Market Dispatches

Market Dispatches10/7/2008 2:45 AM ET

Dow falls 370 points as fear grips markets

Heavy selling around the world pushes the Dow down to levels last seen in October 2004. But the big rebound that cut the day's losses may produce more gains Tuesday. Investors aren't wild about Bank of America's plan to raise $10 billion in new capital.

By Charley Blaine and Elizabeth Strott

The Dow Jones industrials plunged below 10,000 today for the first time since October 2004 and briefly exceeded a record point loss set only a week ago as markets struggled with continued fallout from a global credit crunch.

But two rebounds set in during the last hour of trading that trimmed the Dow's loss. The blue-chip index closed down 370 points, or 3.6%, to 9,956.

The Standard & Poor's 500 Index was down 42 points, or 3.9%, to 1,057, and the Nasdaq Composite Index was off 84 points, or 4.3%, to 1,863.

As painful as the losses were, they were a big improvement over where the market stood only 75 minutes earlier.

Around 2:45 p.m. ET, the Dow was down 800 points -- exceeding its record one-day point loss of 778 points, set only a week ago after the House of Representatives failed to approve a $700 billion rescue package for the nation's financial system.

Today's sell-off came as crude oil fell under $88 a barrel -- a level not seen since early February. The dollar surged against the euro, hitting 13-month highs.

It wasn't clear what pulled stocks back. There was some talk of a concerted interest-rate cut by central banks around the world.

CNBC also suggested there was talk that the Treasury Department would somehow support the commercial paper market. Commercial paper is short-term IOUs issued by companies and actively traded. That market has shrunk substantially in recent weeks as the credit crisis has worsened.

Nonetheless, the close was a disappointment for market bulls looking for a bottom. While the market rebounded, they were hoping for a substantial sell-off that would have taken just about all traders and investors out of the market -- except the bulls.

Bank of America may weigh on markets

The big rebound off the day's lows may produce some follow-through on Tuesday.

Futures trading suggests that the Dow will open around 130 points higher, pushing the index back over 10,000 again. At the same time, the S&P 500 is looking at a 16-point gain to 1,073, and the The Nasdaq-100 Index ($NDX.X), which tracks the largest Nasdaq stocks, could begin the day up 20 points to around 1,431.

Crude oil, meanwhile, was trading above $90 a barrel in electronic trading.

Nonetheless, there will be some headwinds for investors.

After the close, for example, Bank of America (BAC, news, msgs) reported lower third-quarter earnings and said it would cut its dividend to 32 cents from 64 cents and raise $10 billion in a new common stock sale. The earnings report was a surprise; the Dow component had been scheduled to report for two weeks.

The move came as the banking giant reported that third-quarter net income fell 68% from a year ago. The company earned $1.18 billion, or 15 cents a share, down from $3.7 billion, or 82 cents a year ago. Analysts had expected 60 cents in earnings.

"Things are not good with financial companies. This reflects it," Lou Brien, market strategist at DRW Trading in Chicago, told Reuters.

Investors were not cheered by the dividend cut especially. The stock, which was down 6.6% to $32.22 in regular trading, fell an additional 9.5% to $29.17 in after-hours trading.

Also, the Federal Reserve is slated to release the minutes of its Sept. 16 Federal Open Market Committee meeting.

And the third-quarter earnings season starts up with reports from Alcoa (AA, news, msgs) and Yum! Brands (YUM, news, msgs), the operator of KFC, Pizza Hut, Taco Bell and A&W restaurant chains.

Energy prices -- New York close
 Mon.Fri.Chg.Month chg.YTD chg.
Crude oil (NYMEX) (per barrel)$87.81$93.88-$6.07-12.75%-8.51%
Heating oil (per gallon)$2.4740$2.6620-$0.1880-13.57%-6.62%
Natural gas (per million BTU)$6.8350$7.3580-$0.5230-8.11%-8.66%
Unleaded gasoline (per gallon)$2.0591$2.2283-$0.1692-17.13%-17.33%

Crude, commodities fall; so do most stocks

All 30 Dow stocks were lower.

There were 48 gainers among S&P 500 stocks, led by Apartment Investment & Management (AIV, news, msgs), up 13.1% to $35, and Hartford Financial Services (HIG, news, msgs), up 12.8% to $30.90.

There were 12 winners among Nasdaq-100 stocks, led by Monster Worldwide (MNST, news, msgs), up 6% to $14.81. The Nasdaq-100 was down nearly 60 points, or 4.1%, to 1,411.

The sell-off wiped out perhaps $2.5 trillion in wealth, and it pushed the losses sustained by major indexes in the United States since their peak in October 2007 to roughly 30%. The Dow ended the day down 29.7% since its peak on Oct. 9, 2007, with the S&P 500 down 32.5%. The Nasdaq is off 34.8% since its 2007 peak on Oct. 31.

The drubbing mirrored selling that gripped markets from New Zealand to the Germany today. Exchanges in Brazil and Russia were forced to halt trading three times and twice, respectively.

Investors in Brazil worried that bailout plans in the U.S. and elsewhere weren't going to stabilize the banking system, Valmir Celestino, a money manager in Sao Paulo, told Bloomberg News. "The fear of a deeper global recession is building."

With one exception -- gold -- the selling hit commodities as well. Corn was down 30 cents a bushel to $4.24 a bushel -- and has fallen 32% since peaking in early July.

Gold was up $33, or 4%, to $866.20 as many investors looked for refuge from slumping stocks.

Crude oil was off 6.5% to $88.81 as traders worried that a global economic slump would cut demand for gasoline and other fuels.

Since peaking at $147.27 on July, crude oil has fallen nearly 40%. The retail price of gasoline nationally has fallen nearly 15% from a peak of $4.114 a gallon to $3.504 a gallon today, AAA's Daily Fuel Gauge Report reported.

Today's sell-off began after European financial leaders gathered in Paris over the weekend to address the credit crisis, but no comprehensive European rescue plan was announced. There were moves to shore up banks in Germany, Belgium and the Netherlands.

"It will probably be a rough week for global investors as they realize the credit crisis has a long way to play out," Frederic Dickson, chief market strategist at D.A. Davidson, told Bloomberg News.

European leaders are united in their commitment to finding a way out of the mess. Some blame the U.S. for the problems. Observers are worried that Europe, lacking a strong central bank, isn't in a strong position to deal with a credit crisis. Indeed, European Central Bank President Jean-Claude Trichet told Bloomberg that the European Union couldn't copy the $700 billion U.S. rescue plan because it doesn't have a federal budget.

Very little was safe

Today's selling was especially heavy among technology, energy, financial and metals stocks.

Select Sector SPDR-Technology (XLK, news, msgs) exchange-traded fund was the worst performer of the ETFs that track the S&P 500. Microsoft (MSFT, news, msgs) was down 5.5% to $24.91. Google (GOOG, news, msgs) was off 4.1% to $371.21. EBay (EBAY, news, msgs) was down 5.5% to $17.89. (Microsoft is the publisher of MSN Money.)

Business software makers SAP (SAP, news, msgs), the German software maker and rival Oracle (ORCL, news, msgs) both plummeted after SAP warned investors it won't meet expectations for the quarter ended Sept. 30.

SAP dropped 13.1% to $39.15 in New York trading. Oracle dropped 6.1% to $18.30.

Apple (AAPL, news, msgs) had been down as much as 9.8% but stormed back to finish up 1.1% to $98.14. The stock is down 52% since peaking at $202.96 on Dec. 27.

Among energy stocks, ExxonMobil (XOM, news, msgs) was down 0.8% to $77.32. Apache (APA, news, msgs) fell 4.4% to $88.46.

Freeport-McMoRan Copper & Gold (FCX, news, msgs), which had been down 9%, closed down 2.6% to $43.71. Alcoa was off 5.9% to $18.11. The company is expected to report third-quarter earnings after Tuesday's close.

Fed pumps billions into system

The Federal Reserve this morning announced several steps to help the financial markets.

The Fed doubled its term auction facility, an emergency loan program, to $300 billion, effective immediately. The total amount of the program could total $900 billion by the end of the year, the Fed said.

Announced in December, the term auction facility is part of an effort to pump cash into the markets. The Fed has expanded the program since then, as the financial mess has gotten worse. Banks can bid for the rate at which they will borrow funds from the Fed at these auctions.

The credit market has remained tight, despite passage of the bailout plan. Banks continue to hoard cash to meet their own funding needs, wary of lending either to other banks or to businesses and individuals. The three-month London interbank offer rate (Libor) -- the rate banks charge each other for overnight loans -- remained at an eight-month high today.

Investors are turning to safe investments, putting money into Treasury bills, despite the fall of the T-bill rate to 0.48% from 0.5% on Friday.

Lehman's Fuld blames rumors for collapse

The former head of Lehman Bros. testified before Congress today about the company's bankruptcy.

"Ultimately what happened to Lehman Bros. was caused by a lack of confidence," Dick Fuld said in prepared testimony. "This was not a lack of confidence in just Lehman Bros. but part of what has been called a storm of fear enveloping the entire investment-banking field and our financial institutions generally."

Fuld defended his handling of the crisis, saying that, at the time, he believed that the worst of the financial meltdown had passed. "With the benefit of hindsight, I can now say that I and many others were wrong," Fuld said.

Lehman, once the fourth-biggest investment bank in the country, suffered from its huge exposure to subprime mortgages, causing it to file for bankruptcy protection on Sept. 15. The company was 158 years old.

Battle brews for Wachovia

The U.S. government may be getting involved in the fight for Wachovia (WB, news, msgs).

The Federal Reserve wants Wells Fargo (WFC, news, msgs) and Citigroup (C, news, msgs) to make nice, settling their dispute over who will acquire Wachovia by sharing the prize, The Wall Street Journal reported. The Fed's plan would have Wells and Citigroup split up Wachovia's branches, as well as divvy up its assets.

Stock Charts (Year)

Wachovia
Graphical chart for WB
Wells Fargo
Graphical chart for WFC
Citigroup
Graphical chart for C
Wachovia probably won't like that answer. On Sunday, a New York State appeals court overturned an order blocking Wells Fargo from moving forward with its $15.1 billion offer to buy the bank.

Wells Fargo made its bid for Wachovia on Friday, just days after Citigroup offered to buy Wachovia's banking operations for $2.2 billion. Citigroup this morning told CNBC that it is considering making a bid for all of Wachovia.

Shares of Wachovia slipped 6.9% to $5.78; Wells Fargo shares dropped 2.7% to $33.64, and Citigroup was down 5.1% to $17.41.

Germany backs deposits

Germany became the latest European country to guarantee all private bank accounts, covering about $785 billion in savings and checking accounts.

The German government also said it will back a $69 billion rescue plan for Hypo Real Estate Holding, Germany's second-biggest property lender. Germany's Finance Ministry and private banks agreed to give Hypo an additional $21 billion line of credit, adding to a previous $48 billion plan that had been negotiated.

Hypo teetered on the brink of collapse Saturday, when the company said a consortium of financial institutions backed out of a rescue deal.

"We will not allow the distress of one financial institution to distress the entire system," Germany's Chancellor Angela Merkel said in a statement Sunday.

Hypo sought help from the German government in September, when it started to feel pressure from the credit crunch that began in the U.S.

Ireland and Greece made similar moves last week. Italy's UniCredit, its biggest bank by assets, announced plans over the weekend to raise up to $9 billion in capital, a move to help ease investors' concerns.

French banking giant BNP Paribas late Sunday agreed to buy 75% of Fortis Bank Belgium from the Belgian government for $11.3 billion. BNP Paribas will also buy 66% of Fortis' Luxembourg bank.

Andy Rosenbaum contributed to this report.

Short hits from the markets -- New York close
 Mon.Fri.Chg.Month chg.YTD chg.
Treasurys
13-week Treasury bill0.410%0.470%-0.060-54.44%-86.94%
5-year Treasury note yield2.395%2.680%-0.285-19.79%-30.68%
10-year Treasury note yield3.426%3.644%-0.218-10.48%-15.09%
30-year Treasury bond yield3.942%4.123%-0.181-8.43%-11.59%
Currencies
U.S. Dollar Index81.95080.5801.3703.26%6.85%
British pound in dollars$1.7434$1.7652-0.0218-2.20%-12.36%
Dollar in British pounds £0.5736£0.56650.00712.25%14.10%
Euro in dollars$1.3503$1.3663-0.0161-4.24%-7.62%
Dollar in euros€ 0.7406€ 0.73190.00874.43%8.24%
Dollar in yen 101.75104.88-3.13-4.04%-9.03%
Canadian dollar in U.S. dollars$0.905$0.923-$0.0176-3.76%-8.83%
U.S. dollar in Canadian dollars$1.105$1.084$0.02113.84%9.61%
Commodities
Gold$866.20$833.20$33.00-1.66%3.37%
Copper$2.4930$2.6900-$0.20-13.41%-18.02%
Silver$11.2850$11.3250-$0.04-8.07%-24.36%
Corn$4.2400$4.5400-$0.30-13.03%-6.92%
Crude oil (NYMEX) (per barrel)$87.81$93.88-$6.07-12.75%-8.51%

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