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Stocks slumped sharply Monday after investors began to see a bankruptcy filing by mortgage lender Countrywide Financial (CFC, news, msgs) as a real possibility.
The Dow Jones industrials fell more than 237 points, or 1.8%, to 12,743. The Nasdaq Composite Index was off 56 points, or 2.1%, to 2,541, and the Standard & Poor's 500 Index slumped 33 points, or 2.3%, to 1,407.
But futures trading suggested a very strong open for the U.S. markets Tuesday after Citigroup (C, news, msgs) announced it is selling a 4.9% stake to the Abu Dhabi Investment Authority for $7.5 billion.
The investment will make the authority Citigroup's largest shareholder. The swiftness of the deal underscores the banking giant's conclusion that it needed to raise new capital quickly to deal with the credit crisis.
Citigroup had closed down 6.2% to $29.75, its lowest level since October 2002. CNBC's Charles Gasparino reported that the banking giant may lay off as many as 45,000 workers because of the subprime-mortgage crisis.
Thanks to Monday's sell-off, the Dow and S&P 500 are down 10.1% from their Oct. 9 all-time closing highs -- the classic definition of a market correction. The Dow has also fallen 200 points or more on six occasions this month alone. The S&P 500 is again negative for the year with a 0.8% loss. It was briefly negative last week.
The Nasdaq, meanwhile, has fallen 11.1% from its Oct. 31 close, which had been a six-year high.
Only two of the 30 Dow stocks finished with gains today -- Johnson & Johnson (JNJ, news, msgs), up 0.7% to $67.37, and Boeing (BA, news, msgs), up 0.4% to $89.93.
Only 48 S&P 500 stocks had gains, along with 11 Nasdaq-100 stocks ($NDX.X) stocks, led by Garmin (GRMN, news, msgs), a maker of global positioning systems for consumers, up 5.3% to $96.71.
Market technicians who watch charts will tell you a market bottom is near. An S&P level of roughly 1,370 appears to be a major support point.
But the market faces more headwinds this week with reports on existing- and new-home sales on Wednesday and Thursday; the Federal Reserve's beige book report on Wednesday; a preliminary estimate from the government of third-quarter economic growth on Wednesday; and a government report due Friday on personal income and spending for October.
A number of retailers will report third-quarter earnings as well, including Staples (SPLS, news, msgs) and Talbots (TLB, news, msgs), both on Tuesday, and Sears Holdings (SHLD, news, msgs) on Thursday.
Countrywide and Schumer's letter
The concern over Countrywide, whose shares were down 10.5% to $8.64 this afternoon, erupted when Sen. Charles Schumer wrote the Federal Housing Financial Board, which regulates the nation's savings and loans, to question billions of dollars of credit extended to Countrywide by the Federal Home Loan Bank of Atlanta."I am concerned that the loans being pledged by Countrywide to secure these advances may pose a risk to the safety and soundness of the FHLB system as a whole," the New York Democrat's letter said.
The Atlanta Federal Home Loan Bank made $51.1 billion in advances to Countrywide Bank, representing 37% of the bank's total outstanding advances as of Sept. 30. That far exceeded advances made to the next largest borrower, wrote the senator, a member of the Senate Banking Committee.
- Video: What to watch for on Tuesday
If the credit is pulled from Countrywide, the company would have little choice but to seek bankruptcy protection, analysts said. It could affect Bank of America (BAC, news, msgs), which invested $2 billion into Countrywide in August. Bank of America was down 2.9% to $41.88 on the day.
The worries about financial stocks sent many investors scurrying to the safety of Treasury securities. The yield on the 10-year Treasury note fell to 3.84% from 4.01% on Friday, its lowest level since Sept. 1, 2005.
Countrywide wasn't the only problem facing financial stocks. In fact, its loss was just the third-worst among S&P 500 stocks after CIT Financial (CIT, news, msgs), down 17% to $23.74, and E*Trade Financial (ETFC, news, msgs), down 14% to $4.60.
All stocks in the financial sector have been reeling since the subprime-mortgage crisis erupted last summer, and banks and other financial institutions have been struggling to understand their exposure to the problem.
Stock Charts (Year)
Countrywide Financial
Freddie Mac
Fannie Mae
The Federal Reserve today announced it would add cash reserves to the banking system for long-term periods spanning the end of the year, a step aimed at keeping its key overnight lending rate between banks, the federal funds rate, in line with the central bank's 4.5% target.
The rate exceeded the target seven of the past eight days, a sign banks are reluctant to lend.
Crude falls back after topping from $99
Crude oil briefly topped $99 a barrel but fell back during the regular session in New York. Crude closed down 48 cents at $97.70 a barrel in New York and was off an additional 77 cents to $96.93 in electronic trading.Oil had been down more than $1 a barrel on reports that members of the Organization of Petroleum Exporting Countries were boosting production to help the global economy. CNBC said Saudi Arabia has increased production to 9 million barrels a day, up from 8.75 million barrels a day in October.
Oil stocks moved lower, but, thanks to higher natural gas prices, natural gas and oil services stocks showed gains.
Yahoo falls as payment system breaks down
Yahoo (YHOO, news, msgs) was down 3.5% to $25.22 after the company's payment processing system suffered periodic outages that prevented shopping from completing shopping transactions.Tech stocks had a weak day generally.
Cisco Systems (CSCO, news, msgs) fell 4.2% to $27.50. The Associated Press reported that Morgan Stanley said Cisco's emerging market business is slowing and is an area of concern. But Morgan Stanley still rates the stock a buy.
Advanced Micro Devices (AMD, news, msgs) was down 4.7% to $10.27. Barron's noted that the shares have fallen nearly 21% since the company said that it would get a $622 million cash infusion from an arm of the government of Abu Dhabi in exchange for an 8.1% equity stake. The problem: AMD is struggling to compete against Intel (INTC, news, msgs), which was off 2.8% to $24.37.
Dell Inc. (DELL, news, msgs), which reports third-quarter earnings after Thursday's close, was down 1.6% to $25.71. Google (GOOG, news, msgs) fell 1.6% to $660, and Microsoft (MSFT, news, msgs) tumbled 3.3% to $32.97. (Microsoft is the publisher of MSN Money.)
An exception to this grim picture: Apple (AAPL, news, msgs) was up 0.6% to $172.54 in regular trading and an additional 1.3% to $174.83 in after-hours trading.
Goldman Sachs recommended the shares after a "strong start" to the "Black Friday" weekend, Bloomberg News said. "Apple will have multiple winners once again this holiday season, with Macs a particular standout," wrote analysts David Bailey and Laura Conigliaro.
A decent weekend for retailers?
The mess in financial stocks totally offset what was thought to be decent news from the retailing world about sales over the Thanksgiving weekend.Preliminary reports said sales at retail stores jumped 8.3% to $10.3 billion on Black Friday -- the day after Thanksgiving, which unofficially kicks off the holiday shopping season -- ShopperTrak reported over the weekend. But there was skepticism about whether the trend would continue through the entire holiday season.
Dow component Wal-Mart Stores (WMT, news, msgs) was off 1.5% to $45.03. Target (TGT, news, msgs) was down 3.4% to $55.22, and Macy's (M, news, msgs) was off 6.1% to $28.21.
Best Buy (BBY, news, msgs) bucked the downward trend: Its shares were up 0.5% to $48.25.
- Top Stocks blog: Tech stocks bank on 'Cyber Monday'
Even if Friday was a one-shot kind of day, it was still impressive.
The National Retail Federation said that more than 147 million people hit U.S. stores over the holiday weekend, an increase of 4.8% from 2006. An amazing 14.3% of consumers woke up extra-early to get to stores that opened as early as 4 a.m., surveys suggested.
Retailers are hoping that consumers will keep buying today, so-called "Cyber Monday" -- the first Monday after the Thanksgiving holiday, which has become a big day for online holiday shopping.
Nearly 73% of online retailers will offer discounts today for Web shoppers, BIGresearch said, up from nearly 43% last year.
Stores like Target and Circuit City (CC, news, msgs) were offering free shipping today, and Cyber Monday kicks off a five-day online-only sale at Wal-Mart's Web site.
The older term Black Friday comes from the shift to profitability retailers generally experienced on the day after Thanksgiving, when shoppers put the companies "in the black." Black Friday sales typically make up between 4.5% and 5% of all holiday sales, ShopperTrak said.
| Mon. | Fri. | Chg. | Month chg. | YTD chg. | |
|---|---|---|---|---|---|
| Crude oil (NYMEX) (per barrel) | $97.70 | $98.18 | -$0.48 | 3.35% | 60.03% |
| Heating oil (per gallon) | $2.7066 | $2.7042 | $0.0024 | 7.93% | 69.38% |
| Natural gas (per million BTU) | $7.7230 | $7.7000 | $0.0230 | -7.29% | 22.61% |
| Unleaded gasoline (per gallon) | $2.4414 | $2.4670 | -$0.0256 | 4.33% | 52.39% |
HSBC to bail out two investment vehicles
British banking giant HSBC (HBC, news, msgs) said this morning that it will provide up to $35 billion in funding to support two of its structured investment vehicles (SIVs). HSBC is also moving those SIVs, Cullinan Finance and Asscher Finance, to its balance sheet, to prevent a forced liquidation of their assets. HSBC said that its earnings wouldn't be materially impacted.SIVs use short-term funding from the asset-backed commercial paper market to finance higher-yielding and longer-term debt securities, like mortgage-backed securities and collateralized debt obligations.
HSBC's plan is different from the "superfund" that Citigroup, JPMorgan Chase (JPM, news, msgs) and Bank of America are creating; rather than simply change the accounting of those assets, that fund will buy SIV assets in order to help stabilize the financial sector.
HSBC shares were down 2.6% to $82.54 this afternoon.
Meanwhile, Bank of America is taking the lead on persuading smaller banks and companies to participate in the funding of the $80 billion super-SIV, Bloomberg News reported. Bank of America will kick off what's being called the super-SIV campaign this week, with Citigroup and JPMorgan Chase in supporting roles, Bloomberg reported.
Subprime mess to get worse . . .
As bad as the subprime-mortgage mess was in 2007, it may well get worse next year.Billions of dollars in subprime mortgages -- loans made to high-risk borrowers -- are resetting this quarter and in the first quarter of 2008, The Wall Street Journal reported over the weekend, citing statistics from Banc of America Securities unit.
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An additional $152 billion of other adjustable-rate loans are also scheduled to reset next year, The Journal added, including Alt-A loans, a category between subprime and prime mortgages.
. . . But Citigroup says the economy won't collapse
Despite the grim outlook for the subprime and housing markets, Citigroup's Economic and Market Analysis group said things will be OK next year."The current stresses from the U.S. housing sector, high oil prices, a weak U.S. dollar and the recent financial turmoil will not overwhelm the global economy," said Lewis Alexander, the bank's chief economist and head of its Economic and Market Analysis group, in a statement.
Economic data point to "moderation of growth, not a collapse," the group said, but "the level of uncertainty" remains high. Home prices are expected to fall through 2008, with energy and credit costs rising, Citigroup said. The Federal Reserve will continue to cut rates at coming Federal Open Market Committee meetings, the analysts said. The federal funds rate, now 4.5%, will be cut by a total of one percentage point. The FOMC holds its last meeting of the year on Dec. 11.
- Video: Debit or credit?
Citigroup also said that the Fed will lower the federal funds rate by another percentage point.
| Mon. | Fri. | Chg. | Month chg. | YTD chg. | |
|---|---|---|---|---|---|
| Treasurys | |||||
| 13-week Treasury bill | 3.055% | 3.140% | -0.085 | -20.03% | -37.46% |
| 5-year Treasury note yield | 3.245% | 3.409% | -0.164 | -22.13% | -30.97% |
| 10-year Treasury note yield | 3.847% | 4.012% | -0.165 | -14.03% | -18.32% |
| 30-year Treasury bond yield | 4.280% | 4.438% | -0.158 | -9.91% | -11.17% |
| Currencies | |||||
| U.S. Dollar Index | 74.98 | 75.05 | -0.07 | -1.99% | -10.04% |
| British pound in U.S. dollars | $2.0713 | $2.0631 | 0.0081 | -0.46% | 5.70% |
| U.S. dollar in British pounds | £0.4828 | £0.4847 | -0.0019 | 0.46% | -5.39% |
| Euro in U.S. dollars | 1.4877 | 1.4835 | 0.0042 | 2.77% | 12.70% |
| U.S. dollar in euros | €0.6722 | €0.6741 | -0.0019 | -2.69% | -11.27% |
| U.S. dollar in yen | ¥107.34 | ¥108.45 | -1.11 | -6.99% | -9.81% |
| U.S. dollar in Canadian dollars | $0.99 | $0.99 | 0.00 | 4.92% | -14.98% |
| Canadian dollar in U.S. dollars | $1.01 | $1.01 | 0.00 | -4.59% | 17.76% |
| Commodities | |||||
| Gold | $826.50 | $824.70 | $1.80 | 3.92% | 29.55% |
| Copper | $3.0230 | $2.9910 | $0.032 | -12.96% | 5.29% |
| Silver | $14.8300 | $14.8300 | $0.10 | 2.72% | 13.92% |
| Crude oil (NYMEX) (per barrel) | $97.70 | $98.18 | -$0.48 | 3.35% | 60.03% |
Rio Tinto promises dividend boost
British mining mammoth Rio Tinto (RTP, news, msgs) backed its decision to reject a $128 billion stock buyout bid from rival miner BHP Billiton (BHP, news, msgs) by promising to increase its dividend by 30% and pledging strong growth for the future.The company, which is holding its annual investment seminar today, outlined a plan to boost its output of iron ore to 600 million metric tons per year and invest $2.4 billion to bring two iron-ore plants into production.
"We believe we have a better growth pipeline than our competitors, which puts Rio Tinto in a strong position to supply the metal-hungry world," CEO Tom Albanese said in a statement.
Rio Tinto and BHP Billiton shares were down 2.5% each to $425.23 and $70.97, respectively.
By Charley Blaine and Elizabeth Strott
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