Dow Slumps in a Post-14,000 Hangover

The latest market milestone didn't last long as major indexes were hit Friday by disappointing profit news and renewed subprime worries

Dow 14,000, we hardly knew ye. Major U.S. stock indexes dropped sharply Friday in a volatile session, with the Dow industrials fell below the 14,000 level after closing just barely above above that milestone for the first time Thursday.

Disappointing earnings from heavyweights Caterpillar (CAT), Google (GOOG), Ericsson (ERIC), and Microsoft (MSFT) dampened investor sentiment after Thursday's robust gains.

Stocks were also hurt by continued speculation about the impact on credit markets of worsening losses from subprime loans. Standard & Poor's lowered 14 ratings on European collateralized debt obligations. Action Economics said there was market speculation a German bank would be reporting substantial mortgage related losses.

On Friday the Dow Jones industrial average lost 149.49 points, or 1.07%, to 13,850.92. The broader S&P 500 index was down 18.92 points, or 1.22%, to 1,534.16. The tech-heavy Nasdaq Composite index dropped 34.01 points, or 1.25%, to 2,686.03.

Friday's expiration of options contracts likely added to the volatility, notes S&P MarketScope.

U.S. financial and banking stocks Citigroup (C), Wachovia (WB), Goldman Sachs (GS), Merrill Lynch (MER), Lehman Brothers (LEH), and Bank of America A(BAC) were all lower Friday.

The yield on the benchmark 10-year Treasury note fell below 5% as investors sought the relative safety of government debt.

The health of the housing sector was also on traders' minds. Lehman Brothers economists wrote in a note Friday that "the biggest risk to our growth forecast is a double dip in the housing market... [we] look for a prolonged housing recession with construction falling through the first quarter of 2008." Lehman views the recent bad news in the subprime mortgage market as inevitable "aftershocks," confirming an ongoing housing recession and its GDP forecast that is below the market consensus.

Looking ahead to next week's economic calendar, housing will take center stage yet again. Investors will certainly pay lots of attention to the latest new and existing home sales figures for June due out in the coming week. Reports on durable goods orders for June and second-quarter U.S. gross domestic product will also be closely followed.

On the earnings front, the second-quarter blitz continues next week, with 3M (MMM), Corning (GLW), Apple (AAPL), Colgate-Palmolive (CL), Exxon Mobil (XOM), Dow Chemical (DOW), and Black and Decker (BDK) among the marquee names releasing results.

In the energy markets Friday, August West Texas Intermediate crude oil futures fell 35 cents to $75.57 and September Brent crude oil futures shed 15 cents to $77.52. There was little news to move the market as hedge funds squared positions, reports S&P MarketScope. News that Exxon Mobil, BP Plc (BP), and Valero Energy (VLO) started units at refineries in Texas over the past week weighed on the market.

Shares of sector players Exxon Mobil, Chevron (CVX), BP, Royal Dutch Shell (RDS.A), Hess (HES), ConocoPhillips (COP), and Total (TOT) were lower Friday.

Among stocks on the move Friday, Caterpillar shares were down after the company posted a profit of 24 cents a share, 25 cents below Wall Street expectations, despite a 7% increase in revenue. The tractor-maker blamed weakness in its North American business amid ongoing inventory corrections at its dealers.

Google's stock fell in response to disappointing second-quarter results reported after the closing bell Thursday. Earnings rose 28% from a year ago, but fell three cents short of the consensus forecast of $3.59 a share. An 85% jump in operating expenses, other than the cost of revenue, to $1.21 billion outpaced a 63% rise in revenue as Google upped spending to attract top-quality new employees.

Microsoft (MSFT) was trading lower Friday despite a 7% increase in second-quarter profit to $3.04 billion, or 31 cents a share, from $2.83 billion, or 28 cents a share, a year ago. Excluding an 8-cents-a-share charge for having to extend the Xbox 360's warranty to three years due to hardware failures, the software giant earned 39 cents per share, in line with analysts' expectations.

European stock markets slumped on Friday. In London, the FTSE 100 index was down 0.83% to 6,585.2. Germany's DAX index dropped 1.46% to 7,874.85. In Paris, the CAC 40 index fell 1.79% to 5,957.16.

Asian markets traded mostly higher on Friday. In Japan, the Nikkei index was up 0.23% to 18,157.93. In Hong Kong, the Hang Seng index rose 1.20% to 23,291.90. In China, the Shanghai Composite index climbed 3.73% to 4,058.85.

Treasury Market

Treasuries soared Friday, with the 10-year yield moving below the 5.00% threshold, amid continued worries over the subprime mortgage market as S&P cut its ratings on European CDO issues.

The benchmark 10-year Treasury notes gained 18/32 to 96-20/32 for a yield of 4.943% and the 30-year bond was up 27/32 to 95-15/32 for a yield of 5.049%.