Rate and inflation fears beat up stocks

Stocks swooned today on worries interest rates are moving higher and could stop the global economic boom in its tracks.

At the close, the Dow Jones industrials were down nearly 130 points, nearly 1%, to just under 13,466, its worst loss since May 10. The Dow has fallen nearly 211 points in two days, its worst two-day performance since mid-March.

The Standard & Poor's 500 index tumbled about 13.5 points, 0.9%, to 1,517, and the Nasdaq Composite Index suffered a 24-point loss, 0.9%, to 2,588.

The immediate catalyst was a decision by the European Central Bank to raise its key rate a quarter-point to 4%. Traders in the United States feared the move (and additional moves that the market expects) could force the Federal Reserve to raise rates as well. The Fed's key federal funds rate has been at 5.25% since June 2006.

Investors have been watching the rise of interest rates in the U.S. in recent weeks, especially the 10-year Treasury note, whose yield nearly hit 5% yesterday. The yield was down slightly to 4.97% today.

• Video: How bad will the sell-off be?

Adding to the selling pressure today was the weak housing market. It forced the White House to cut its estimate on economic growth to 2.3% for 2007 from 2.9%.

"It is just not quite clear where we are in terms of the housing market, whether it has bottomed out," Edward Lazear, chairman of the White House's Council of Economic Advisers, told reporters.

And the National Association of Realtors said it now sees a 4.6% decline in existing home sales this year to 6.2 million units. A prior projection called for a 2.9% decline. The group also sees new home sales falling to 860,000, an 18.2% decline. The old forecast called for a 17.8% decline.

The start of a correction?

It could be that the selling is the start of a long-expected correction, but that won't be clear for another week or so.

The market has been putting out lots of signals in recent weeks that the rally that began last July was overextended.

The Dow was up nearly 26% as of Monday from that mid-July low, hitting 49 record closes in the process. The S&P finally moved ahead of its March 2000 high on May 30.

U.S. stocks become vulnerable when their prices moved 10% or so above their 200-day moving averages. Five of the 10 S&P 500 sectors were 10% above their 200-day averages in the past few days and have experienced some of the larger drops.

Morgan Stanley in the United Kingdom warned today that three key warning indicators flashed today. Teun Draaisma, the chief European equities strategist, told Reuters that European stocks could fall as much as 14% in the next six months.

A big, broad decline

Today's declines were broad and deep, with only five of the 30 stocks in the Dow showing gains.

The leaders were telecom giant Verizon (VZ, news, msgs), up 0.6% to $43; followed by Hewlett-Packard (HPQ, news, msgs), up 0,4% to $46.10; Altria (MO, news, msgs), up 0.3% to $70.89; Caterpillar (CAT, news, msgs), up 0.27% to $78.86; and Wal-Mart Stores (WMT, news, msgs), up 3 cents to $50.55.

Intel (INTC, news, msgs), IBM Corp. (IBM, news, msgs) and DuPont (DD, news, msgs) were the biggest losers, all down more than 2%. IBM's 3.2% loss to $102.41, in fact, contributed 27 points to the Dow's loss. The stock fell on news that the Securities and Exchange Commission ruled yesterday that the company had overestimated the impact of stock-based compensation expenses on quarterly earnings in 2005.

Boeing's (BA, news, msgs) 1.2% loss to $98.29 reduced the Dow by an additional 9.7 points.

In addition, more than 430 stocks in the S&P 500 were lower, along with 87 of the 100 stocks in the Nasdaq-100 Index ($NDX.X). The latter index, which represents the biggest stocks on Nasdaq, was down 0.9% to just under 1,915.

E*Trade Financial (ETFC, news, msgs) was the S&P 500 leader, up 7.3% to $25.60 on the possibility of more industry consolidation. Cummins Engine (CMI, news, msgs) was the S&P laggard. The stock had led the index on Tuesday.

Utility, transportation, housing and energy stocks took the day's biggest beating. The Dow Jones Utilities Index ($UTIL) was off 1.3% to 504. The Dow Jones Transportation Index ($TRAN) was down 1.8% to 5,159. The Amex Oil Index ($XOI.X) tumbled 1.5% to 1,377.

The new housing projections hurt builder stocks. The Philadelphia Housing Sector Index ($HGX.X) was down nearly 2% to 231. Standard Pacific (SPF, news, msgs) fell 2.7% to $20.54. KB Home (KBH, news, msgs) slid 2.7% to $45.50, and D.R. Horton (DHI, news, msgs)fell 2.2% to $22.44.

Yes, 2007 looks like 2006

If the market's swoon looks a little familiar, it should. Stocks sagged from mid-May into mid-July last year as investors fretted about higher inflation and higher interest rates.

The 10-year Treasury yield jumped over 5% -- peaking at 5.2% in the process -- and the Dow fell nearly 8.3% from its peak in May before hitting a final bottom July 14. A huge rally began when it became apparent that the Federal Reserve wasn't planning to raise its key federal funds rate above 5.25%.

Energy prices -- New York close

	Wed.	Tues.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$65.96	$65.61	$0.35	3.05%	8.04%
Heating oil (per gallon)	$1.9737	$1.9644	$0.0093	4.83%	23.52%
Natural gas (per million BTU)	$8.0800	$8.0640	$0.0160	1.83%	28.27%
Unleaded gasoline (per gallon)	$2.1904	$2.2073	-$0.0169	-2.70%	36.72%

Why the European Central Bank boosted rates

The ECB's rate decision to push its key rate to its highest level since August 2001 and its eighth rate increase in 19 months contained two ironies for the stock market:

• The decision was widely expected. In fact, many economists are predicting another increase later this year. But traders sold anyway.

• Interest rates in the United States actually fell. Not only is the yield on the 10-year Treasury note lower today, the five-year note yield was 4.934%, down from 4.954% yesterday. Yields slipped as some investors fled to the relative safety of bonds.

Bank President Jean-Claude Trichet said the bank boosted its rate because of the likelihood of higher prices. He cited concerns over oil prices and rising labor costs. "The euro-area economy continues to expand at a pace which is significantly stronger than generally expected a year ago," Trichet told a news conference.

"The ECB, like many others, may have underestimated the economic-growth dynamic in the euro area," Thorsten Polleit, the chief Germany economist at Barclays Capital in Frankfurt, told Bloomberg News. "They will leave the door open for further rate increases by highlighting upside risks to inflation."

• Get free, real-time stock quotes on MSN Money

European stocks took a beating today after the rate increase. London's FTSE 100 ($GB:UKX) fell 1.7% to 6,523, the German DAX ($DE:DAX) lost 2.4% to 7,730, and the French CAC 40 ($FR:PX1) lost nearly 1.7% to 5,978.

Remarks yesterday by Federal Reserve Chairman Ben Bernanke citing continued inflation concerns also triggered a broad sell-off.

Europe's economy is expected to grow 2.5% this year, according to a news release issued yesterday by the International Monetary Fund. "Key fundamentals for continued solid growth are in place, including favorable profitability, financing conditions, and external demand; but also improved fiscal positions and, especially, buoyant employment growth," the statement said.

The region's economy grew at three times the pace of the U.S. in the first quarter, according to Bloomberg.

Prudential shutting doors on brokerage business

Prudential Financial (PRU, news, msgs) said it is exiting the research and brokerage business and will cut 420 jobs and close offices around the world.

The insurance giant said offices in New York City, San Francisco, Philadelphia, London and Tokyo would close, among others.

Prudential shares were down 1.1% to $99.46.

In March, one of the company's best-known analysts, Michael Mayo, left Prudential to go to Deutsche Bank (DB, news, msgs). Mayo, who covered the financial-services industry, had gained a reputation for independence for his willingness to criticize companies he covered.

CNBC reported that the company said its research and equity group was too small to compete effectively. Instead, the company will concentrate on its core insurance and asset management businesses.

Prudential has been slimming down its operations over the past several years, Forbes.com noted. In 2003, it combined its securities unit with Wachovia (WB, news, msgs). Under that arrangement, Wachovia owns a majority stake and runs the joint venture, now known as Wachovia Securities. Wachovia Securities has 10,600 advisers in 2,700 locations around the world. On May 31, Wachovia agreed to buy regional broker A.G. Edwards (AGE, news, msgs).

Short hits from the markets -- 4 p.m.

	Wed.	Tues.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	4.655%	4.690%	-0.035	1.42%	-4.71%
5-year Treasury note yield	4.932%	4.954%	-0.022	1.63%	4.91%
10-year Treasury note yield	4.970%	4.976%	-0.006	1.64%	5.52%
30-year Treasury bond yield	5.084%	5.067%	0.017	1.46%	5.52%
Currencies
U.S. Dollar Index	81.84	81.86	-0.02	-0.50%	-1.91%
British pound in dollars	$1.9936	$1.9936	0.0000	0.66%	1.73%
Dollar in British pounds	£0.5016	£0.5016	0.0000	-0.65%	-1.70%
Euro in dollars	1.3512	1.3523	-0.0011	0.35%	2.36%
Dollar in euros	€ 0.7401	€ 0.7395	0.0006	-0.35%	-2.31%
Dollar in yen	¥121.06	¥121.32	-0.26	-0.51%	1.71%
Commodities
Gold	$674.60	$675.10	-$0.50	1.18%	5.74%
Copper	$3.4040	$3.4415	-$0.04	0.25%	18.56%
Silver	$13.7170	$13.7450	-$0.03	1.83%	6.05%
Crude oil (NYMEX) (per barrel)	$65.96	$65.61	$0.35	3.05%	8.04%

Hedge funds want TD Ameritrade deal

TD Ameritrade (AMTD, news, msgs) should be the next big company to merge. Or rather, that's what hedge funds SAC Capital Advisors and Jana Partners, which own a combined 8.4% stake in the online brokerage, hope for.

The two funds told TD Ameritrade in a regulatory filing late yesterday that they are looking to substantially increase their position in the company. TD Ameritrade said in the same filing that it continually reviews its strategy, including the possibility of mergers or combinations with other companies.

Two potential candidates for a merger: Charles Schwab (SCHW, news, msgs) and E*Trade Financial. Schwab, however, said in a statement that it is not interested in a deal.

TD Ameritrade shares rose 3.8%, to $20.71, not quite as big a gain as E*Trade. Schwab was down 1.1% to $21.80.

FTC challenges Whole Foods-Wild Oats deal

The Federal Trade Commission plans to file a lawsuit to prevent a merger between Whole Foods Market (WFMI, news, msgs) and Wild Oats (OATS, news, msgs), saying the deal will limit competition in the natural-food industry.

Whole Foods was off 3% to $39.25. Wild Oats was down 1.7% to $16.87.

"Whole Foods and Wild Oats are each other's closest competitors in premium natural and organic supermarkets and are engaged in intense head-to-head competition in markets across the country," said Jeffrey Schmidt, the director of the FTC's Bureau of Competition, in a news release yesterday. "If Whole Foods is allowed to devour Wild Oats, it will mean higher prices, reduced quality and fewer choices for consumers. That is a deal consumers should not be required to swallow."

The companies said they will challenge the FTC. "While we disagree with the FTC's position and believe it is without legal and factual merit, we are confident that, once presented with the facts, the court will agree that this merger is pro-competitive and the FTC's application for an injunction will be denied," Wild Oats CEO Greg Mays said in a prepared statement.

The issue at hand is the definition of Whole Foods' market -- whether the grocery chain competes only with health-food markets or whether its market is broader, including supermarkets such as Kroger (KR, news, msgs) and Safeway (SWY, news, msgs).

• Video: Traditional supermarkets like Kroger and Safeway are coming back

Whole Foods argues that these supermarkets have expanded their organic and natural lineups and therefore should be included as part of its competitive marketplace.

Morgan Stanley cut Whole Foods stock rating to "equal weight" from "overweight," saying uncertainty about the merger could add more risk to the stock.

Whole Foods said in February that it would buy Wild Oats for $18.50 per share.

Panera Bread sales are bland

Bakery-cafe chain Panera Bread (PNRA, news, msgs) said same-bakery sales rose 1.2% for the five-week period ending May 29 and that it was reducing its earnings and sales forecast for the second quarter.

The company now expects earnings of 38 to 40 cents per share, below the consensus estimate for 49 cents per share. Panera also cut its same-bakery sales forecast to between 1.5% and 2.5% growth, from a previous range of 3.5% to 4.5%.

Shares of Panera fell 13.8%, to $50.28.

By Charley Blaine and Elizabeth Strott