of its workforce, in 2008, in an attempt to cut costs and match slowing demand for some vehicles.
On Thursday, crude oil for December delivery in New York settled $1.04 lower at $93.49 per barrel after topping $96 in electronic trading overnight. There were reports of massive profit-taking, mostly by hedge funds, with oil prospects tied to the U.S. equity market over the near term, and concerns over an economic slowdown, Action Economics said.
Among stocks in the news Thursday, Exxon Mobil (XOM) reported a drop in third-quarter profit to $1.70 a share from $1.77 a share a year ago on 10% lower revenue. The oil behemoth attributed the decline to lower downstream and chemical margins, partly offset by higher crude oil realizations. Production fell 2% from the prior-year period. Shares fell 3.8%.
CIBC World Markets downgraded Citigroup (C) to sector underperform from sector perform. CIBC believes that over the near term Citigroup will need to raise over $30 billion in capital through either asset sales, a dividend cut, a capital raise, or combination of these methods. CIBC analyst Meredith Whitney said higher credit losses and more disruption in SIV market could only exacerbate capital pressures that should take the stock lower. She cut her 2008 profit estimate to $4.20 from $4.55 a share. Citigroup shares fell 6.9% to $38.51, a five-year low.
Crox shares plunged 36% after it said it expects 2007 earnings to come in below analysts' consensus forecast of $1.97 a share. The footwear maker reported earnings 66 cents a share for the third quarter, vs. 27 cents a share in adjusted earnings a year ago, on sharply higher revenue. It also raised its 2007 earnings outlook to $1.94 to $1.98 on $820 million to $830 million in revenue. Wedbush Morgan cuts its earnings estimates for the stock.
Prudential Financial (PRU) shares rose 1.4% after it posted earnings of $1.97 a share for the third quarter, vs. $1.72 a share (non-GAAP) a year ago on 9.8% rise in revenue. The company projected a non-GAAP profit of $7.45 to $7.60 a share for 2007, which assumes stable equity markets over the remainder of the year.
Credit Suisse Group (CS) shares dropped 5.0% after it reported income from continuing operations of CHF1.3 billion in the third quarter, down 11% from a year. The decline reflected lower results in Investment Banking and Asset Management. The structured products businesses, including residential and commercial mortgages and collateralized debt obligations, recorded a valuation reduction of CHF 1.1 billion, net of fees and hedges.
Altria Group (MO) agreed to acquire John Middleton, a leading maker of machine-made large cigars, for $2.9 billion in cash. Shares were off 1.4%.
European equity indexes fell on Thursday. In London, the FTSE 100 index dropped 2.02% to 6,586.10. Germany's DAX index slid 1.73% to 7,880.85. In Paris, the CAC 40 lost 2.00% to trade at 5,730.92.
Asian markets ended mostly higher. In Japan, the Nikkei 225 index finished up 0.79% at 16,870.40. In Hong Kong, the Hang Seng index climbed 045% to 31,492.88. The Shanghai composite index was off 0.68% at 5,914.28.
Treasury prices shot back to the upside on weaker economic numbers and the plunge in equities. The two-year notes gained 11/32 to trade at 99-23/32 for a yield of 3.76%; 10-year notes rose 1-00/32 to 103-06/32 for a yield of 4.35%; and the 30-year bond jumped 1-26/32 to 105-25/32 for a yield of 4.64%.