Market Dispatches3/13/2007 8:45 PM ET

Dow falls 243 points on mortgage woes

A broad sell-off spurred by rising mortgage delinquencies leads to warnings of a credit crunch across the entire housing market. Despite big earnings, Goldman Sachs falls 1.7%. Texas Instruments' guidance hits chips. Viacom slaps YouTube with a $1 billion suit.

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Just two weeks after the biggest one-day loss since 2001, the stock market plunged again.

The Dow Jones industrials fell 242.66 points, nearly 2%, to 12,076. The Standard & Poor's 500 Index was off 28.7 points, 2%, to 1,378, and the Nasdaq Composite was down nearly 52 points, 2.2%, to just under 2,351.

Unlike two weeks ago, today's plunge wasn't a panic triggered by a sell-off in China. Instead, it was fueled by concern that the problems in the subprime mortgage market will metastasize into a full-blown credit crunch across the entire housing market. That would make it tough for first-time homebuyers and for current homeowners to refinance loans and dampen home sales generally.

The selling hit financial and home building stocks the hardest. The Philadelphia Housing Sector Index ($HGX.X) was off nearly 3.4%, and the Amex Securities Broker/Deal Index ($XBD.X) was off 4.4% as investors dumped the shares of big investment banks. The investment houses have been key suppliers of capital to lenders that specialized in subprime mortgages -- mortgages made to borrowers with little credit histories or bad credit.

It was a take-no-prisoners sell-off. Goldman Sachs (GS, news, msgs), which reported strong earnings this morning, was down 1.8% to $199.03. In fact, many traders said investors threw in the towel on the market today when Goldman shares went negative at 12:15 p.m.

Investors will key on what happens in the overnight markets as well as the government's trade report. Also, Lehman Bros. (LEH, news, msgs) reports first-quarter earnings in the morning.

The Japanese stock market was slumping in early Wednesday trading. At 8:45 p.m. ET, the Nikkei 225 Index ($N225) was down 2.1% to 16,818.

The market decline suggests the market may head lower before a bottom gets put in. If last summer's sell-off is any guide, clear evidence of a bottom may not be clear for perhaps eight weeks.

The selling also produced calls for the Federal Reserve to cut interest rates at next week's Federal Open Market Committee meeting.

It produced a big rally in bonds -- and a decline in interest rates. The yield on the 10-year Treasury note fell to 4.495% today from 4.553% yesterday. Crude oil also fell 98 cents to $57.93 a barrel.

It also sparked a furious demand for options by investors seeking to protect their positions. The CBOE Volatility Index , which measures options taken out on the S&P 500 Index, jumped 29.6% to 18.13 today. The CBOE Nasdaq Volatility Index ($VNX.X), which does the same thing for the Nasdaq-100 Index ($NDX.X), shot up 19% to 22.04. The VIX is up 57% so far this year; the VNX is up 36%.

The plunge was the first decline in four trading sessions for the Dow and the S&P 500. Since the Dow hit an intraday high of 12,793.61 on Feb. 20, it has fallen 5.6%. The S&P 500 is down 5.7%, and the Nasdaq down 7.1% since their intraday highs on Feb. 22.

There are "deep concerns about a possible credit crunch and then, of course, the impact that will have on the economy and earnings," Hugh Johnson, chairman of Johnson Illington Advisors, a New York money management firm, told CNBC this afternoon.

"This is now becoming a liquidity crisis, an unnecessary one," said Angelo Mazilo, the CEO of Countrywide Financial (CFC, news, msgs), one of the nation's biggest home lenders. "There's been a rush to judgment, an overreaction, a baby out with the bath water."

If that happens, the entire economy could suffer, he told CNBC's "Closing Bell."

Countrywide was down 4.7% today to $33.49.

Mortgage delinquencies jump

Today's sell-off was precipitated by a Mortgage Bankers Association report that the percentage of payments that were 30 or more days past due for all loans tracked jumped to 4.95% in the October-to-December quarter.

Stock Charts (Year)

Amex Securities Broker/Dealer Index
Graphical chart for $XBD.X
Philadelphia Housing Sector Index
Graphical chart for $HGX.X
That marked a sharp rise from the third quarter's delinquency rate of 4.67% and was the worst showing since the spring of 2003, when the late-payment rate climbed to 4.97%. The association's survey covers 43.5 million loans.

The percentage of mortgages that started the foreclosure process in the final quarter of last year rose to 0.54% -- a record high. The previous high, 0.5%, occurred in the second quarter of 2002 as the economy was recovering from the blows of the 2001 recession.

The late-payment rate for all subprime loans jumped to 13.33% in the fourth quarter, up from 12.56% in the prior period and the highest in four years. The delinquency rate for subprime borrowers with adjustable-rate mortgages was even higher -- 14.44%, also the highest in four years.

The association's report comes as mounting worries about risky mortgages have been making investors jittery. Those fears also contributed to that big worldwide stock meltdown on Feb. 27.

A separate report from GMAC, the former financing arm of General Motors (GM, news, msgs), stoked worries. GMAC said its ResCap Holding, which runs GMAC's mortgage businesses, lost $651 million in the fourth quarter, reversing a profit of $118 million a year ago. ResCap has cut back originations of subprime loans and is actively trying to fix its growing portfolio of problem loans.

GM owns 49% of GMAC. The rest is owned by Cerberus Capital Management. GM shares were down 2.6% today, sixth-worst among Dow stocks.

Another big sell-off

Twenty-nine of the 30 Dow stocks were lower, and financial and housing stocks absorbed the brunt of the selling.

The only Dow winner: AT&T (T, news, msgs), up 0.5% to $37.26. 3M (MMM, news, msgs) had been up for most of the day but slipped to a 0.5% loss to $74.77.

At the same time, the S&P Financial Index, whose stocks represent nearly 22% of the market capitalization of the S&P 500, was down 3.1%.

Goldman Sachs' spanking was modest compared with its competitors. Bear Stearns (BSC, news, msgs) was the worst of the S&P 500 stocks, down 6.7% to $142.97. Lehman Bros. was down 5.9% to $72. Pulte Homes (PHM, news, msgs) was down 5% to $25.99, and KB Home (KBH, news, msgs) was down 5.4% to $43.86.

Banking giants Bank of America (BAC, news, msgs), Citigroup (C, news, msgs) and JPMorgan Chase (JPM, news, msgs) were all down more than 3%.

Washington Mutual (WM, news, msgs), which has been a very aggressive mortgage lender, was down 4.9% to $39.84, a 52-week low.

Energy prices -- New York close
 Tues.Mon.Chg.Month chg.YTD chg.
Crude oil (NYMEX) (per barrel)$57.93$58.91-$0.98-6.25%-5.11%
Heating oil (per gallon)$1.6902$1.6823$0.0079-5.07%5.78%
Natural gas (per million BTU)$6.8920$6.9120-$0.0200-5.59%9.41%
Unleaded gasoline (per gallon)$1.9318$1.9105$0.02134.56%20.58%

New Century's problems get worse

The New York Stock Exchange said it suspended trading of New Century Financial (NEW, news, msgs) and its preferred securities because they "are no longer suitable for continued listing." The stock had been halted yesterday.

The company also faces a probe by the U.S. Securities and Exchange Commission. The mortgage company said that the SEC is conducting a preliminary investigation into it and requested a meeting "to discuss the events leading up to the company's previous announcement of the need to restate certain of its historical financial statements."

New Century also said its obligations to Credit Suisse First Boston Mortgage Capital were $1.4 billion, not the $900 million it previously had stated. The company said it was an inadvertent error.

New Century's share price has plunged 90% since the beginning of the year, and it will likely have to declare bankruptcy soon. The shares were quoted at $1.66 this afternoon, down nearly 95% from its 2006 close of $31.69.

Meanwhile, Accredited Home Lenders (LEND, news, msgs) joined the roster of mortgage companies slammed by the subprime storm.

Its shares plunged 65% this afternoon to $3.97, after the company said it is exploring its strategic options after paying $190 million in margin calls since the beginning of the year. A margin call occurs when a broker demands that an investor using margin -- borrowing money to purchase securities -- liquidate his position or deposit more cash or securities into the account.

The mortgage company also said it is seeking more capital, as well as waivers and extensions of other debt agreements.

Accredited Home was downgraded today by Keefe Bruyette & Woods to "underperform" from "market perform." The analyst who downgraded the company said in a note to clients that the company "will lose money for the foreseeable future which will likely trigger a liquidity crisis."

Goldman's earnings are great; the shares are slammed

Goldman Sachs shares jumped as much as $5.80 right after the open after Goldman reported record fiscal-first-quarter earnings that beat Wall Street's estimates. But the gains were wiped out after the Mortgage Bankers Association delinquency report came out.

Stock Charts (Year)

Goldman Sachs
Graphical chart for GS
The bank reported a 29% jump in first-quarter profit to $3.2 billion, or $6.67 per share, thanks to a strong mergers-and-acquisitions business and trading gains. Last year, the bank earned $2.48 billion, or $5.08 per share; analysts had expected the company to report earnings of $4.97 per share.

Goldman has beaten expectations for seven quarters in a row.

"They beat estimates in just about every part of the business," Andrew Corn, the chief executive officer of Clear Asset Management, told Bloomberg News. "Each part of their business is global, and that gives them an advantage over their competitors."

"Although the subprime sector within the mortgage market experienced significant weakness, the broader credit environment remained strong," Goldman said in a news release.

Because Goldman was the first of the big banks to report earnings, and because financial stocks were walloped during last month's correction, its earnings come under extra scrutiny.

Worries about a spillover of the subprime mortgage mess into the financial sector have been hampering financial companies' shares, although Goldman is not as exposed as other big banks such as Citigroup and HSBC (HBC, news, msgs), which was down 1.5% this afternoon.

Lehman Bros. reports tomorrow.

YouTube sued

YouTube is facing another copyright problem: a $1 billion lawsuit from media giant Viacom (VIA, news, msgs). Viacom is charging that Google's (GOOG, news, msgs) video-sharing site has shown 160,000 of its videos without permission.

"Their business model, which is based on building traffic and selling advertising off of unlicensed content, is clearly illegal and is in obvious conflict with copyright laws," Viacom said.

Google spokesman Ricardo Reyes said in a statement that Google is "confident that YouTube has respected the legal rights of copyright holders and believe the courts will agree." Reyes said the suit would not become a distraction to the growth of YouTube.

This is the first major lawsuit filed against YouTube by a mega-media company. Last month, YouTube said it would remove 100,000 Viacom clips, including a number from Comedy Central shows, after talks about a licensing deal failed.

Google shares were down 2.6% to $443.03. So far this year, the shares are down 3.8%, and they have fallen 13.1% sitting peaking at $509.65 on Nov. 21.

Soft retail sales in February

U.S. retail sales rose 0.1% last month after a flat January, falling below economists' forecast of a 0.3% rise. Excluding automobile and gasoline sales, retail sales dropped 0.3%, the biggest decline since April 2004.

Sales at clothing stores fell 1.8%, the biggest decline since September 2005. Some economists are blaming last month's storms, which discouraged consumers from leaving home to spend money.

Sales of durable goods outside the car sector were also weak, due to the struggling housing market. Retail sales make up about one-half of consumer spending.

Texas Instruments' guidance disappoints

Chip maker Texas Instruments (TXN, news, msgs) said late yesterday that it expects first-quarter revenue of $3.07 billion to $3.22 billion, a narrower range than earlier guidance of $3.01 billion to $3.28 billion. The tech company said earnings per share would be 29 to 33 cents, also narrower than the 28-to-34-cent range it had previously forecast.

Stock Charts (Year)

Texas Instruments
Graphical chart for TXN
The newer guidance is in line with analysts' estimates of $3.15 billion in revenue and earnings of 31 cents per share.

The guidance made no one happy. Shares fell 2.6% to $31.74 today and hit chip stocks generally. The Philadelphia Semiconductor Index ($SOX.X) was down 1.7% to 471.33; seventeen of the 18 stocks in the index was lower.

The one winner: Novellus Systems (NVLS, news, msgs), up 0.5% to $33.08.

Texas Instruments said weaker demand for its 3G chips, which are used in cell phones, and fewer orders from its bigger customers are the reason for the new guidance.

The company did say that things are looking up for its analog-chip business. "The current market correction is happening quickly and will be short-lived," Ron Slaymaker, the company's vice president of investor relations, said in a prepared statement.

Short hits from the markets -- 4 p.m.
 Tues.Mon.Chg.Month chg.YTD chg.
13-week Treasury bill4.935%4.950%-0.015-2.08%1.02%
5-year Treasury note yield4.414%4.501%-0.087-1.98%-6.11%
10-year Treasury note yield4.495%4.553%-0.058-1.21%-4.56%
30-year Treasury bond yield4.658%4.692%-0.034-0.24%-3.32%
U.S. Dollar Index83.8584.21-0.360.42%0.50%
British pound in dollars$1.929$1.9290.000-1.76%-1.54%
Dollar in British pounds £0.518£0.5180.0001.79%1.57%
Euro in dollars1.3201.3200.000-0.22%0.04%
Dollar in euros€ 0.7573€ 0.75730.0000.22%-0.04%
Dollar in yen ¥116.26¥116.260.00-1.93%-2.32%
Crude oil (NYMEX) (per barrel)$57.93$58.91-$0.98-6.25%-5.11%

Citi sweetens bid for Japanese bank

Citigroup increased the price it is offering for Japan's Nikko Cordial brokerage company by 26% to $13.4 billion or $14.53 per Nikko share.

The New York banking giant, which already owns 4.9% of Nikko, had offered $10.8 billion for the company last week, which many big investors had opposed as too low.

It boosted its offer yesterday after the Tokyo Stock Exchange decided not to delist Nikko over an accounting fraud. Had the stock been delisted, Japanese investors would have been forced to sell their shares.

By Charley Blaine and Elizabeth Strott

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