Stocks tumbled Thursday after news of more trouble in the credit markets and just before a crucial employment report is issued on Friday.
Among the Street’s concerns about the deepening credit crisis were missed margin calls by financial entities that could augur a wave of liquidation of mortgage-backed securities. Traders were also unnerved by an uptick in mortgage foreclosures and new lows in the U.S. dollar.
On Thursday, the Dow Jones industrial average fell 214.6 points, or 1.75%, to 12,040.39. The broader S&P 500 index shed 29.36 points, or 2.2%, to 1,304.34. The tech-heavy Nasdaq composite index fell 52.31 points, or 2.3%, to 2,220.50.
For every four stocks moving higher on the New York Stock Exchange, 28 fell in price. On the Nasdaq, the ratio was 24 to 6 negative.
Bonds were higher Thursday as Boston Federal Reserve bank President Eric Rosengren urged quick action on the housing crisis, while the Cleveland Fed’s Sandra Pianalto said the economic slowdown will reduce inflation. The dollar index was lower, while gold futures fell. Oil futures were lower.
There were more negative headlines from the mortgage sector Thursday. In a regulatory filing, Thornburg Mortgage Inc. (TMA) said it has suffered defaults under a variety of lending agreements, and that its obligations under those agreements are "material." The company also said JPMorgan Chase & Co. (JPM) plans to exercise its rights under an agreement under which it lent $320 million, after Thornburg failed to meet a $28 million margin call. The notification from JPMorgan triggered cross-defaults under all of Thornburg's other reverse repurchase agreements and secured loan agreements.
The Mortgage Bankers Association said a record 0.83% of U.S. loans were entering the foreclosure process in the last three months of 2007 compared with 0.54% in the same time a year earlier. The annual U.S. mortgage delinquency rate of 5.82% was the highest since 1985 and up from the 4.95% seen in the fourth quarter of 2006. The rate of failing loans swelled across most mortgage types but was led by a growing wave of subprime borrowers unable to make payments, the trade group said in its delinquency and foreclosure survey.
Credit markets also got a shock from the U.S. Treasury Department's denial of a rumor that it would provide explicit backing to loans made by the government-sponsored enterprises Fannie Mae (FNM) and Freddie Mac (FRE).
Gold prices were taking a breather, down to $977.10 an ounce, but are still seen moving toward $1,000, assisted by ongoing weakness in the U.S. dollar. The dollar index continued to trade near record lows.
Weaker sales for U.S. retailers in February reflected growing jitters about the economy among consumers. J.C. Penney Co. (JCP), Gap Inc. (GPS) and American Eagle Outfitters (AEO) all showed significant declines in sales at U.S. stores open at least one year.
Clothing retailers are believed to already be in a recession, with a dearth of new fashion trends adding to consumer worries about the economic slowdown, CNBC said.
There were exceptions to the downtrend in retail sales, however. Wal-Mart Stores (WMT) posted a better-than-expected 2.6% increase in same-store sales, excluding fuel sales. Continued strength in the grocery, health and wellness and entertainment" segments drove the gains, Wal-Mart said. The company forecast March sales would be flat to 2% higher.
After recent weakness in same-store sales, Target (TGT) also showed signs of strength, reporting a 0.5% increase for February, slightly better than analysts expected.
On the economic data front, initial jobless claims for the week ended Feb. 29 fell 24,000 to an annualized rate of 351,000, well below the average estimate for the week, Action Economics said.
The climb in initial jobless claims in February suggests that layoffs have picked up, while the uptrend in continuing claims "implies that it's been harder for those who have lost their jobs to find new employment," said John Ryding, chief U.S. economist at Bear Stearns (BSC).
Investors will closely watch Friday's jobs report for clues to the state of the economy. The Street expects nonfarm payroll's to rise 25,000 in February, and the unemployment rate to move from 4.9% to 5.0%. Deutsche Bank (DB) economist Joseph A. LaVorgna expects worse numbers, including a 5.1% rate and a 17,000 decline in payrolls. "Indicators strongly suggest the trend in job creation is slowing," he wrote.
On Thursday, the Federal Reserve Flow of Funds report said the net worth of U.S. households fell by $533 billion, or a 3.6% annual rate, in the fourth quarter of 2007. For the entire year, net worth rose 3.4% to $57.7 trillion, but that was the slowest growth in five years and net worth fell when adjusted for nflation. "Overall, the report indicates that higher prices, a bigger debt burden and weaker home prices have reduced American net worth in 2007 [and will] likely slow spending in 2008," said Beth Ann Bovino, an economist at Standard & Poor's.
The U.S. pending home sales index held steady at 85.9 in January from December but was down 19.6% from a year ago, the National Association of Realtors said. In the fourth quarter, 5.8% of all home loans were delinquent, a 4.0% increase from the third quarter, while the rate of loans entering the foreclosure process rose 6.4% from the third quarter. Subprime adjustable-rate mortgages represented 42% of loans in foreclosure.
Oil prices hit a new record high of $105.96 in overnight trading Thursday before pulling back a bit. Supply constraints are helping to keep crude markets strong in the wake of a three million barrel inventory drawdown and OPEC's decision to hold output levels steady. By later on Thursday, crude oil for April delivery on NYMEX was up 81 to $105.33 per barrel.
Among other stocks in the news on Thursday, Comtech Telecommunications (CMTL) posted second-quarter GAAP earnings of 91 cents per share, vs. 68 cents a year ago on a 36% sales rise, reflecting significant growth in the mobile data communications and RF microwave amplifiers segments. That growth was partly offset by lower net sales in the telecommunications transmission segment.
DXP Enterprises Inc. (DXPE) reported earnings of 84 cents per share in the fourth quarter, up from 61 cents a year ago on a sharp increase in sales. The distributor of industrial maintenance and repair products beat an 81-cent consensus estimate for the latest quarter.
European indexes finished lower Thursday after the European Central Bank left its key lending rate unchanged at 4% and ECB President Jean-Claude Trichet said inflation is running at 3.2%, the fastest pace since the euro's debut in 1999. In London, the FTSE 100 index fell 1.49% to 5,766.40. In Paris, the CAC 40 index dropped 1.65% to 4,678.05. Germany’s DAX index was down 1.38% at 6,591.31.
Asian indexes rebounded to close higher. Japan’s Nikkei 225 index climbed l.88% to 13,215.42. In Hong Kong, the Hang Seng index rose 0.99% to 23,342.73.
U.S. Treasury bonds bounced on the selloff in equities. The 10-year note rallied 18/32 to 99-03/32 for a yield of 3.61%, and 30-year bond rose 07/32 to 96-24/32 for a yield of 4.57%.