Dow Drops 370 Points

The blue chip index sank below 10,000 amid deepening worries about the financial crisis. Markets in Europe and Asia also tumbled

U.S. stocks finished sharply lower Monday, but a glance at the closing numbers doesn't even begin to tell the story of yet another nerve-wracking day on Wall Street.

At one point during the session, the big three U.S. indexes posted losses of 8% or greater -- an ugly echo of the Sept. 29 market rout, which resulted in the greatest one-day percentage losses for market benchmarks since 1987. The Dow fell as much as 800 points during the session, driving it below 10,000 for the first time since October, 2004, before the late-session upswing. But in the final hour of trading, buyers jumped in -- accompanied by a notable increase in trading volume -- trimming the market's outsized losses virtually in half.

Still, the closing numbers were ugly, and served as a reminder of the excruciating volatility investors have had to endure in recent weeks amid investor worries about the health of the financial system and credit markets -- and the rising likelihood of a U.S. recession.

Call Monday's action in U.S. markets a half-meltdown.

On Monday, the blue-chip Dow Jones industrial average fell 369.88 points, or 3.58%, to 9,955.50. The broader S&P 500 index shed 42.34 points, or 3.85%, to 1,056.89. The tech-heavy Nasdaq composite index tumbled 84.43 points, or 4.34%, to 1,862.96.

Monday's rout brings the Dow's loss for the year to almost 25%. The S&P 500 is now down 28%, while the Nasdaq has lost nearly 30% this year.

One-day chart of DOW

The U.S. VIX equity volatility index, the stock market's favored "fear gauge," hit a fresh cycle high of 58.24 earlier before retreating back to 52.05.

U.S. equity markets joined a worldwide sell-off fueled by fears that policy makers may not be able to cure the ailing global economy anytime soon. "We're really in an emotional sell-off state," says Alex Paris, president of Barrington Research, an economic and investment research firm in Chicago. "It's hard to identify the bottom, but we're in the bottoming process."

Market watchers are worried that the U.S. government's financial rescue plans won't stop the economy from falling into a recession. "I was hoping it won't stop us from having negative GDP growth, but it's not enough to keep [the economy] from turning into a real downturn," Paris says.

However, Paris believes the economy is in the maturing stages of a downturn, as the housing and auto industries have struggled for the last three years, rather than the beginning of one. Usually, the stock market moves higher before the economy recovers. And with stocks now at a "throw-away stage" -- he says he's planning to slowly invest in high-quality stocks like General Electric (GE), which is trading at just 10 times estimated earnings.

Bonds moved higher Monday as the Fed moved to add liquidity to the financial system. The 10-year note rallied 34/32 to 104-14/32 for a yield of 3.46%, while the 30-year bond soared 57/32 to 108-01/32 for a yield of 3.98%. No major U.S. economic reports were scheduled for Monday.

The U.S. dollar index rallied on speculation the European and U.K. central banks will cut interest rates. Gold futures were higher in a flight to safety.

Crude oil futures skidded below $90 per barrel on prospects of lower demand, ending down $6.32 to $87.56 a barrel, an eight-month low.

As traders pondered details of the U.S. bailout plan enacted Friday, they also eyed reports that European banks were considering guaranteeing bank deposits but Germany, France, Britain, and Italy decided against a coordinated bank bailout, while vowing to stabilize markets.

European stocks plunged as the banking crisis widened. In London, the FTSE 100 index fell 6.88% to 4,637.53. In Paris, the CAC 40 index dropped 8.25% to 3,744.06. Germany's DAX index sank 6.87% to 5,398.72.

Asian markets also finished sharply lower. Japan's Nikkei 225 index fell 4.25% to 10,473.09. In Hong Kong, the Hang Seng index slumped 4.97% to 16,803.76.

Back in the U.S., Chicago Fed President Donald Evans, speaking at the National Association for Business Economics annual meeting in Washington, said the U.S. economy faces difficult challenges, and weak growth will probably linger into 2009. Evans said core inflation, at 2.6%, was "too high" and that even as commodity prices fall far off their peak there was still a chance high inflation expectations could become embedded in price- and wage-setting behavior. Evans said real economy activity would stay sluggish into the new year and that the level of uncertainty about the timing of a pickup in growth, which will depend on improvements in the financial and credit markets, "is very high."

The Fed is doing everything it can to ease the freezing up of the credit markets, said Dallas Fed president Richard Fisher in a Q&A session after his speech before the NABE. Fisher said that the capital markets are operating in "semi-panic, if not outright panic mode" right now.

NABE members sharply lowered their expectations on near-term economic growth, with a stall expected in the fourth quarter, according to the National Association of Business Economics October outlook. The more negative economic outlook stems from the tightness in credit markets and weakness in consumer spending.

Federal Reserve Chairman Ben Bernanke is scheduled to speak at the NABE meeting on Tuesday.

The Fed faces increasing market pessimism about the outlook for the economy. Goldman Sachs economist Jan Hatzius wrote in a note Monday that "with the boost from fiscal stimulus gone and the impact of tighter credit conditions working its way into the real economy, U.S. economic activity has decelerated sharply in recent weeks." Hatzius adds that the intense distress in financial markets -- which seems unlikely to dissipate quickly -- "further darkens the outlook."

As a result, Goldman marked down its forecasts for growth and interest rates substantially. "The recession that we have been forecasting now looks likely to be deeper and longer, taking the unemployment rate to 8% by late 2009 and pushing the Fed to cut interest rates to 1% or lower."

Developments in Europe held the spotlight Monday. During the weekend, leaders of Europe's four biggest economies -- Germany, France, Britain and Italy -- decided against a coordinated bank bailout, while vowing to stabilize markets. Italian Prime Minister Silvio Berlusconi later said Italy would revive the idea of a common bank bailout fund at a meeting of finance ministers on Monday. The other three countries shot the idea down. Expectations are building that a meeting of finance leaders from the Group of Seven major industrialized nations, scheduled for this week in Washington, could set the stage for coordinated interest rate cuts.

In the banking industry, France's BNP Paribas scooped up the assets of Fortis in Belgium and Luxembourg for €14.5 billion to stem a cash drain on Fortis and Dexia. German officials clinched a revised rescue deal for lender Hypo Real Estate that will see commercial banks and insurers provide €15 billion in liquidity, on top of an initial pledge of €35 billion.

The German government will not legislate to formally increase safety for German savers, according to a BBC report. Chancellor Angela Merkel's commitment was a political one that no German savers would lose any money, according to BBC business editor Robert Preston, who suggested that her undertaking was similar to that offered by U.K. Chancellor Darling. There were fears over the weekend if Germany offered 100% then the U.K. would have to follow. Merkel said over the weekend that all savings were secured.

"If the commitment leads to a change in legislation, or if this is a safety net offered on an ad hoc basis, it seems clear that Merkel's comments were meant as an effective 100% guarantee for deposits in savings and current accounts, which according to a government spokesman amount to €568 billion," says Action Economics. The spokesman said that the step was designed to prevent a bank run, says Action Economics.

Sweden, following Germany's pledge to guarantee private deposit accounts, said it would expand bank deposit guarantees and the central bank increasing the amount of loans offered to its banks. Austria, Denmark, and Ireland issued the first such guarantees last week.

This put pressure on other countries, such as Britain, which face the prospect of a drain in deposits from their less-guaranteed banks.

Iceland's parliament is expected to adopt financial legislation later Monday geared toward avoiding national bankruptcy, according to comments from Prime Minister Geir Haarde, who detailed unprecedented legislation to authorize government intervention in Iceland's financial markets. Authorities will be allowed to intervene in bank operations, conduct shareholder meetings and overrule their boards, merge or dissolve firms, forbid asset disposal, takeover assets and migrate housing loans to a government housing entity, among other rights.

"European governments proved unable or unwilling to act together on banking crisis and so will act apart, and therefore potentially exacerbate existing tensions," wrote UBS Investment Research analyst Meyrick Chapman in a note Monday.

Separately, the Bank of Japan it offered to lend 1 trillion yen against pooled collateral in an auction to inject liquidity into the market and the Bank of England said it would offer $10 billion in an overnight repo operation. South Korea's finance minister said the country would dip into the world's sixth-largest foreign exchange reserves to help with loans.

On Monday, Reuters reported that overnight dollar deposit rates were indicated around 1.0%-2.55% in London, holding close to the Federal Reserve's 2% target rate and well down from levels of over 10% seen in September after the demise of Lehman Brothers. The ECB and BoE liquidity provisions helped European banks meet their demand for greenbacks to fund their dollar-based liabilities and market exposure.

The cost of borrowing overnight funds on international money markets remained close to central banks' targets on Monday thanks to continued liquidity injections but lending was virtually non-existent across all maturities.

Meanwhile, in the U.S., the Federal Reserve was pushing Citigroup (C) and rival Wells Fargo (WFC) to compromise over their competing bids for hobbled Wachovia Corp. (WB) that could result in them carving up its assets. Monday afternoon, the three companies announced that they have agreed to a standstill of all formal litigation activity effective immediately; cease any formal discovery activities; and cooperate in good faith to agree among themselves to secure orders here necessary in all applicable cases in all jurisdictions tolling any schedules for filing of litigation papers or court appearances or any other formal litigation deadlines, with goal of preserving status quo during the litigation standstill period.

After the market close, Bank of America (BAC) reported that earnings fell 68% to $1.18 billion, or 15 cents per share, for the July-to-September period from $3.7 billion, or 82 cents per share, in the same period last year. That missed analysts' forecast of 62 cents. To raise capital, Bank of America said it plans to sell $10 billion of common stock. It will also reduce its quarterly dividend to 32 cents from 64 cents.

Hartford Financial Services Group (HIG) announced a binding deal with Allianz SE (AZ), which provides for a $2.5 billion capital investment. Hartfor said Allianz will buy, at $31 per share, $750 million of preferred shares convertible to common stock after receipt of applicable approvals, $1.75 billion of 10% junior subordinated debentures. Hartford expects an $8.50-$8.80 third quarter loss per share (including $7.05-$7.25 in net realized capital losses), and $1.50-$1.60 core EPS before the effect of a DAC (deferred acquisition costs) unlock.

Fitch downgraded National City Corp. (NCC) and its National City Bank subsidiary's long and short-term Issuer Default Ratings (IDR). National City Corp.'s long-term IDR has been lowered to BBB+ from A while the bank's long term IDR has been lowered to A- from A. The bank and holding company's Individual rating has been lowered to C from B. Fitch placed all ratings on Negative Rating Watch.

Fitch said the near future is unlikely to offer National City Corp. any relief, and may very well result in additional asset quality problems as the economy weakens.

Richard S. Fuld Jr., chief executive of Lehman Brothers Holdings Inc., in his prepared testimony before a House Government Reform Committee, portrayed Lehman Brothers as mistaken in its assumptions about the health of mortgage markets, but also the victim of happenstance and financial markets that eroded too quickly for Lehman executives to contain the firm's losses.

Among other stocks in the news Monday, ImClone Systems (IMCL) and Eli Lilly (LLY) announced that the boards of directors of both companies have approved a definitive agreement under which Lilly will acquire ImClone through an all cash tender offer of $70 per share, or about $6.5 billion.

eBay (EBAY) expects to hit the low end of its third quarter revenue guidance, but exceed GAAP and non-GAAP EPS guidance. Separately, EBAY acquired U.S.-based online payments business Bill Me Later for $820 million in cash and $125 million in outstanding options. It also acquired Denmark's leading online classifieds site for $390 million in cash. The company plans to reduce its global workforce by about 10%, affecting about 1,000 employees, expected to result in pretax restructuring charges of $70 million-$80 million.

SAP AG (SAP) shares fell after the company warns that it expects third quarter 2008 U.S. GAAP software and software-related service revenues to increase 13%-14% from the third quarter of 2007. It says the market developments of the past several weeks have been dramatic and worrying to many businesses. These concerns triggered a very sudden and unexpected drop in business activity at the end of the quarter.

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