Stocks: An Unhappy Anniversary

Twenty years to the day after Black Monday, major indexes shed more than 2% amid poor earnings and more signs of credit problems

Deja vu all over again, as Yogi Berra used to say? Not quite, but memories of the 1987 stock market crash may have unsettled equity investors as Wall Street marked the 20th anniversary of Black Monday with a big stock sell-off.

Major U.S. stock indexes finished sharply lower on Friday -- recording the biggest losses since late July -- reflecting renewed worries about slowing U.S. economic growth, spurred by a negative outlook by Caterpillar (CAT) and further signs of trouble in the credit markets. Oil prices, while slightly down after a six-day rally, were also chipping away at investor confidence.

On Friday, the Dow Jones industrial average dropped 366.94 points, or 2.64%, to 13,522.02. The broader S&P 500 index slid 39.45 points, or 2.56%, to 1,500.63. The tech-heavy Nasdaq index fell 74.15 points, or 2.65%, to 2,725.16, as a break below 2,750 triggered some technical selling.

On the New York Stock Exchange, 28 stocks dropped for every five that gained ground, while Nasdaq breadth was 25 to five negative. The pall over the markets was such that investors weren't able to muster much enthusiasm even for companies with blow-out profit reports, such as Google (GOOG) and McDonalds Corp. (MCD).

In lowering its profit forecast for 2007, Caterpillar shared some gloomy views on the economy, saying it saw the gains in the second quarter fading in the second half of this year and that many of the most important industries it serves, such as the housing, mining and commercial construction sectors, are now in recession. Including commercial construction in this group sent off alarms for some observers, since economists had seen that industry holding up well in spite of turbulence in the credit markets.

There's no reason to think the bull market that's been in place for the past five years can't keep going, "but when we look at what’s typical and the overview for the overall economy, it's pretty easy to think we’ve run a lot of our course here," said Barry Ritholtz, chief market strategist at Ritholtz Research and Analytics. If there is a recession -- he now sees a 65% chance of one within the next 18 to 24 months -- the market could correct 10%, 20%, or even as much as 30%, fairly typical for a correction during a recession.

All bets for avoiding a downturn are off now that it's clear that big companies such as 3M Co. (MMM) and Honeywell International (HON), which had been thought to be benefiting from the weak U.S. dollar, aren't such a safe haven after all, he said.

Financials remained in the spotlight Friday, with some European banks being downgraded by analysts and Citigroup (C) saying that it has secured funding for its program to unfreeze the market for structured investment vehicles (SIVs). A big factor in the negative sentiment that has crept back into the market this week, analysts say, is renewed fear that the credit problems continue to play out and are likely to curb economic growth going forward.

The widening of spreads on certain interest-rate swaps shows that the money markets are clearly bracing for another credit event, according to Action Economics, which notes persistent rumors of a couple of smaller SIV funds in jeopardy.

The credit situation -- along with the chronic weakness in the dollar -- is also likely to dominate the discussion at the G7 summit in Washington, D.C., this weekend.

Contributing to negative sentiment Friday were concerns that turmoil in the credit markets -- reflected by continued downgrades by Standard & Poor's in the subprime mortgage-backed securities markets and the specter of forced liquidations for some SIVs -- could once again lead to a seizing up in liquidity, said Derrick Wulf, a portfolio manager at Dwight Asset Management in Burlington, Vt.

The $80 billion to $100 billion superfund being created by some of the nation's largest banks, led by Citigroup, may have had some unintended consequences, one of which was to remind people that SIVs remain an ongoing concern, he said.

There was no fresh economic data on Friday, giving the market time to digest a flurry of mostly weaker data from earlier this week that will probably convince the Federal Reserve to cut interest rates again at its policy meeting on Oct. 31.

Next week, the market will be paying particular attention to the Wednesday report on existing home sales, which are expected to have tumbled further in September after a 250,000 drop in August. The September durable goods orders due out on Thursday will also be watched, but the focus next week will continue to be how strong corporate earnings are, Ritholtz said.

Speaking by video feed to a St. Louis Fed conference, Chairman Ben Bernanke said the uncertainty of monetary policy was a pervasive feature of policy making and said the Fed's goal should be to be transparent and predictable and avoid overreactions to economic data, although he didn't refer specifically to current policy, Action Economics said.

In view of Bernanke's comments earlier this week that the Fed's policy committee's focus is on the functioning of the credit market, its effects on the housing sector and the potential for spillover to the broader economy, Barclays Capital says it now expects the Fed to cut rates by another quarter-percentage point on Oct. 31. The weaker housing and jobless claims data this week has the markets pricing in a 70% chance of a rate cut, compared with a 40% chance a week ago, Barclays said in a research report. Other analysts say a half-percentage point rate cut is in the cards.

Crude oil for November delivery in New York ended 87 cents lower at $88.60 a barrel on profit-taking after topping $90 in electronic trading overnight. The price continues to be supported, however, by concerns about potential supply disruptions if Turkey launches a military attack into northern Iraq, and tight supplies in the U.S.

Among stocks in the news Friday, Google shares rose 0.8% after the company issued its earnings report after Thursday's closing bell. The Internet search outfit posted earnings of $3.38 a share for the third quarter, vs. $2.36 a share a year ago, on a 57% leap in revenue.

Caterpillar shares were down 5.3% after it reported a gain in third-quarter profit to $1.40 from $1.14 a share a year ago, with revenue rising 8.8% as strength in its integrated service business offset weakness in North America. But the equipment manufacturer missed analysts' estimate of $1.43 a share and cut its profit outlook for 2007 to between $5.20 and $5.60 a share from a prior range of $5.30 to $5.80 a share.

Schlumberger Ltd. (SLB) shares fell 11.0% on remarks by CEO Andrew Gould that he doesn't know see an end yet to deteriorating prices in its North American pressure pumping business. The oilfield services outfit reported a third-quarter profit of $1.09 a share, vs. 81 cents a share a year ago, thanks to a 19% revenue increase.

3M Co. shares dropped 8.5% despite posting a 8.6% gain in third-quarter net income to $1.32 a share from $1.18 a share a year ago, on a 5.4% rise in sales. Selling stemmed from the company's saying it was cutting prices on its profitable films for LCD television screens to protect against further slowing in sales rates from tougher competition. 3M raised its 2007 profit outlook to between $5.54 and $5.62 a share from a previous range of $5.40 to $5.60. The new forecast includes an estimated net gain of 60 to 65 cents a share from special items.

Honeywell shares fell 3.9% despite the company posting a 14% gain in profit to 81 cents from 66 cents a share in the third quarter of 2006 on talk that its profit margins in its transportation and automation and controls businesses were lower than expected. Revenue jumped 10% $8.74 billion, driven by higher sales to commercial, defense and aerospace markets.

Wachovia Corp. (WB) shares fell 3.6% after it said earnings fell to 89 cents a share from $1.17 a share in the third quarter of 2006 despite a 4.3% gain in tax-equivalent revenue. The bank said disruption in capital markets resulted in valuation losses of $1.3 billion, and lower loan origination and distribution revenues in its corporate and investment bank units.

European equity indexes were trading lower Friday. In London, the FTSE 100 index fell 1.23% to 6,527.90. Germany's DAX slipped 0.47% to 7,884.12. In Paris, the CAC 40 reversed to the downside, down 0.46% to 5,740.48.

Asian markets ended mixed. In Japan, the Nikkei 225 index dropped 1.71% to 16,814.37. In Hong Kong, the Hang Seng index was closed for a holiday, while the Shanghai composite index edged 0.12% lower to 5,818.05.

Treasury Market

Treasury bonds continued to benefit Friday as investors sought the safety of government debt amid the slump in equities.

The 10-year note jumped 30/32 in price to 102-30/32 for a yield of 4.38%, and the 2-year note gained 08/32 to trade at 100-13/32 for a yield of 3.77%. The 30-year bond surged 1-18/32 to 105-06/32 for a yield of 4.67%.

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