Stocks Plunge as Economic Gloom Deepens

Indexes sank to multi-year lows as the biggest drop in consumer prices in 61 years sparked deflation worries, and the Fed lowered its growth forecast

The ghosts of October's dismal market returned to Wall Street on Wednesday, pushing major stock indexes to new lows, including the worst close for the Dow Jones industrial average since March 2000.

U.S. stocks plunged as fears about economic contraction and revived concerns about the financial system converged to kill any lingering optimism of a short-term rally on what had been seen as oversold conditions. Wall Street eyed reports showing the biggest monthly drop in in the consumer price index (CPI) in 61 years in October. That, along with a record low in housing starts and permits in October, painted a picture of an economy in recession with deflation, according to S&P MarketScope.

But the impetus for the accelerated selling in the final hour of trading was the release of minutes from the Federal Reserve's policy committee's meeting on Oct. 28 and 29, which revealed that the FOMC saw economic contraction when it met last month. The big bombshell from the minutes: the Fed's significantly higher estimates for unemployment rates, above 6.5%, and dramatically lower growth projections out to 2011.

And the reports of job cuts kept coming, as Boeing Co. (BA) announced it was eliminating 800 jobs at a Wichita, Kans. refueling facility. The airplane manufacturer is also reworking its entire production schedule, adding as much as 10 weeks to the original delivery date for all 3,734 jetliners in its order backlog as it tries to recover from a strike by its machinists, according to people familiar with the situation, the Wall Street Journal reported Wednesday.

Citigroup (C) shares tumbled nearly 23% to a 13-year low on fresh worries about the assets on its balance sheet, which include $16.9 billion in commercial mortgage-backed securities, or CMBS, accounting for 11% of its total equity. Values of CMBS began to plummet last week after Treasury Secretary Henry Paulson announced the TARP would not buy distressed assets as had been hoped.

Bonds were higher. The dollar was higher in volatile trading. Gold futures were up, but off session highs. Oil futures slid after the release of the U.S. Energy Dept.'s weekly inventory report.

On Wednesday, a drop in all 30 stocks on the Dow Jones industrial average caused the blue-chip index to fall 427.47 points, or 5.07%, to close at 7,997.28. The broad S&P 500 index shed 52.54 points, or 6.12%, to finish at 806.58, and the tech-heavy Nasdaq composite index lost 96.85 points, or 6.53%, to end at 1,386.42, below their October lows.

On the New York Stock Exchange, 30 stocks were lower in price for every two that advanced. The ratio on the Nasdaq was 25-3 negative. Trading was slow.

European stocks ended sharply lower Wednesday, with the FTSE 100 index in London down 4.82%, the CAC 40 index in Paris lower by 4.03%, and Germany's DAX index slumping 4.92%. Asian equity markets finished mixed, with Tokyo stocks down 0.66%, Hong Kong lower by 0.77%, and Shanghai surging 6.05%.

In economic news Wednesday, U.S. CPI fell 1.0% in October, while the core rate, which excludes food and energy prices, slipped 0.1%. Those follow a flat headline reading in September, and a 0.1% increase in the ex-food and energy component. On a year-over-year basis, headline CPI eased to 3.7% from 4.9% in September. The year-over-year core rate slowed to 2.2% from 2.5% previously. Declining energy prices have helped moderate price pressures significantly, says Action Economics.

U.S. housing starts dropped 4.5% to a 791,000 unit annual pace in October, from a revised 828,000 rate in September (from 817,000 previously). Permits tumbled 12.0% to a 708,000 annual clip, from a revised 805,000 in September (786,000 previously). Weakness was widespread. Single family starts were down 3.3%, a fifth consecutive monthly decline. Multi-family starts fell 6.8%. Housing completions dropped 10.2%.

"There's no relief in the beleaguered housing market," says Action Economics.

The plunge in consumer prices, while certainly welcomed by U.S. households, "points to a deflationary trend, and that’s what the market is really fearful of here," says Peter Cardillo, chief market economist at Avalon Partners in New York. "It complicates the Fed’s work to stimulate the economy" with further interest rate cuts after having cut the Fed funds rate to 1.0% just three weeks ago.

"Once deflation sets in, it’s very difficult to combat [economic contraction]," he says.

Cardillo predicts the Fed will trim interest rates by another quarter-point at its December policy committee meeting.

Meanwhile, there was talk of accelerated efforts by Senate Democrats to prepare a fiscal stimulus package that could be voted on before the Senate adjourns for the year. If a bill isn't passed by year-end, fiscal relief for the economy will have to wait until the new Congress takes office in January.

In a speech at the at the Cato Institute's annual monetary conference in Washington on Wednesday, Fed Vice Chairman Donald Kohn said the weak economy and fragile markets were likely to persist as the disruption from the current asset bubble burst is much more severe than past episodes. Yet he remains unconvinced that central banks can detect and check such bubbles with rate hikes early enough. Instead, he favors strengthening the regulatory system.

Also speaking before the Cato Institute, Richmond Fed President Jeffrey Lacker warned that the dramatic rise in Fed lending is pushing past its supervisory reach and could destabilize the financial system, with additional regulatory oversight needed to limit moral hazard and reestablish the boundaries of Fed lending and public support. The non-voting inflation hawk argues it's important to eventually roll back this public safety net and sometimes disappoint borrowers in order to avoid stifling innovation.

Wall Street gloom was exacerbated as investors watched a second day of testimony on Capital Hill by the three big U.S. automakers, who, after being snubbed by the Senate on Tuesday, pleaded with the House for at least $25 billion aid in a testy session. Ford Motor Co. (F) and General Motors (GM) told legislators they haven't planned contingencies in case of bankruptcy, while Chrysler said it has made some plans.

Senate Democratic leaders said they had not been able to muster the support for legislation that would provide $25 billion to the troubled auto industry from the Treasury Department's $700 billion economic rescue fund, reports The New York Times. There is still a possibility that money may be freed up for Detroit from a previously approved loan program to help automakers retool their plants for more fuel-efficient vehicles.

Bloomberg reports U.S. regulators may require banks and insurers to disclose data about all credit-default swap trades to a central registry to boost transparency in the $47 trillion market, a person with knowledge of the talks said. The New York Fed and SEC want information about credit-default swaps that don't meet standard terms to be disclosed to a warehouse that would record all trades, said the person, who declined to be identified because the discussions are private.

In other U.S. markets Wednesday, the 10-year Treasury bonds were up in price at 103-20/32 for a yield of 3.32%, and the 30-year notes jumped to 110-11/32 for a yield of 3.91%.

The dollar index was higher at 87.28.

December West Texas Intermediate crude oil futures settled were 77 cents lower at $53.62 per barrel after the Energy Dept. reported crude oil inventories rose 1.6 million barrels to 313.5 million barrels, gasoline stocks increased 500,000 barrels to 198.6 million barrels, and distillate inventories fell 1.5 million barrels to 126.9 million barrels.

December gold futures were $3.30 higher at $736.00 per ounce.

Among other stocks in the news on Wednesday, BJ'S Wholesale Club (BJ) posted third-quarter EPS of 48 cents, vs. 35 cents, on 12% higher comparable-club sales and 13% higher total sales. The company raised its fiscal 2009 guidance to $2.20-$2.30 EPS from its prior $2.10-$2.20 forecast; BJ's sees fiscal 2010 EPS of $2.27-$2.39.

KLA-Tencor (KLAC) said it will reduce its global workforce by about 15% by June 30, 2009. The company sees an initial charge of about $15 million-$20 million, almost all of which is related to estimated severance costs associated with the workforce reduction.

Insituform Technologies (INSU) announced a reorganization of its North America Region business unit management that will eliminate layers of management to cut administrative and overhead costs. The company expects to realize about $4.2 million in annual cost savings from these efforts. Insituform says it will record pre-tax charges of about $1.6 million in the 2008 fourth quarter related to the reorganization and position eliminations.

TEVA Pharmaceutical Industries (TEVA) says one of its units and a unit of Barr Pharmaceuticals (BRL) inked a deal with Aventis Pharmaceuticals, Inc., Sanofi-Aventis U.S. LLC and Albany Molecular to settle patent litigation involving Teva's and Barr's U.S. generic versions of Aventis Pharmaceuticals' Allegra (fexofenadine) 30mg, 60mg and 180mg tablets, including all claims for patent infringement and damages.

BAIDU.COM Inc. (BIDU) shares dropped after Citigroup downgraded the stock to sell from buy. On Monday, BIDU said it removed paid search listings of unlicensed medical and pharmaceutical companies and service providers, affecting up to 10%-15% of its sales. The company said customers will be able to resume listings once they provide evidence of relevant licenses. The near-term financial impact of the move is uncertain. S&P keeps its hold rating.

Royal Caribbean Cruises (RCL) will discontinue its common stock dividend.

Phillips-Van Heusen (PVH) posted fourth-quarter GAAP EPS of $1.03, vs. $1.05 one year earlier, despite a 4% revenue rise. Excluding costs associated with the closing of the company's Geoffrey Beene outlet division, EPS totaled $1.10. For full-year fiscal 2009, the company now sees GAAP EPS of $2.71-$2.81, which includes Geoffrey Beene operating results and exit costs of about $24 million pre-tax, or $15 million after tax. For the fourth quarter, it sees GAAP EPS of 23 cents-33 cents, which includes Geoffrey Beene operating results and exit costs of about $10 million pre-tax, or $6 million after tax.

Jack in the Box (JBX) posted fourth-quarter EPS from continuing operations of 46 cents, vs. 42 cents one year earlier, despite 4.5% lower restaurant sales and slightly lower revenue.

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