Fresh Fears for Wall Street

Stocks sank Tuesday on weak reports on home prices and consumer confidence. An FOMC warning that housing will drag on growth was the icing on the cake

U.S. stocks took another beating Tuesday, with major market indexes each down over 2% on the session. Investors, seemingly ready to unload equities on any piece of bad news that comes their way, saw the release of weak home-price data, a decline in a closely watched gauge of consumers' mood, and a statement from the Federal Reserve that housing market woes may pose a continued drag on economic growth as a signal to sell. And sell some more.

On Tuesday, the Dow Jones industrial average tumbled 280.28 points, or 2.1%, to 13,041.85. The broader S&P 500 fell 34.43 points, or 2.35%, to 1,432.36. The tech-heavy Nasdaq composite index dropped 60.61 points, or 2.37%, to 2,500.64.

Market sentiment was broadly negative, with 29 issues declining in price for each 4 that posted gains on the NYSE. Nasdaq trading breadth was 24-6 negative. The CBoE volatility index, or VIX, widely regarded as a stock-market fear gauge, jumped nearly 16% Tuesday.

While stocks were solidly in the red for the entire session, the 2:00 pm EDT release of the Fed's minutes from its Aug. 7 policy meeting seemed to send investors into a deeper funk. Policymakers thought there would be a continued drag from the housing market on growth for some time, but doubted the dislocations in the credit market would hurt capital spending.

Like a stage magician that already has the name, address, and telephone number of a random audience member written on a piece of paper, the Fed seemed to be peering into the future in the Aug. 7 minutes: "[A] further deterioration in financial conditions could not be ruled out and, to the extent such a development could have an adverse effect on growth prospects, might require a policy response." That, of course, was the purpose of the Fed's half-point cut in the discount rate on Aug. 17.

The Fed minutes released Tuesday did not cover the Aug. 16 conference call or the subsequent statement on Aug. 17 when the central bank cut the discount rate. The Fed expected a return to "normal" markets after a time, though said they needed to watch the situation "carefully" as the credit market conditions could change rapidly. Fed officials remained unconvinced that the slowdown in inflation would last.

Lehman Brothers economist Drew Matus wrote in an note Tuesday that the Aug. 7 minutes show that the Fed was already concerned about the state of the asset-backed commercial paper and mortgage markets at the time of the meeting. Overall, says Matus, the report suggests the FOMC was concerned about financial market conditions even as it kept its inflation bias. "As such, the report may indicate a slightly higher bar for action than we had previously assumed as the concerns around inflation pressures are clearly widespread", Matus says. But he believes that bar has been reached and looks for the Fed to lower the Fed funds rate by 25 basis points at the Sept. 18 FOMC meeting.

The market has entered "hypersensitivity mode" regarding the Fed, according to Bill Larkin of Cabot Money Management, as investors wonder whether and how much the Fed plans to cut interest rates.

Traders will be watching carefully Friday when Fed Chairman Ben Bernanke gives a much-anticipated speech on housing and monetary policy.

The market was already on the defensive Tuesday before the release of the Fed minutes. Investors were discouraged by a report on consumer confidence, measured by the Conference Board index, which fell to 105.0 in August, from 111.9 in July.

The number matched many analysts' expectations exactly, and Action Economics says a drop in August confidence was to be expected given the recent news. However, "in this context the adjustment is modest and likely signals only limited downside risks" to consumer spending.

Also, data showed housing prices are continuing to fall. According to the U.S. S&P Case/Shiller index, home prices fell 3.9% in June to an index of 199.18.

In other economic news Tuesday, the U.S. ICSC UBS chain stores sales index rose 0.3% last week.

That's the second straight weekly increase, but it comes after steep declines the prior two weeks, Action Economics says.

In the energy markets, October West Texas Intermediate crude oil futures fell 24 cents to $71.73 per barrel as Tuesday's weak economic reports heightened concerns a slowdown would cut demand. Traders were bracing for Wednesday's weekly DOE inventory report, which is expected to show that crude oil stocks declined.

Among stocks in the news on Tuesday, investment banking issues, already battered by worries about their exposure to subprime debt and credit contagion, sank further Tuesday as Merrill Lynch downgraded its recommendation on shares of Bear Stearns (BSC), Lehman Brothers (LEH) and Citigroup (C).

CIT Group (CIT) announced that it had closed down its home lending business. It announced it was closing its loan origination last month.

Berkshire Hathaway said it had bought 10.1 million shares of Burlington Northern Santa Fe (BNI) since Thursday, increasing the Warren Buffett-led company's stake in the railroad giant to nearly 14.8%.

Medco Health Solutions (MHS) agreed to buy Polymedica (PLMD) in a $1.5 billion deal. Medco is offering $53 cash per Polymedica share.

Coachmen Industries (COA), a maker of recreational vehicles, voted to suspend dividend payments, citing the poor housing market and other uncertainties.

Winn-Dixie Stores (WINN) reported earnings of 38 cents in the fourth quarter, vs. a 12 cents loss a year ago. Identical store sales rose 1.3% and total sales rose 1.5%.

Cost-U-Less Inc. (CULS) agreed to be acquired by North West Company Fund for $52.2 million, or $11.75 per share.

Sanderson Farms (SAFM) reported earnings of $1.51 per share in the third quarter, vs. 16 cents a year ago, on a 40% rise in revenue.

Acorn International (ATV) reported earnings of 7 cents per share, after breaking even a year ago, on a 58% rise in revenue. Acorn says its mobile handset business is slowing down, but maintained its 2007 guidance.

World markets were lower. London's FTSE 100 Index was off 1.68% to 6,115.5. Germany's DAX index fell 0.71% to 7,432.88. In Paris, the CAC 40 index dropped 2.28% to 5,463.19.

In Japan, the Nikkei index edged down 0.09% to 16,287.49. In Hong Kong, the Hang Seng index fell 0.91% to 23,363.76. The Shanghai composite index was up 0.87% to 5,194.69.

Treasury Markets

Treasurys edged higher as stocks skidded. The 10-year note was up 10/32 in price to 101-26/32 for a yield of 4.531%, 2-year notes were up 05/32 to 100-29/32 for a yield of 4.133%.