Dow Drops 348 Points

Weak economic reports spark concerns about a recession as investors also worry about Friday's House vote on the financial rescue package

Investors stayed in a selling mood Thursday, sending major U.S. stock indexes skidding amid concerns about the fate of the revised financial-system rescue plan the Senate passed Wednesday night. The bill includes tax incentives designed to entice reluctant House Republicans. But earmarks added to the bill make the outcome of Friday's House vote uncertain.

Worries about a recession also contributed to declines. Economic reports released Thursday contained some discouraging news for the U.S. economy, with a small rise in first-time unemployment filings and a decline of 4.0% in August factory orders adding to the argument that the U.S. is heading into recession.

"The economic data basically confirms that the economy is slipping into recession," says Peter Cardillo, chief market economist for Avalon Partners in New York. "That, along with waiting for the economic rescue package, is putting pressure on stocks."

Market analysts were also questioning what will happen if the bill does get passed. "Even when we do get the package, and I think we will, it's not going to cure all the ills of the economy," Cardillo says. The passage of the bill, he says, should help restore confidence in the credit markets and get credit flowing again.

"The credit situation has put us in a consumer-led recession," Cardillo says. "Hopefully it's going to be shallow, but if credit markets stay dysfunctional then all bets are off and we'll be in a serious deflationary period."

Says Sam Stovall, chief investment strategist at Standard & Poor's in New York: "Even if Congress passes a revised rescue plan, cascading concerns remain. Will it be enough to accomplish the required task of unfreezing credit markets? If so, are we just back to recession 101?"

"We believe a plan will be passed, but it will not shorten the recession," Stovall says. "Yet it should help put us closer to a market bottom."

On Thursday, the blue-chip Dow Jones industrial average dropped 348.22 points, or 3.22%, to 10,482.85. The broader S&P 500 index fell 46.78 points, or 4.03%, to 1,114.28. The tech-heavy Nasdaq composite index shed 92.68 points, or 4.48%, to 1,976.72.

On the New York Stock Exchange, 27 stocks declined in price for every 5 that advanced. The ratio on the Nasdaq was 23-5 negative. Trading was moderate.

Fertilizer and agricultural chemicals stocks were among the biggest losers Thursday after a Merrill Lynch analyst downgraded some companies in the group. Financial stocks were lower amid the fresh bailout concerns. Insurance stocks also got hit, after Senate Majority Leader Harry Reid said Wednesday night a major insurer is on the verge of bankruptcy, according to newswires. Reid didn't disclose the name of the insurer and said it was brought up by another senator during recent meetings.

The Senate handily passed a controversial financial rescue package Wednesday night, giving the bill its first legislative victory but adding provisions that could complicate efforts to push the $700 billion plan through the House of Representatives. A close vote is expected in the House on Friday.

In the meantime, credit markets continue to suffer. The total amount of commercial paper outstanding fell a record $94.9 billion to $1.607 trillion in the week ended Oct. 1, bringing the cumulative drop for the 3 weeks to $208 billion. The declines reflect the seizing up of the credit market and withdrawals of monies from money market funds, which held $700 billion of commercial paper at the end of the second quarter. The latest decline, which marks an abrupt shift, reflects the drying up of credit availability in the commercial paper market. The 7-day rate for asset-backed commercial paper has jumped to 4.50% from the roughly 2.5% rate that prevailed over the past few months. The commercial paper market is where entities go to raise working capital to produce goods and services. Issuers with mortgage-related exposures have been pushed out of the market, which is what makes this latest round of seizing up worrying, because the issuers that remain are considered far more stable entities with more predictable cash flows, according to S&P MarketScope.

Federal Reserve officials are reportedly weighing further interest-rate cuts, even if Congress passes a $700 billion rescue plan, in the face of a deteriorating economic outlook and severely strained financial conditions. The Fed's willingness to consider additional cuts marks a turnaround from the past few months, when soaring food and energy prices turned its attention to inflation risks.

Economists will be watching Friday's employment report, which is expected to show a drop of 100,000 nonfarm payrolls in September. The unemployment rate is widely expected to stay at 6.1%.

In U.S. economic news Thursday, U.S. jobless claims edged up 1,000, remaining elevated at 497,000 for the week ended Sept. 27, after surging 38,000 to 496,000 in the prior week (revised up from 493,000 previously). The Bureau of Labor Statistics said the hurricanes along the Gulf Coast added some 45,000 to claims. But the data are also reflecting a softening labor market, says Action Economics.

Factory orders plunged 4% in August, below the forecast and following a downwardly revised 0.7% in July, though the weak durable report already foreshadowed this slump.

In the bond markets Thursday, the 10-year Treasury note rose 25/32 to 102-31/32 for a yield of 3.64%, while the 30-year bond climbed 33/32 to 105-24/32 for a yield of 4.16%.

December gold futures plunged $41.10 to $846.20 per ounce as the dollar index rose amid growing concern that the U.S. and Europe are headed into a severe recession that would reduce demand for commodities. In the energy markets, November West Texas Intermediate crude oil futures fell $3.41 to $95.12 a barrel.

Stock markets in London, Frankfurt, and Paris turned lower Thursday as the European Central Bank (ECB) left interest rates unchanged. In Asia, Tokyo stocks fell while Hong Kong rose; Shanghai's markets remained closed for a holiday.

The ECB left official rates unchanged, as widely expected, but hinted at a possible future rate cut. ECB chief Jean-Claude Trichet will reportedly attend a meeting of key European Union officials on the crisis on Saturday and he is likely to be quizzed on his view on an optimal response to the crisis.

European policymakers clashed over how to protect the EU's financial system from the global credit crisis, reports the Financial Times, as France floated the idea of a single rescue fund to deal with bank failures. Christine Lagarde, France's finance minister, raised the possibility of a European fund “to support the financial sector". Britain is also skeptical about the idea of a pan-European fund, preferring to tackle crises on an ad hoc basis, although officials in both the Bank of England and the Treasury are working on a range of plans in case a more co-ordinated approach arises. These include extended liquidity

Greek Finance Minister Alogoskoufis issued a guarantee on deposits, according to Dow Jones. He issued a blanket guarantee to savers that their deposits were fully insured by the Greek government, after signs that some depositors had moved to withdraw their savings from banks. The move follows similar measures taken by the Irish authorities, increasing the pressure on other eurozone countries to follow.

The U.S. Justice Department is ramping up criminal investigations into the collapse of the market for investments known as auction-rate securities. One investigation is looking at whether Lehman Brothers Holdings defrauded its clients, and another probes whether a former executive at UBS AG (UBS) was involved in insider trading, according to several people familiar with the matter. The investigations are among the first to look at whether individuals committed crimes as the market collapsed in the credit crisis.

Among Thursday's stocks in the news, General Electric (GE) shares fell 9.6% to 22.15 after the conglomerate announced that its offering of 547.825 million shares of its stock at $22.25 per share.

Mosaic Co. (MOS) shares plunged 41% to 39.65 after the agricultural chemicals maker posted lower-than-expected first quarter EPS of $2.65, vs. 69 cents one year earlier, on sharply higher sales. Wall Street was looking for $2.94. The company notes momentum has slowed in its phosphates business near-term due to soft seasonal demand, higher customer inventory levels, and falling raw material costs. Merrill reportedly downgraded its rating on the shares to underperform from buy.

Truckers fell after Con-Way (CNW) cut its $3.00-$3.40 2008 EPS guidance to $2.60-$2.80. The company cited weak demand for freight transportation services. S&P reiterates its hold rating on the shares but cut its EPS estimates and price target. Stifel downgraded the shares to hold.

Marriott International (MAR) posted third-quarter EPS from continuing operations of 26 cents, vs. 31 cents one year earlier, on 1% lower comparable revenue per available room (REVPAR) in company-operated facilities in North America and 1% higher total revenue. The company posted 34 cents third quarter adjusted EPS from continuing operations; Wall Street was looking for 32 cents. Given the current soft economic climate in North America and weakening markets elsewhere, Marriott expects worldwide and North America REVPAR to decline.

Nabors Industries (NBR) sees third-quarter EPS of 65 cents to 68 cents, which includes significant charges in its investment income and other expense items as well as a tax rate adjustment for an expected higher full-year effective tax rate.

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