Market Dispatches on MSN Money

Market Dispatches10/15/2008 8:15 PM ET

Dow drops 733 as fear drives stocks lower

Heavy late-day selling helps take out most -- if not all -- of Monday's gains. September retail sales are grim, and a report on manufacturing in the New York area shows a sharp contraction. Crude oil falls below $75. JPMorgan's profit surprises the Street.

By Charley Blaine and Elizabeth Strott

Fear returned to Wall Street today, driving the Dow Jones industrials down 733 points as the stock market gave up nearly all the gains from Monday's rally.

The percentages losses for the Dow and the Standard & Poor's 500 Index -- 7.9% and 9%, respectively -- were their worst since the Oct. 19, 1987, market crash.

The cause was a combination of weak economic reports in the morning, a gloomy outlook on the economy from Federal Reserve Chairman Ben Bernanke and then heavy late-day selling, apparently from hedge funds and others scrambling to meet margin calls.

Today's sell-off was pushing futures prices for stock indexes lower, suggesting a weak open for U.S. stocks on Thursday. Asian stocks were down sharply in early Thursday trading.

The blue chips finished at 8,578, down 7.9% on the day. The S&P 500 fell 90 points to 908. The Nasdaq Composite Index was off 151 points, or 8.5%, to 1,628.

The point losses for the Dow and the S&P 500 were their second-largest. The biggest came only on Sept. 29 -- 778 points for the Dow and 107 points for the S&P 500.

In two days, the Dow has given back 86% of its 936-point gain on Monday. The S&P's retracement: 92%.

The Nasdaq, the Nasdaq-100 Index ($NDX.X), which tracks the largest Nasdaq stocks, and the Russell 2000 Index, ($RUT.X), which tracks small-cap stocks, have given up all of their Monday gains.

The Nasdaq-100 fell 120 points, or 8.8%, to 1,244. The Russell 2000 fell 52 points, or 9.5%, to 502.11.

The market "is absolutely trading on fear right now," John Wilson, co-director of equity strategy at Morgan Keegan in Memphis, told Bloomberg News, because "nobody knows yet how bad the economy is going to get."

About the only solace an investor can take from the close is this: All the indexes are still 8% or so above the lows they saw in panic selling right after Friday's open.

In addition, crude oil fell under $75 a barrel for the first time since Aug. 31, 2007. Crude is now down 49% from its peaks in July and down 21% on the year.

Prices at the pump have declined as well. AAA's Fuel Gauge Report put the national average price of gas at $3.125 a gallon today, down 24% from the $4.114 peak on July 17.

Gasoline prices tend to fall more slowly than crude as refiners work off higher-cost inventories.

Energy shares were battered all day and were the market's weakest link. ExxonMobil (XOM, news, msgs) and Chevron (CVX, news, msgs) both fell more than 12% and contributed nearly 149 points of the Dow's loss. The Select Sector SPDR-Energy (XLE, news, msgs) exchange-traded fund, which tracks the energy sector of the S&P 500, was down 14.4% to $43.30.

Financial stocks overall moved lower after Oppenheimer & Co. analyst Meredith Whitney said the government's plan to stabilize key U.S. banks by injecting $250 billion is not a "panacea solution." The Select Sector SPDR-Financial (XLF, news, msgs) ETF, which tracks the financial sector of the S&P 500, was down 10.9% to $15.45. The ETF has fallen 46.6% this year.

As stocks fell, many investors looked for safety, driving interest rates lower. The yield on a 1-month Treasury bill dropped to 0.03% today, which means investors were basically paying the government for safety. The dollar moved higher as a result.

In addition, many investors piled into put options to protect against more losses. The CBOE Volatility Index ($VIX.X), which rises with increasing fear, closed up 26% to 69.25 today.

Several fears drove the market:

  • The economic slowdown hasn't hit bottom, and it will take longer than anyone expected to rebound. That hit consumer stocks such as McDonald's (MCD, news, msgs), down 8% to $51.55; Starbucks (SBUX, news, msgs), down 10.4% to $10.12; and Apple (AAPL, news, msgs), down 5.9% to $97.95.

  • Moves by the Fed, the Treasury and central banks around the world won't be enough to turn the financial system around quickly.

  • Economic growth in emerging nations, particularly China, Russia and Brazil, is slowing rapidly, if not stalling entirely.

Energy prices -- New York close
 Wed.Tues.Chg.Month chg.YTD chg.
Crude oil (NYMEX) (per barrel)$74.54$78.63-$4.09-25.93%-22.34%
Heating oil (per gallon)$2.1905$2.2597-$0.0692-23.48%-17.32%
Natural gas (per million BTU)$6.5920$6.7270-$0.1350-11.37%-11.91%
Unleaded gasoline (per gallon)$1.7822$1.8848-$0.1026-28.27%-28.45%

A big, broad decline

Twenty-nine of the 30 Dow stocks were lower for the day. The one winner: Coca-Cola (KO, news, msgs), up 1.1% to $44.21 on the strength of a strong third-quarter earnings report.

In addition, 495 S&P 500 stocks were lower. Four of the five winners were financial companies, with Hudson City Bancorp (HCBK, news, msgs) the leader, up 3.9% to $16.70. The fifth was Coca-Cola.

All of the Nasdaq-100 stocks were down. The best performer was SanDisk (SNDK, news, msgs), down 1.9% to $16.60.

Adding to a potentially weak open for stocks on Thursday is a disappointing outlook from eBay (EBAY, news, msgs). The Internet company warned that its full-year revenues would fall below its previous forecast as it restructures its main online auctions business.

The stock fell 13.6% to $15.33 in regular trading and an additional 5.9% to $14.43 after hours.

Also reporting on Thursday: Citigroup (C, news, msgs), Merrill Lynch (MER, news, msgs), Sherwin-Williams (SHW, news, msgs) and Google (GOOG, news, msgs).

Consumers head to the sidelines

A series of weak economic reports started today's slump.

The Commerce Department said sales fell 1.2% for the month as consumers were sidelined by the credit freeze, higher jobless rates and a free fall in the stock market. The number was far worse than the 0.7% economists had expected.

Excluding autos, retail sales fell 0.6% -- also worse than the expected decline of 0.2% last month.

"Firms and consumers will likely postpone projects and large purchases until they better understand the implications of the current situation," Christian Broda, an economist at Barclays Capital, told Bloomberg News. "Business and consumer paralysis is today's main risk."

Economists expect consumer spending to fall in the third quarter for the first time since 1991. Consumer spending makes up about two-thirds of the economy.

Wholesale prices also fell in September, the Labor Department reported this morning. The Producer Price Index fell 0.4% last month, in line with economists' expectations, and an improvement from the 0.9% decline seen in August.

But the core PPI, which excludes volatile food and energy prices, rose 0.4%, double the expected 0.2%. The core PPI is a key benchmark for Federal Reserve policymakers.

Producer prices are up 8.7% over the past year, with core prices up 4% from last year, the biggest year-over-year gain since 1991.

Adding to the gloomy outlook: The Federal Reserve Bank of New York's Empire State Manufacturing Index fell to a record low of negative 24.6 in October, down from a reading of negative 7.4 in September.

More fund managers already think the economy is in a recession. Merrill Lynch's October fund-manager survey showed that 69% of managers believe that the economy has slumped into recession territory -- up from 44% last month.

Bernanke: Don't expect a quick rebound

Fed Chairman Bernanke cautioned traders not to expect too much too fast from government efforts to calm financial markets.

"Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away," Bernanke told the Economic Club of New York. "Economic activity will fall short of potential for a time."

Bernanke also said that the central bank will consider discarding its long-standing aversion to interfering with asset-price bubbles and warned that the banking business may be concentrated in too few companies.

Officials should review how supervision and interest rates can minimize the "dangerous phenomenon" of bubbles in housing, stocks and other assets that risk bringing the financial system and economy down with them when they burst, Bernanke said. "There is no doubt that as we emerge from the current crisis that we are all going to look very hard at that issue and what can be done about it," he said.

Many traders believe the Fed will cut interest rates when it meets again on Oct. 29, Miller Tabak Chief Bond Strategist Tony Crescenzi wrote in a note to clients today. The market is guessing the key federal funds rate will drop to 1%.

JPMorgan, Coca-Cola surprise

JPMorgan Chase (JPM, news, msgs) reported a surprising third-quarter profit, although net income fell 84% from last year. The bank said it earned $527 million, or 11 cents per share, down from $3.4 billion, or 97 per share, last year.

Analysts had expected an 18-cent loss for JPMorgan.

Stock Charts (Year)

Graphical chart for JPM
Graphical chart for KO
Revenue fell to $14.7 billion, from $16.1 billion in the quarter.

Chief Executive Officer Jamie Dimon cautioned about future earnings. JPMorgan shares fell 5.5% to $38.49.

Coca-Cola, meanwhile, said it earned $1.89 billion, or 81 cents per share, in the third quarter -- a 14% increase from the $1.65 billion, or 71 cents per share. Excluding charges, it earned 83 cents per share, a nickel better than analysts' expectations.

Revenue rose 9% to $8.39 billion. Coca-Cola got a boost from its international business, particularly in China, Turkey and India.

The stock hit as high as $47.33 on the news before falling back.

Credit freeze starts to thaw

While the average investor has been fixated on the wild gyrations of the stock market, money pros have been keeping an eye on key indicators of stress in the credit markets, where things are looking up.

The London interbank offered rate, or Libor, has been moving slightly lower. Libor is a key benchmark rate used to adjust a host of other borrowing rates around the world.

The three-month Libor was still high, at 4.55% on Wednesday but down from Tuesday's 4.64% and 5.38% a week ago when credit markets were virtually frozen and stocks were sinking. Last month, the three-month Libor was 2.8%.

The yield on the three-month Treasury bill, often considered the safest investment, dropped to 0.2% today from 0.24 on Tuesday.

Andy Rosenbaum contributed to this report.

Short hits from the markets -- New York close
 Wed.Tues.Chg.Month chg.YTD chg.
13-week Treasury bill0.200%0.235%-0.035-77.78%-93.63%
5-year Treasury note yield2.888%2.963%-0.075-3.28%-16.41%
10-year Treasury note yield4.011%4.023%-0.0124.81%-0.59%
30-year Treasury bond yield4.248%4.260%-0.012-1.32%-4.73%
U.S. Dollar Index82.34581.6400.7053.76%7.37%
British pound in dollars$1.7340$1.7419-0.0079-2.72%-12.83%
Dollar in British pounds £0.5767£0.57410.00262.80%14.72%
Euro in dollars$1.3523$1.3624-0.0101-4.10%-7.48%
Dollar in euros€ 0.7395€ 0.73400.00554.27%8.08%
Dollar in yen 100.76102.11-1.35-4.97%-9.92%
Canadian dollar in U.S. dollars$0.843$0.861-$0.0189-10.42%-15.14%
U.S. dollar in Canadian dollars$1.187$1.161$0.026011.57%17.77%
Crude oil (NYMEX) (per barrel)$74.54$78.63-$4.09-25.93%-22.34%

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