Market Dispatches

Market Dispatches7/9/2008 8:10 PM ET

Dow off 237 as financial stocks crumble

Markets tumble as financial stocks weaken; Freddie Mac falls nearly 24%. Tech shares sag after Cisco Systems doesn't expect a spending recovery until late this year or early next year. Retailers release June sales Thursday, with General Electric earnings due Friday.

By Charley Blaine and Elizabeth Strott

The stock market gave up all of Tuesday's gains today -- and more -- amid worries about whether financial stocks can survive the housing meltdown.

The selling, which accelerated in the last hour of trading, also battered tech stocks after Cisco Systems' (CSCO, news, msgs) CEO suggested that corporate spending on technology may not strengthen for a while.

The Dow Jones industrials closed down 237 points, or 2%, to 11,147. The Standard & Poor's 500 Index was down 29 points, or 2.3%, to 1,245, and the Nasdaq Composite Index was down 60 points, or 2.6%, to 2,235.

Among the very worst hit today: Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs), which provide cash to the mortgage industry. Fannie Mae fell 13% to $15.31, and Freddie Mac fell nearly 24% after yields on a sale of notes by Fannie Mae were much higher than expected. Both stocks closed at levels not seen since the early 1990s.

The selling was broad: No major index was in positive territory except the Dow Jones Utility Average ($UTIL), which moved up nearly 1% to 518 as frightened investor looked for shelter. Utility stocks pay stable dividends, which helps their values when markets go down. Interest rates on government securities were also lower as investor seeking safety bid up prices.

Not even energy stock were immune, though crude oil finished the day basically unchanged at $136.05 a barrel in New York. Crude moved higher early in the day on reports that Iran had successfully tested missiles that could reach Israel and U.S. military forces in the Middle East. But oil moved back after an Energy Department report showed that gasoline inventories were rising and U.S. motorists used 2% less gas in the week ended July 4 than a week earlier.

The Amex Oil Index ($XOI.X) was down 2.4% to 1,406; ExxonMobil (XOM, news, msgs) was down 1.9% to $84.31.

Where is the bottom?

The selloff left the Dow, S&P 500 and Nasdaq all 20% down from their October highs -- the textbook definition of a bear market. The Dow and S&P hit their lowest levels in nearly two years; the Nasdaq's close was its lowest since mid-March.

The aftermath obviously makes investors skittish because no one knows if the market has bottomed or is even near a bottom. The major indexes have crashed through support level after support level since May. A support level is a trigger that causes more buying.

Stock Charts (Year)

Dow Jones Industrial Average
Graphical chart for $INDU
Select Sector SPDR-Financial ETF
Graphical chart for XLF

There is concern that the Dow won't bottom until it hits 10,000, and the S&P may drop under 1,200 and could conceivably hit 1,150. That would mean declines of roughly 10% could be ahead. While a bear market is defined as a drop of 20% or more, the last several bear markets have seen drops of 30% or more.

Investors face two hurdles on Thursday and Friday. First up are the monthly sales reports from major retailers, which should offer a good indication of how badly consumer pocketbooks have been hit by $4-a-gallon gasoline. These reports will come out in Thursday morning.

On Friday, Dow component General Electric (GE, news, msgs) will report its second-quarter earnings. The report will be closely examined by investors because GE surprised investors in April with an earnings miss. GE was down 3.1% to $27.19 today.

The ugliness of the selling was such that Boeing (BA, news, msgs) fell 0.5% to $65.59 even though the Defense Department decided to rebid a contract to build tankers for the Air Force.

Boeing had successfully appealed a decision to give the contract, worth upwards of $100 billion to a partnership of Northrop Grumman (NOC, news, msgs) and EADS, the maker of the Airbus line of commercial airliners. Northrop Grumman fell 1.4% to $65.27.

Only three Dow stocks were higher on the day: McDonald's (MCD, news, msgs), up 1.3% to $59.25; Merck (MRK, news, msgs), up 0.2% to $37.06; and Procter & Gamble (PG, news, msgs), up 0.2% to $63.80.

Only 76 S&P 500 stocks had gains on the day, along with just nine stocks in the Nasdaq-100 Index ($NDX.X), which fell 52 points, or 2.8%, to 1,819.

The financial damage was widespread

The battering sustained by Fannie Mae and Freddie Mac came because of fears the mortgage-finance companies may not have enough capital to weather the biggest housing slump since the Great Depression. Both have raised billions of dollars in new capital this year, but the stocks were roiled by reports early this week that they may need to raise as much as $75 billion more.

The companies buy mortgages from lenders, replenishing their cash to make more loans. If Fannie Mae and Freddie Mac must raise more capital, their ability to replenish lenders' coffers will be crimped and could lengthen the housing slump substantially.

If Fannie and Freddie are put on the sidelines, banks and other financial institutions with heavy exposure to construction lending and the like also could be threatened.

And that's why so many financial stocks were hit hard today.

The Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund, which mirrors the financial sector of the S&P 500, was off 5% to $19.51. That was its lowest level since October 2002 as the market bottomed in the aftermath of the dot-com bust and the Sept. 11, 2001, terror attacks.

The market's reaction to Fannie Mae's note sale was basically a vote of no-confidence in the financial sector of the economy.

The five financial stocks in the Dow -- JPMorgan Chase (JPM, news, msgs), Citigroup (C, news, msgs), American Express (AXP, news, msgs), Bank of America (BAC, news, msgs) and American International Group (AIG, news, msgs) -- all lost at least 4.2%. Bank of America fell 6.3% to $22.06.

Merrill Lynch (MER, news, msgs) was down 9.3% to $29.74, its lowest level since October 2002, after Fitch Ratings placed the stock on Rating Watch Negative, which could lead to a downgrade. Fitch sees Merrill reporting a fourth consecutive loss with its second-quarter report, due on July 17.

The Bear Market scoreboard
WednesdayChange from closing peak Date of peak
Dow Jones Industrial Average

11,147.44

-21.30%

Oct. 9, 2007

S&P 500 Index

1,244.69

-20.47%

Oct. 9, 2007

S&P 100 Index

569.91

-21.91%

Oct. 9, 2007

Nasdaq Composite Index

2,234.89

-21.83%

Oct. 31, 2007

Nasdaq-100 Index

1,819.18

-18.75%

Oct. 31, 2007

S&P Midcap 400 Index

786.61

-14.24%

Oct. 9, 2007

Russell 2000 Index

663.75

-22.44%

July 13, 2007

Dow Jones Utilities Average

518.03

-6.28%

Dec. 10, 2007

Dow Jones Transportation Average

4,804.57

-12.53%

June 5, 2008

Nikkei 225 Index (Japan)

13,052.13

-25.24%

Oct. 11, 2007

FTSE 100 Index (Britain)

5,529.60

-17.85%

Oct. 12, 2007

Dax Index (Germany)

6,386.46

-20.58%

Oct. 12, 2007

Cisco's price target cut

Cisco's Chambers was frank about when networkers and other tech shops will see a big rebound in spending.

"I think most of us realize that it's probably going to be a little bit longer than the one to two quarters that some people had hoped for," Chambers told Reuters in an interview today.

Analysts agreed, and Cisco shares sagged. The stock was the second-biggest drag among stocks in the Nasdaq-100. Cisco subtracted 3.2 points from the Nasdaq-100.

Stock Chart (Year)

Cisco Systems
Graphical chart for CSCO
Moreover, Cisco's weakness pulled all big tech shares lower. Apple (AAPL, news, msgs), off 3% to $174.25, subtracted 7.7 points from the Nasdaq-100. Research In Motion (RIMM, news, msgs), off 3.7% to $117.54 on the day, knocked 3 points off the Nasdaq-100.

Cisco faces a slowdown in the U.S. and Europe, UBS analyst Nikos Theodosopoulos wrote in a note to clients. "Enterprise spending remains challenging, and there has been further slowing in the U.S., especially in the West Coast region."

Theodosopoulos also lowered his price target on the stock to $25.50 from $27.

RBC Capital Markets analyst Mark Sue also lowered his price target on Cisco, to $27 from $29. "Initially, the thought was that the tech spending environment would improve by the second half of this year," Sue wrote in a note to clients. "Instead (CEO John) Chambers is pointing to a more realistic scenario of a first-half 2009 recovery."

Chambers also hinted that changes will be made to the roles of top executives. "In terms of how we evolve our entire leadership team, including the office of the CEO, it's very likely to be different five years from now than it was five years ago."

Chambers has been CEO since January 1995.

Energy prices -- New York close
 Wed.Tues.Chg.Month chg.YTD chg.
Crude oil (NYMEX) (per barrel)$136.05$136.04$0.01-2.82%41.75%
Heating oil (per gallon)$3.8516$3.8202$0.0314-1.31%45.38%
Natural gas (per million BTU)$12.0060$12.3680-$0.3620-10.09%60.44%
Unleaded gasoline (per gallon)$3.3808$3.3631$0.0177-3.45%35.73%

Wachovia gets a new boss

Late today, Wachovia (WB, news, msgs), the fourth-biggest U.S. bank, named Treasury Undersecretary Robert Steel as chief executive officer to stanch losses caused by bad loans.

Steel, 56, a former head of equities and later vice chairman at Goldman Sachs (GS, news, msgs), has 30 years of experience on Wall Street and at the Treasury.

He replaces interim CEO Lanty Smith, 65, the board chairman who led Wachovia after the June 2 ouster of Kennedy Thompson.

Wachovia had lost 8% to $14.29 in regular trading, but investor liked the choice and bid the stock up 2.3% to $14.62 in after-hours trading.

Steel has a tough job. Wachovia shares are down 62% this year alone because of problems with bad mortgages.

Steel stocks rebound; Alcoa shares fall

There was some good news in the market today. Steel stocks, which had been drubbed on Tuesday, moved higher, although big gains early in the day were trimmed by the selling.

The reason: analysts at UBS and Longbow Research upgraded many of the stocks in the group, saying the recent sell-off was overdone.

Stock Charts (Year)

Nucor
Graphical chart for NUE
Steel Dynamics
Graphical chart for STLD
Nucor (NUE, news, msgs) jumped 3.9% to $65.59. U.S. Steel (X, news, msgs) was up 5.1% to $158.17.; the stock had fallen 4.6% on Tuesday. Steel Dynamics (STLD, news, msgs) was up 4.7% to $33.19; it had fallen 4.4% on Tuesday.

Meanwhile, Dow component Alcoa (AA, news, msgs) didn't quite hit the ball out of the park with its report late Tuesday, but the aluminum giant did beat the Street, offering a hint of hope for a quarter that most analysts expect to be pretty grim.

Despite that, the stock was not immune to the market's tumble. Alcoa finished down 2.4% to $31.54.

Iran says it demonstrates resolve

Iran said it had test-fired nine medium- and long-range missiles at the Strait of Hormuz in the Persian Gulf -- a transport bottleneck through which passes approximately 40% of the world's oil. The tests intensified tensions between Iran and Israel.

The tests were designed "to demonstrate our resolve and might against enemies who in recent weeks have threatened Iran with harsh language," said Gen. Hossein Salami, a leader of Iran's Revolutionary Guards.

The actions come just a day after Iranian President Mahmoud Ahmadinejad rejected the idea of war with Israel or the U.S. Also on Tuesday, an aide to Supreme Leader Ayatollah Ali Khamenei said that Iran would target Israel and the U.S. fleet in the Gulf if either country attacked Iran.

"The missile threat is not an imaginary one," U.S. Secretary of State Condoleezza Rice told reporters in Sofia, Bulgaria, today. "Those who say that there is no Iranian missile threat against which we should be building this defense system, perhaps ought to talk to the Iranians."

The Energy Department reported today an unexpected increase in gasoline stocks last week. Gasoline supplies rose by 900,000 barrels in the period, far greater than the expected decline of 200,000 barrels.

That offset a bigger-than-expected decline in crude oil inventories, which fell by 5.9 million barrels last week; economists had expected a drop of only 1.9 million barrels.

Has oil peaked?

Oil's drop of more than $9 on Monday and Tuesday had some wondering whether oil's run is over.

Oil fell $5.33 on Tuesday alone, to close at $136.04 a barrel -- the biggest one-day drop in dollar terms since Jan. 17, 1991. Oil had fallen $3.92 a barrel on Monday after closing at a record of $145.29 last Thursday.

Oil prices had declined this week because of a stronger dollar and worries about weakening demand.

"Total petroleum consumption is projected to shrink by 400,000 barrels per day in 2008," the Energy Information Administration said in its Short-Term Energy Outlook. That drop is sharper than the nearly 300,000 barrels per day the agency projected last month. The projection is "based on prospects for a weak economy and record high crude oil and product prices extending into 2009," the EIA said.

Some observers were skeptical that we have seen an end to the oil price run-up.

"Haven't we seen this movie before?" energy expert Stephen Schork queried in his daily newsletter, The Schork Report.

Crude "rallies hard before a holiday, and then after we return from our long weekend all of that pre-holiday exuberance is exorcised from the market; thereby luring masochistic bears to step into the trap on the misperception that finally, the bubble has burst."

Crude is up 42% in the first half of the year.

NASCAR promoter hits attendance slick

NASCAR fans may be devoted, but the slowing economy and rising gas and food prices have kept many at home in the last three months. International Speedway (ISCA, news, msgs), which promotes and operates many NASCAR racetracks across the U.S., including the Daytona International Speedway, this morning lowered its full-year outlook because of the "challenging macro-economic environment" that is "impacting consumer spending."

The stock fell 3.3% to $38.06, its lowest close of the year. It's off 30% since reaching $54.30 in February 2007.

The company said earnings for the year will be between $3.05 and $3.10 per share, a tighter range than its previous forecast of between $3.05 and $3.15 per share. International Speedway also lowered its revenue outlook to between $805 million and $815 million, down from a previous forecast of $825 million.

The company reported adjusted second-quarter earnings of 54 cents per share, up from 51 cents per share last year, but missing the consensus estimate by a penny. Admissions declined by 6.6% in the quarter to $53.4 million, and food and beverage sales fell 12.3% to $17.7 million.

Short hits from the markets -- 4 p.m.
 Wed.Tues.Chg.Month chg.YTD chg.
Treasurys
13-week Treasury bill1.790%1.820%-0.0304.99%-42.99%
5-year Treasury note yield3.107%3.171%-0.064-7.00%-10.07%
10-year Treasury note yield3.834%3.880%-0.046-3.64%-4.98%
30-year Treasury bond yield4.428%4.456%-0.028-2.27%-0.70%
Currencies
U.S. Dollar Index72.87073.315-0.4450.10%-4.99%
British pound in dollars$1.9794$1.97040.0090-0.69%-0.49%
Dollar in British pounds £0.5052£0.5075-0.00230.70%0.50%
Euro in dollars$1.5755$1.56760.00790.03%7.80%
Dollar in euros€ 0.6347€ 0.6379-0.0032-0.03%-7.23%
Dollar in yen 107.19107.40-0.210.94%-4.17%
Canadian dollar in U.S. dollars$0.989$0.982$0.00710.92%-0.41%
U.S. dollar in Canadian dollars$1.012$1.019-$0.0074-0.90%0.40%
Commodities
Gold$928.60$923.30$5.300.03%10.81%
Copper$3.7390$3.6965$0.04-3.70%22.95%
Silver$18.1750$17.9550$0.223.80%21.82%
Corn$6.9475$7.0450-$0.10-4.14%52.52%
Crude oil (NYMEX) (per barrel)$136.05$136.04$0.01-2.82%41.75%

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