An Ugly Day for Stocks

Investors dump stocks as credit market disruptions threaten the buyout boom, while new home sales plunged

The bears roamed freely on Wall Street Thursday as investors weighed a nasty brew of continued dreadful home sales, mixed earnings news, a jump in energy prices, and further retrenchment for the credit markets.

At one point in the afternoon, the Dow Jones Industrial average was down more than 400 points. That rivaled the biggest loss of the year on Feb. 27, when fears about China's overheated market and a trading glitch sent the index down 416 points.

Stocks recovered some ground late in the trading session, but still erased nearly all trading gains from the month of July. The Dow Jones industrial average was down 311.5 points, or 2.26%, to 13,473.57. Just last week, on July 19, the Dow closed a fraction above 14,000 for the first time.

The broader S&P 500 moved well below the 1,500 mark, down 2.33%, or 35.43 points, to 1,482.66. And the tech-heavy Nasdaq Composite was off 1.84%, or 48.83 points, to 2,599.34.

Losses were widespread, with 30 stocks lower for every three higher on the New York Stock Exchange. On the Nasdaq, the ratio was 24 to 5 negative.

Market analysts said worries about a looming credit crunch started the sell-off. On Wednesday, bankers postponed the sale of $12 billion in debt to fund the purchase of an 80% stake in Chrysler Group by Cerberus Capital Management. The deal may still go forward, but the move raised questions about the credit market's willingness to buy riskier corporate debt, and what that might mean for the ongoing boom in buyout activity (see, 7/25/07, "Wall Street Reacts to Bad News").

Bill Larkin, portfolio manager of fixed income at Cabot Money Management warns of "a drastic re-pricing of risk, which is definitely going to have an impact on anyone who needs to borrow money."

Deepening the concerns was more bad news on housing. New home sales plunged 6.6% in June. Wall Street was expecting a 1.6% drop. May and April new home sales numbers were revised lower. Add that to Wednesday's news that existing home sales dropped 3.8% in June, and bad earnings figures from home builders. "Housing will provide a slow-burn source of economic damage well into 2008," Charles Dumas of Lombard Street Research wrote Thursday. There are renewed worries that housing could hurt consumer spending and the labor market.

Though the market is going through the busiest part of the second-quarter earnings season, profit reports seemed to have little impact. While Apple (AAPL) and Ford (F) reported strong earnings, other companies' earnings reports fell short or failed to wow the market.

More than a third of the S&P 500 report earnings this week. As of midday on Thursday, corporate earnings were coming in 6.8% above a year ago. That projection, from Reuters Estimates, is up from 6% at the start of the week. Earnings are expected to come in about 3% ahead of analysts' estimates, which is typical.

"This quarter is in line with what we expected," says Ashwani Kaul, a senior research analyst with Reuters Estimates. Technology and financial companies are doing well, while cyclical firms are showing weakness, he says.

It has been a volatile several days on Wall Street. The Dow has alternated between double-digit increases and triple-digit sell-offs every other day for a week.

In other economic news Thursday, U.S. durable goods orders Thursday were up 1.4%, less than many had expected, after a 2.3% decline in May. Action Economics says that despite the headline gain, many of the subcomponents fell.

U.S. jobless claims fell 2,000 to 301,000 in the week ended July 21 from 303,000 the previous week. The data indicate a solid labor market, Action Economics says, but probably won't have much impact on markets. Friday the markets will receive initial data on second-quarter U.S. gross domestic product (see our economic calendar).

The initial GDP number is often revised substantially later, so it's unclear how seriously traders will take it.

Oil prices retreated after pushing up above $77 a barrel on Thursday. September NYMEX crude oil futures ended the day down 93 cents to $74.95 a barrel. Traders worried about reduced demand from a slower U.S. economy, Action Economics says.

Among the earnings news, Exxon Mobil's (XOM) profits fell 1% in the second quarter. The world's largest company reported earnings of $1.83, up from $1.72 because fewer shares are on the market due to a buyback program. Analysts were expecting earnings of $1.96 per share, according to Reuters Estimates, and stock dropped almost 5%.

Apple reported third quarter revenue of $5.41 billion and net profit of $818 million, or $0.92 per share, up from revenue of $4.37 billion and profit of $472 million, or $0.54 per share a year ago. Gross margin was 36.9%, up from 30.3% a year ago. The stock was up 6.4%.

Ford Motor surprised Wall Street by posting a profit in the second quarter of 31 cents. Revenues rose 6% as the company lost 17 cents a year ago.

3M (MMM) earned $1.25 per share in the second quarter, up from $1.15 per share and above analyst expectations of $1.18 per share. 3M was the only stock in the Dow average that ended higher.

U.S. Airways (LCC) was down after reporting earnings of $2.77 per share, vs. $3.25 a year ago. Revenues were slightly lower and the firm reported higher non-fuel expenses.

Dow Chemical (DOW) fell after reporting earnings of $1.07 per share, vs. $1.05 a year ago. Revenue rose 6%.

Black & Decker (BDK) disappointed investors with earnings of $1.75 per share, vs. $1.98 a year ago. Sales were flat, and the firm expects third quarter sales to be flat as well. The tool maker cited the weak housing industry and commodity inflation.

Aetna (AET) reported earnings of 85 cents per share, vs. 67 cents a year ago. Revenues were up 8.7%. The insurance firm raised its 2007 guidance by 5 to 7 cents per share.

Travelers Companies (TRV) reported earnings of $1.86 per share, vs. $1.36 a year ago. Gross written premiums were up 1%, and the insurance company raised its 2007 earnings guidance by 20 cents.

Ryland Group (RYL) reported a loss of $1.25 per share in the second quarter. The home builder's revenues fell 38%. Beazer Homes (BZH) also reported a loss, of $3.20 per share, with revenues down 37%.

Bristol-Myers Squibb (BMY) reported earnings of 36 cents per share, vs. 34 cents a year ago as sales rose 1%.

Raytheon Co. (RTN) reported earnings of 79 cents, vs. 61 cents a year ago. Sales were up 9%.

European stock markets plunged on Thursday. In London, the FTSE 100 index was off 3.15% to 6,251.20. Germany's DAX index dropped 2.39% to 7,508.96. In Paris, the CAC 40 index fell 2.78% to 5,675.05.

Asian markets were also down on Thursday. In Japan, the Nikkei index was off 0.88% to 17,702.09. In Hong Kong, the Hang Seng index fell 0.64% to 23,211.69. In mainland China, the volatile Shanghai Composite index was up 0.52% to 4,346.46.

Treasury Market

Treasury prices spiked on a flight to safety from lower U.S. and European stocks. The 10-year note was up 29/32 to 97-25/32 for a yield of 4.78%; the 2-year note was up 09/32 to 100-03/32 for a yield of 4.56%; and 30-year bonds were up 1-03/32 to 96-28/32 for a yield of 4.95%.