A Fearful Friday for Stocks

U.S. stocks closed sharply and broadly lower Friday, led by financial issues, as disappointing reports on personal spending and consumer confidence stoked investors' concerns about the economy. Treasuries jumped as stocks skidded.

On Friday, the 30-stock Dow Jones industrial average dropped 249.85 points, or 2.51%, at 9,712.73. All 30 stocks in the Dow industrials fell.

The broad Standard & Poor's 500-stock index was down 29.92 points, or 2.81%, at 1,036.19.

The tech-heavy Nasdaq composite index lost 52.44 points, or 2.50%, to 2,045.11.

On the New York Stock Exchange, 27 stocks were lower in price for every four that advanced. Breadth on the Nasdaq was 22-5 negative.

Fittingly, the day before Halloween saw market players flee in terror from a number of specters. In addition to the disappointing data, stocks were hurt by a spike in the U.S. dollar index that pushed commodities-related futures and stocks lower.

A report that Citigroup (C) may announce a $10 billion write-down in the fourth-quarter related to deferred tax assets raised fresh concerns about the profitability of the financial sector. Meanwhile, CIT Group (CIT) plunged 24% after Carl Icahn agreed to support its prepackaged bankruptcy plan.

Another appropriate touch as the spookiest day of the year drew near: The Street's traditional fear gauge, the VIX volatility index, spiked above 30 for the first time since July.

Profit taking was the order of the day, with the market giving back all the gains won in Thursday's broad-based rally after futures-related sell programs kicked in as major indexes broke key support levels.

"[W]hile the sell-off a day after the strong GDP report caught many of us off guard - myself included as I was looking for at least a few more days of gains - it doesn't represent anything new under the sun," says S&P technical analyst Chris Burba. "It has become clear after the fact ... that the economic recovery in the third quarter had been fully discounted by [stock investors] as of Oct. 21."

So where does the market go from here? "I expect to see some wide swings in the indexes in the weeks or months ahead, during which time some lower lows [for equity indexes] are established," says Burba. "In terms of what influences crowd psychology, we'll probably start seeing more headlines and hearing more scuttlebutt about economic growth slowing as consumer spending retrenches after stimulus measures have run their course."

Traders looked ahead to news week's meeting of Federal Reserve policymakers for hints as to whether the Fed will tighten credit following Friday's positive Chicago PMI index and University of Michigan consumer sentiment data. But many experts see the economic trajectory lower heading into the fourth quarter.

Wall Street was also looking ahead to next week's other big event: the release of the October employment report on Friday, Nov. 6.

There was some volatility in Friday's session as investors adjusted their portfolios on October's last trading day, says S&P MarketScope.

European stocks tumbled Friday, with benchmark indexes off 2.21% in London, 2.86% in Paris, and 3.09% in Frankfurt.

Asian equities moved higher Friday. Tokyo stocks rose 1.45%, Hong Kong gained 2.29%, and Shanghai advanced 1.20%.

In U.S. earnings news Friday, MetLife (MET) posted third-quarter operating earnings per share (EPS) of 97 cents, vs. 84 cents operating EPS one year earlier, despite a slight decline in total revenue. According to newswire headlines from the company's conference call, MetLife said it may have to inject capital into its life insurance business; the company is tepid on 2010 investment prospects. MetLife also said lower invested capital and the potential for weak returns from some investments will probably hold down return on equity in 2010.

Novatel Wireless (NVTL) shares tumbled after the company warned of flat-to-lower sales.

Shares of McAfee (MFE) fell after the software security firm missed revenue estimates.

Duke Energy (DUK) gained 1.8% after third-quarter net profits fell 49% following a $400 million write-off, though that beat estimates.

Chevron (CVX) shares gained modestly after reporting a 51% drop in net income to $3.83 billion. In economic news Friday, U.S. consumer confidence edged up to 70.6 in the final reading of the October University of Michigan survey, from the 69.4 preliminary print. The index had surged to 73.5 in September from 65.7 in August. The current conditions index was revised up to 73.7 from the 72.1 preliminary (73.4 in September). The final 6-month outlook index increased to 68.6 from 67.6 in the preliminary (73.5 in September). The 1-year ahead inflation index rose to 2.9% from 2.8% in the preliminary (2.2% in September). The 5-year ahead price index was unchanged from the 2.9% preliminary (2.8% September).

U.S. Chicago PMI climbed to 54.2 in October after sliding almost 4 points to 46.1 in September, unable to hold August's 50.0. But the components were mixed. The employment component slipped to 38.3 from 38.8. New orders surged to 61.4 from 46.3. The inventory index fell to 32.2 from 38.9. Prices paid declined to 48.6 from 51.3. This adds to the mix of other regional October PMI data: NY's Empire State reading jumped to 34.6 from 18.9 while the Dallas Fed's index improved to -3.3 from -6.4, while the Philly Fed dropped to 11.5 from 14.1 and the Richmond Fed declined to 7 from 14.

The U.S. employment cost index (ECI) rose 0.4% in the third quarter following a 0.4% increase in the second quarter and a 0.3% increase in the first. Wages and salaries were up 0.4% vs. 0.4% previously. Benefit costs rose 0.4% from 0.3% previously. On a year-over-year basis, employment cost growth slowed to a 1.5% pace from 1.8% previously, a new all-time low for this series.

U.S. personal income was flat while spending fell 0.6% in September. August's 0.2% increase in income was revised down to a 0.1% gain (July's 0.2% increase was also revised down to 0.1%). The 0.9% rise in spending in August was revised up to 1.0%. Spending on durable goods declined 7.0%, erasing the 6.1% increase in August, largely a function of the government's "cash for clunkers" program to spur auto sales. Wages and salaries fell 0.2% last month, with disposable income unchanged. The savings rate rose to 3.3% from 2.8% previously (revised from 3.0%).

The personal consumption expenditures price index was up 0.1% in September following a 0.3% gain in August, while the core rate, which excludes food and energy prices, was steady at 0.1%.

The U.S. economy's return to growth during the third quarter shows stability has been regained but recovery is fragile and needs nurturing, Treasury Secretary Timothy Geithner said. In a one-hour question-and-answer session at the Economic Club of Chicago, Geithner said the United States can't borrow-and-spend its way to health and pledged every effort to encourage an investment-led recovery.

Investor George Soros warned of a double-dip recession as the economy runs out of steam and more "bloodletting" in commercial real estate and leveraged buyouts (LBOs).

PIMCO CEO Mohamed El-Erian on CNBC said he expects third-quarter GDP to be revised lower and repeated skepticism about growth in 2010.

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