Market Dispatches

Market Dispatches3/5/2009 10:00 PM ET

Dow falls 281 to 12-year low

The S&P 500 falls to its lowest level since 1996. Citigroup briefly falls below $1, and potential downgrades slam other bank stocks. Wal-Mart's February sales are better than expected. The big question: How bad will Friday's jobs report be?

By Charley Blaine and Elizabeth Strott

Stocks plunged today, with the Dow Jones industrials briefly falling as much as 331 points and ending at levels not seen since April 1997.

The slump was built on steep declines in financial stocks -- Citigroup (C, news, msgs) briefly fell to 97 cents -- and the fear that General Motors (GM, news, msgs) might collapse.

At the same time, many investors around the world were disappointed that China did not announce an expansion to its economic stimulus program. The expansion had been expected and was a major reason why stocks rallied on Wednesday.

The Dow finished down 281 points, or 4.1%, to 6,594, wiping out all of its gains on Wednesday and dropping to its lowest close since April 15, 1997. The blue chips were off 300 points on Monday.

The Standard & Poor's 500 Index was off 30 points, or 4.3%, to 683, its lowest close since September 1996. And the Nasdaq Composite Index was off 54 points, or 4%, to 1,299.59, its first close below 1,300 since March 12, 2003.

The sell-off sets Friday as potentially a very volatile day of trading. The government will report on U.S. unemployment and nonfarm payrolls before Friday's open. The consensus estimate is for the unemployment rate to hit 7.9%, up from 7.6% in January, and for payrolls to drop by 650,000.

Futures so far suggest a slightly lower open on Friday. Meanwhile, stocks in Japan, Hong Kong and Australia opened lower on Friday.

So far this year, the Dow is down 25% and is off 53% since peaking in October 2007. The Dow, S&P 500 and the Nasdaq have fallen in 11 of the last 15 sessions, with the three indexes tumbling nearly 7% this week alone.

The sell-off in U.S. markets mirrored heavy selling in Europe and parts of Asia. The selling also sent many frightened investors to seek safety in U.S. government securities, gold and silver. Gold closed up $21.10 an ounce to $927.80; silver was up 21 cents to $13.12 an ounce.

The yield on the 5-year Treasury note fell to 1.81% from 1.97% on Wednesday. The yield on the note has fallen more than one-tenth this week.

Crude oil fell in sympathy with the market, closing down $1.77, or 3.9%, to $43.61 a barrel. The drop pulled energy shares lower.

Two of Tuesday's winners -- Caterpillar (CAT, news, msgs) and Joy Global (JOYG, news, msgs) -- were down 7.7% to $23.49 and 4.9% to $16.69 after China disappointed investors by not announcing a second economic stimulus plan today.

Exxon Mobil (XOM, news, msgs) fell 5.3% to $62.22, subtracting nearly 28 points from the Dow. Chevron's (CVX, news, msgs) 4.8% decline to $56.46 pulled 22 points from the blue chips.

Financials can't get a break

Financials were the market's biggest problem today, with Citigroup down 9.7% to $1.02 after its historic drop below $1.

Also, Moody's said it was reviewing the ratings of Bank of America (BAC, news, msgs) and Wells Fargo (WFC, news, msgs) and downgraded its outlook for JPMorgan Chase (JPM, news, msgs). Bank of America fell 11.7% to $3.17, Wells Fargo was off 15.9% to $8.12, and JPMorgan was down 14% to $16.60.

Insurance stocks were also clobbered because many investors aren't sure how to value the companies' investments in real estate and related assets. Hartford Insurance Group (HIG, news, msgs) was off 19.7% to $4.13. Prudential Financial (PRU, news, msgs) fell 18.3% $11.29, and Met Life (MET, news, msgs) was off 17.8% to $12.10.

Why the selling: Falling earnings and unhappiness with Washington

The selling since the first of the year reflects two issues:

  • Analysts and investors in this country are struggling to understand how badly the recession is hurting corporate earnings.

  • A belief among a number of traders and investors that the Obama administration's tax proposals are bad for investments, especially stocks.

The earnings problem is severe, CNBC's Bob Pisani noted this afternoon, because stock prices are usually built as a multiple of earnings.

In fact, Thomson Reuters noted last week that analysts were expecting first-quarter earnings for S&P 500 companies to fall 31% from a year ago. That projection is down from a gain of 25.7% projected in October and declines of 12.5% and 25.9% projected on Jan. 1 and Feb. 1.

On the tax side, Wall Street is opposed to raising the capital gains rate to 20% for top-earning taxpayers from 15% now, and many money managers don't like the idea of limiting itemized deductions for the most affluent taxpayers, a key element of the Obama tax plan.

Compounding the problem has been the lack of clarity of how the administration might stabilize the U.S. financial system.

War has broken out between Wall Street and the administration, market analyst Dennis Gartman told Bloomberg Television said this afternoon.

But Andrew Leonard, writing on Salon.com, noted, "This is a brutal bear market immaculately reflecting the reality that day by day, the state of the U.S. economy is looking worse and worse."

Energy prices -- New York close
 Thur.Wed.Chg.Month chg.YTD chg.
Crude oil (NYMEX) (per barrel)$43.61$45.38-$1.77-2.57%-2.22%
Heating oil (per gallon)$1.1598$1.2145-$0.0547-8.38%-17.49%
Natural gas (per million BTU)$4.0880$4.3400-$0.2520-2.62%-27.29%
Unleaded gasoline (per gallon)$1.3127$1.3816-$0.06892.50%30.20%

GM sounds bankruptcy alarm

General Motors' future was looking pretty dark today.

In its delayed annual report, the company and its auditor, Deloitte & Touche, said today that there is "substantial doubt" about its ability to remain a "going concern" and that it hopes to get even more help from the government.

Shares of GM fell 15.5% to $1.86 on the news.

GM is seeking up to $30 billion in additional loans from the U.S. government and more from foreign governments, including the U.K., Sweden and Canada.

The company has already received $13.4 billion in federal loans. On Feb. 17 it submitted a viability plan to the government. GM faces a March 31 deadline to secure a deal with the United Auto Workers union.

The company has lost $82 billion in the past three years.

On Tuesday, the automakers reported dreadful February sales numbers, falling to levels not seen since 1981.

The "going concern" determination -- a very serious appraisal of GM's prospects -- comes as GM tries to persuade bondholders to swap around $16 billion in debt for equity in a restructured company. Despite GM's financial woes, a bondholders' committee wants GM to restructure outside of bankruptcy, The Wall Street Journal said tonight.

Even an expedited, or so-called pre-packaged bankruptcy, "would be a complete catastrophe," a source told The Journal. All of the players -- management, labor, suppliers and bondholders -- would end up in a "guerrilla war," he said. And it could lead to liquidation, with huge implications for the economy.

GE: GE Capital won't need new capital

General Electric (GE, news, msgs) shares were down slightly today after its chief financial officer said that the company's GE Capital subsidiary will be profitable for the first quarter and all of 2009. Moreover, Keith Sherin said, GE Capital won't need fresh capital except under an unlikely disaster scenario.

GE closed down 0.5% to $6.66, down 59% this year and its lowest finish since November 1992. The shares were up 0.8% to $6.71 after hours.

Calling recent speculation about risks that GE Capital faces "overdone," Sherin said today that GE has enough capital to fund itself through 2010 with $45 billion in cash and an additional $60 billion available under the Temporary Loan Guarantee Program. There are no short-term "triggers" that would strain the cash position, he added.

Wal-Mart's winning ways

Wal-Mart reported a 5.1% jump in February sales at stores open at least one year, excluding gasoline sales. The company also said it is increasing its annual stock dividend by 15% to $1.09 per share.

The stock rose 2.6% to $49.75.

But Wal-Mart's gain highlighted everyone else's pain. "Are retailers out of the woods yet? No," Peter Kwiatkowski, money manager at Fifth Third Asset Management, told MarketWatch.com. "Everybody is hurting. What do you have in your toolbox to deal with the environment is the key. Wal-Mart definitely has a lot of momentum right now."

Where the pain is

Some teen retailers also fared reasonably well last month. Hot Topic (HOTT, news, msgs) said sales jumped 11%, much better than the 4.3% increase analysts were looking for, but shares were down 2.5% to $8.26. American Eagle Outfitters (AEO, news, msgs) said sales fell 6.6% last month, better than the 13.4% decline analysts had expected. But shares fell 8.2% to $9.13.

Abercrombie & Fitch (ANF, news, msgs) said sales plunged 30%, far worse than the consensus estimate of a 19.8% decline. Shares fell 12.9% to $18.24.

And high-end department stores saw a big drop in sales last month. Saks (SKS, news, msgs) said same-store sales slumped 26%, and Nordstrom (JWN, news, msgs) said sales fell 15%. Saks shares fell 6.1% to $1.99. Nordstrom was off 10% to $12.23.

Overall, retailers were expected to post a 1.2% decline in same-store sales in February, according to Thomson Reuters.

Ford to restructure its debt

Meanwhile, Ford Motor (F, news, msgs) is taking steps to reduce its debt load.

The troubled automaker late Wednesday said it could retire up to $10.4 billion in debt, about 40% of the company's total $25.8 billion in outstanding debt.

Ford will offer holders of its 4.25% senior convertible notes due Dec. 15, 2036, an $80 cash premium to convert to common stock.

Stock Charts (Year)

General Motors
Graphical chart for GM
The company's finance arm, Ford Motor Credit, will make a $1.3 billion cash tender offer for Ford's unsecured, nonconvertible debt securities, and an additional $500 million cash tender offer for Ford's senior secured term loan debt.

Ford shares fell 3.2% to $1.81.

Ford, unlike rivals GM and privately held Chrysler, has neither sought nor received government aid. Ford recently reached an agreement with the United Auto Workers union regarding labor costs.

"This is all part of a restructuring plan to make the company healthier in the end," Ford spokesman Mark Truby said in a statement.

One expert agreed. "This is an enormously leveraged company, so if you reduce the debt, you reduce the company's risk profile," auto analyst John Casesa of Casesa Shapiro Group told Bloomberg News. "The company faces tremendous operating risk, so reducing the financial risk is welcome."

Surprise drop in jobless claims

The jobless picture is still a huge worry for Americans, but fewer people signed up for first-time unemployment benefits for the week ending Feb. 28.

The Labor Department said that 639,000 people filed for first-time claims, less than the 650,000 economists had expected and down significantly from last week's 670,000.

The report is a prelude to an important report due Friday on unemployment for the month of February.

Meanwhile, in other economic data, the Labor Department's final report on nonfarm productivity for the fourth quarter showed a 0.4% decline -- better than the 1.6% drop economists had been expecting. Unit labor costs rose 5.7% in the fourth quarter.

And a report on January factory orders from the Commerce Department showed continued weakness. Orders fell 1.9% in January, the sixth straight month of declines, but the number was better than economists had expected.

"The report still shows the same pattern of substantial weakness in equipment and software spending," Mike Englund, chief economist at Action Economics, told Bloomberg News. "The factory sector is contracting probably even faster in the first quarter than it did in the fourth."

BOE, ECB lower rates

The Bank of England lowered its key interest rate to 0.5% from 1%. The new rate is the lowest since the bank began keeping records in 1694.

"In these highly uncertain times, there are merits to stimulating the economy through a variety of different channels," BOE Governor Mervyn King wrote in a letter to Chancellor of the Exchequer Alistair Darling.

The bank is also actively adopting a strategy of quantitative easing, increasing the money supply to help thaw frozen credit markets, and will purchase $105 billion in bonds.

The European Central Bank lowered its key lending rate to 1.5% from 2%, as expected. "We didn't decide . . . that this was the lowest rate we could attain," ECB President Jean-Claude Trichet said at a news conference after the announcement, hinting that future cuts could be coming.

The Dow Jones Stoxx 600 Index lost 3.6% to 162, Germany's Xetra Dax Index fell 5% to 3,695, and London's FTSE 100 Index ($GB:UKX) fell 3.2% to 3,530.

Google in talks with Universal Music

Google's (GOOG, news, msgs) could be on the path to being the next MTV.

Google's YouTube and Vivendi's (VIVEF, news, msgs) Universal Music Group are in talks about a music video partnership, The Wall Street Journal reported late Wednesday, where YouTube would build a new hub for music videos where it could then sell higher-priced advertisements.

Universal Music Group, the biggest music recording company in the world, already has a licensing arrangement with YouTube, as do the other big record companies.

A deal could still fall apart, the report said.

Google was down 4.2% to $305.64. Vivendi was off 4.4% to $23.65.

Andrew Rosenbaum contributed to this report.

Short hits from the markets -- New York close
 Thur.Wed.Chg.Month chg.YTD chg.
Treasurys
13-week Treasury bill0.200%0.250%-0.050-20.00%73.91%
5-year Treasury note yield1.807%1.969%-0.162-10.54%16.51%
10-year Treasury note yield2.819%3.011%-0.192-7.30%25.62%
30-year Treasury bond yield3.505%3.698%-0.193-5.83%30.25%
Currencies
U.S. Dollar Index89.20088.7000.5001.19%8.58%
British pound in dollars$1.4132$1.4198-0.0066-1.33%-4.08%
Dollar in British pounds £0.7076£0.70430.00331.35%4.26%
Euro in dollars$1.2563$1.2657-0.0094-0.93%-10.33%
Dollar in euros€ 0.7960€ 0.79010.00590.94%11.52%
Dollar in yen 97.8999.13-1.240.29%7.99%
Canadian dollar in U.S. dollars$0.776$0.786-$0.0094-1.20%-5.11%
U.S. dollar in Canadian dollars$1.289$1.273$0.01651.21%5.39%
Commodities
Gold$927.80$906.70$21.10-1.56%4.92%
Copper$1.6535$1.6940-$0.047.47%17.27%
Silver$13.1200$12.9150$0.210.08%14.34%
Corn$3.5850$3.6350-$0.052.21%-11.92%
Crude oil (NYMEX) (per barrel)$43.61$45.38-$1.77-2.57%-2.22%

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