Dow plunges 307 as economic fears grow

Stocks suffered their biggest losses since November as new problems in financial stocks just plain frightened many investors and official Washington started to cobble together plans to stave off a recession.

As the market correction that began in earnest in October deepened, losses in smaller stocks hit bear-market territory, defined as a drop of 20% from a high.

At the close, the Dow Jones industrials were down 307 points, or 2.5%, to 12,159. It was the lowest close for the blue-chip index since March. The point loss was the largest since Nov. 7 and the biggest point and percentage losses for the blue chips so far in 2008.

The Standard & Poor's 500 Index was down 40 points, 2.9%, to 1,333, its worst level since Oct. 3, 2006 and its worst three-day percentage loss since Aug. 3-5, 2002, when the index fell 8.5%.

The Nasdaq Composite Index was down 48 points, 2%, to 2,347, its lowest close since March 5.

The S&P 500's point and percentage losses were its largest since Nov. 7.

The sell-off came as Federal Reserve Chairman Ben Bernanke called on Congress to pass, as soon as possible, an economic stimulus package that would include a tax rebate and possible tax breaks for new investments. The White House indicated it supported a stimulus package as well, but one worry was that disputes over whether to make the 2001 and 2003 tax cuts permanent could derail the process.

But the market loss was so extreme that many analysts wondered if capitulation had hit. Capitulation occurs when many investors sell because they want out of the stock market no matter what. Often, that's a signal of a bottom.

In fact, two battered stocks initially traded higher in after-hours trading, despite reporting big losses today: Washington Mutual (WM, news, msgs) shares shot up 6.2% to $13.23 right after reporting a $1.9 billion fourth-quarter loss, including a $1.6 billion write-down for bad mortgages. The results were in line with the company's guidance. The shares pulled back to $12.46, WaMu's close in regular trading.

Chip maker Advanced Micro Devices (AMD, news, msgs) shares jumped 5.7% to $6.70 -- and held at that level -- despite posting a fourth-quarter loss of $1.77 billion, or $3.06 per share. A year ago, the rival to Intel (INTC, news, msgs) lost $576 million, or $1.08 per share. AMD had closed at $6.34 in regular trading.

Financial stocks were the big problem in the markets today, especially the shares of bond insurers. Ambac Financial (ABK, news, msgs), one of the biggest companies that insures bonds for investors, was down 52% to $6.24. The percentage loss was by far the largest among S&P 500 stocks. The reason: The company faces downgrades from ratings agencies.

In addition, Merrill Lynch (MER, news, msgs) shares were down 10% to $49.45 after reporting a $10 billion fourth-quarter loss. The loss was much bigger than expected.

The S&P Banking Index ($BIX.X) was down 5.2% to 242. The Amex Securities Broker/Dealer Index ($XBD.X) fell 5.5% to 179.

Along with the sell-off in stocks, gold was off $1.50 to $880.50 an ounce.

Crude oil fell 0.8% to $90.13 a barrel in New York. So far in January, crude is down 6.1%. Dow component ExxonMobil (XOM, news, msgs) fell 3% to $83.91, contributing 21 points to the Dow's loss. The stock is down 10.4% this month. The Amex Oil Index ($XOI.X) fell 3.4% to 1,336. The Philadelphia Oil Service Sector Index ($OSX.X) was off 4.3% to 263.

All 30 Dow stocks were lower on the day, with American International Group (AIG, news, msgs) the biggest loser, down 6.3% to $54.27. General Motors (GM, news, msgs) and Wal-Mart Stores (WMT, news, msgs) were the Dow leaders, each down a penny to $22.84 and $47.48, respectively.

In addition, 450 S&P 500 stocks and 81 Nasdaq-100($NDX.X) stocks were lower.

All 10 sectors of the S&P 500 were lower today; the S&P Materials sector was the worst of the lot, down 5.4%. The sector includes metals stocks, which have been rocked by a drop in metals prices. Freeport-McMoRan Copper & Gold (FCX, news, msgs) fell 8.1% to $81.49.

Losers beat gainers by 4 to 1 on the New York Stock Exchange and 3 to 1 on the Nasdaq systems. And trading volume accelerated in the afternoon. NYSE volume was 2.1 billion shares, 50% above average. Nasdaq volume topped 2.8 billion shares, also about 50% above average.

• Talk back:Is this a correction or start of a nasty bear market?

With today's close, the small caps have entered in bear-market territory. The Russell 2000 Index, which tracks small-cap stocks, finished the day down 2.8% to 681. Since peaking on July 13, the index has fallen 20.5%.

Meanwhile, the Dow has lost more than 1,100 points, or 8.3%, in January alone and 14.2% from its peak on Oct. 9. The S&P 500's loss for the month is now 9.2%, and the fall since October has reached 14.8%. The Nasdaq is off 11.5% this month and 18% since a six-year peak on Oct. 31.

Energy prices -- New York close

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$90.13	$90.84	-$0.71	-6.10%	-6.10%
Heating oil (per gallon)	$2.5035	$2.5184	-$0.0149	-5.51%	-5.51%
Natural gas (per million BTU)	$8.0810	$8.1330	-$0.0520	7.99%	7.99%
Unleaded gasoline (per gallon)	$2.2668	$2.2783	-$0.0115	-8.99%	-8.99%

Bernanke to Congress: Move quickly

The Fed chairman called on Congress to pass an economic stimulus package quickly because the economy is likely to slow significantly in the next few months, dragged down by the weight of the housing bust.

But he was careful to say the stimulus should be short and focused on getting money into the hands of consumers by the summer. Bernanke appeared to favor a tax rebate as one tool to get people to spend more money, and there were calls for tax breaks on new investments as well.

He wouldn't say if he favors making the 2001 and 2003 tax cuts permanent.

He was asked several times by members of the House Budget Committee whether a recession had started, and each time he said the economy was still growing. But he did concede that the slowdown was pronounced.

The Federal Reserve is regarded by many economists as the only institution that can impose measures that will truly help the economy.

Bernanke did not endorse any specific plan but added that "any fiscal package should be efficient . . . and any program should be explicitly temporary." He added that because "financial and economic conditions can change quickly . . . the FOMC must remain exceptionally alert and flexible, prepared to act in a decisive and timely manner."

President Bush was going to hold a conference call with top brass in both parties to discuss ideas to help the economy. The White House said the president favors a short-term stimulus effort, though it did not offer particulars.

• Talk back: Do you think a recession has hit yet?

Rep. John Boehner, R-Ohio, the House minority leader, told reporters that the package could cost $100 billion to $150 billion but that there was "no firm number" yet for an "upper limit."

The danger of falling bond-insurer shares

The huge loss that Ambac shares suffered today -- on top of a 39% loss on Wednesday -- added a new wrinkle to the subprime-mortgage mess.

Here's the problem. Companies like Merrill Lynch insured their portfolios of mortgage-related securities with the Ambacs of the world. But, as CNBC's Bob Pisani noted, if the bond insurers go broke, portfolio insurance is worthless.

Bond insurers failing is something no one on Wall Street anticipated, and Pisani was quick to say failures were not likely. But it adds to the uncertainty for anyone looking at stocks in the financial sector.

In addition to Ambac's loss, competitor MBIA (MBI, news, msgs) fell 31% to $9.22.

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Manufacturing report shows plunge

Adding to the market's foul mood was a report on manufacturing that was released at the same time as Bernanke's testimony.

• Video: What's hot in 2008?

The Philadelphia Federal Reserve Bank's manufacturing index dropped to a reading of -20.1 in January from a reading of -1.6 in December. The January reading was the lowest since October 2001, and well below economists' predictions of a -1.0 reading.

Any negative reading indicates contraction in the manufacturing sector. The average reading in 2007 was 5.1.

Housing starts fall

Meanwhile, anyone still hoping a housing turnaround will save the economy should look elsewhere: New-home construction was dismal in December.

Housing starts plummeted 14% last month from November to a seasonally adjusted annual rate of 1.01 million. The rate was the slowest since 1991.

For all of 2007, housing starts plunged 25% -- the biggest yearly drop since 1980 -- to 1.35 million.

"Housing will take a big chunk out of growth in the first half" of 2008, Patrick Newport, Global Insight economist, told Bloomberg News. "Builders are cutting back production and discounting heavily, but they haven't really made a significant dent in inventories."

Merrill Lynch has a breathtaking loss

Merrill Lynch was the third financial-services company to report a big decline in fourth-quarter profit this week.

Merrill's loss was a breathtaking $9.8 billion, or $12.01 per share -- far worse than the expected loss of $4.93 per share and a huge drop from the $2.35 billion, or $2.41 per share, Merrill earned in the fourth quarter of 2006.

Merrill wrote down $14.1 billion in the quarter: $2.6 billion related to hedges with bond insurers and $11.5 billion related to bad bets on subprime mortgages and collateralized debt obligations.

• Video: More on Merrill's loss

Analysts had expected write-downs between $12 billion and $15 billion.

Merrill's earnings report wasn't altogether negative, however. Although the banking giant reported a net revenue loss of $8.2 billion -- a huge decline from the $8.39 billion in net revenue it brought in during the same quarter last year -- Merrill said that revenue in its equity markets rose to a record $8.3 billion, up 23% from the fourth quarter of 2006.

Meanwhile, revenue at its global wealth-management division also hit a record, rising 12% to $3.6 billion.

"While the firm's earnings performance for the year is clearly unacceptable, over the last few weeks we have substantially strengthened the firm's liquidity and balance sheet," new Chief Executive Officer John Thain said in a press release.

• Video: Merrill CEO John Thain talks about the economy

Thain also said that Merrill will not sell its stakes in money-management firm BlackRock (BLK, news, msgs) or Bloomberg to raise cash.

Because of profits reported in the first three quarters, Merrill reported a full-year loss of $8.6 billion, or $10.73 per share, down from the profit of $7.1 billion, or $7.17 per share, in 2006.

On Tuesday, Citigroup (C, news, msgs) reported a huge loss and wrote down $17.4 billion on bad mortgage bets. On Wednesday, JPMorgan Chase (JPM, news, msgs) reported a 34% drop in profit for the fourth quarter.

Citigroup was down 4.9% today to $24.96. JPMorgan Chase fell 3.4% to $40.04.

Continued: Anti-depressant makers have a downer day

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