Bad Economic News Sends Stocks Plummeting

U.S. stocks plunged today as investors locked in profits from yesterday's rally and digested more bad economic news.

U.S. stocks fell to their lowest levels in more than five years Wednesday amid more volatility and worries about a serious economic slowdown not only in the U.S. but worldwide.

On Wednesday, the Dow Jones Industrial Average tumbled 514.45 points, or 5.69%, to 8,519.21. The broad S&P 500 shed 58.27 points, or 6.1%, to 896.78. The tech-heavy Nasdaq composite fell 80.93 points, or 4.77%, to end at 1,615.75.

In recent trading sessions, stocks appeared to be digging out of the deep hole they had excavated in September and early October. But at Wednesday's close the S&P 500 plunged to a new low for the year, a level it has not seen since April 2003.

"This is a market that is leaving most people without words for description," says Chris Johnson of Johnson Research Group. On Wednesday, there was more evidence that the credit crunch, which caused so much concern in the past month, was easing slightly. However, "the market doesn't have any shortage of things to worry about," Johnson says.

Among the alarming developments Wednesday were signs that the world's worst financial crisis in 80 years is hammering emerging markets. That prompted emergency central bank moves and calls for international help to curb investor flight. Reuters reported emerging market stocks, sovereign debt and currencies all came under intense pressure as investors unwound funding positions amid worries about the deteriorating world economy.

Hungary ratcheted up interest rates by three full points to defend its currency. Belarus's central bank said it had requested credit from the International Monetary Fund and Ukrainian Prime Minister Yulia Tymoshenko said she expected her country would receive "substantial" financial aid from the IMF next week. The IMF is also ready to help Pakistan, which needs funds to avoid a balance of payments crisis, and Iceland, driven close to bankruptcy as frozen credit markets caused its banks to fail.

Hemmed in by the global financial squeeze and commodities slump, Argentina's leftist government has seemingly found a novel way to find the money to stay afloat: cracking open the piggy bank of the nation's private pension system, according to a Wall Street Journal dispatch. The government proposed to nationalize the private pensions, which would provide it with much of the cash it needs to meet debt payments and avoid a second default this decade.

Reflecting worries about the world economy, commodity prices continued to slide Wednesday. On the NYMEX, crude oil dropped $4.80, or 6.65%, to $67.38. The Energy Dept.'s weekly report showed that crude oil inventories rose 3.2 million barrels, above analysts' forecast of a rise of 2.9 million barrels. Many traders worry the world is headed into a severe recession that will reduce demand for all commodities, fears that overshadow OPEC's emergency meeting in Vienna on Friday, where the cartel is expected to cut output 1 million barrels.

"The market is trying to assess how deep this global recession is going to be," says Peter Cardillo, chief market economist at Avalon Partners. While lower oil prices may be good for U.S. consumers, falling commodities hurt emerging economies that have been an engine of global growth in recent years, he says.

December gold futures sank $37 to $731 per ounce as the dollar index soared against most currencies on foreign bank demand.

NEW YORK (CNNMoney.com) -- Stocks surged Monday, pushing the Dow back above the 9,000 level, as investors welcomed talk of a second economic stimulus plan and an improvement in key lending rates.

The Dow Jones industrial average (INDU) added 413 points, or 4.7% according to early tallies. The Standard & Poor's 500 (SPX) index gained 4.8%. The Nasdaq composite (COMP) added 3.4%.

After the close, American Express (AXP, Fortune 500) reported quarterly earnings from continuing operations of 74 cents per share, topping forecasts of 59 cents and down from 94 cents a year earlier. The company reported revenue of $7.2 billion versus forecasts for $7.31 billion.

Investors cheered comments from Federal Reserve Chairman Ben Bernanke that suggested a second economic stimulus package could be up for discussion. Additionally, comments from Treasury Secretary Henry Paulson and an improvement in lending rates added heft to bets that the credit market freeze is starting to thaw.

But the volatility of recent weeks isn't over, analysts said. Monday's gains reflected the need for traders to take a break from last week's wild swings, if nothing else, said Dean Barber, president at Barber Financial Group.

He said that the huge Dow swings last week of sometimes 1,000 or more points in a single session - between the highs and the lows - have really worn people out.

"I think there's a sense that the selling has gotten overdone, so you're seeing an advance today," Barber said.

"But people shouldn't think that means that we're moving up from here on out," he said. "I think we're still in for a rough ride going forward."

In testimony before the House Budget Committee, Bernanke noted that "with the economy likely to be weak for several quarters and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate."

The Bush administration said it was open to the idea. Congressional Democrats have previously said a second stimulus package is needed.

Shortly after Bernanke's speech, Secretary Treasury Henry Paulson gave a statement that a "broad group of banks" is interested in participating in the government's plan to invest $250 billion directly into lending institutions. Paulson also reiterated that the investments should eventually earn a good return for taxpayers.

These announcements helped propel Wall Street. But on a broader level, stocks were up because investors were starting to express optimism, said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams.

He said investors were encouraged by a weekend cover story from financial weekly Barron's that suggested that the recession won't drag on as long as feared. However, the main factor restoring confidence was an improvement in lending rates over the past week, he said.

"The credit market is the most important thing right now," he said. "We need to see the banks lending to each other again."

He added that the recent drop in Libor, a key bank lending rate, on both an overnight and three-month level, was critical: "We're seeing that the government's efforts are starting to work," Rovelli said.

The morning brought an improved report on the economy as well. The September index of leading economic indicators (LEI) rose 0.3% after falling a revised 0.9% in the previous month. Economists surveyed by Briefing.com thought LEI would fall 0.1%. (Full story)

Stocks slipped Friday at the end of a volatile week as recession fears were countered by Google's earnings and bullish comments from influential billionaire Warren Buffett.

But Wall Street managed to post gains for the week, which included the Dow's biggest one-day point gain ever and the second-biggest point loss ever. For the week, the Dow and S&P 500 both added 4.7% and the Nasdaq added 3.6%.

Credit market: Lending rates improved Monday, building on last week's recovery, as the global initiatives undertaken continued to have an impact.

The South Korean and Dutch governments have now joined the list of nations trying to stem the global financial crisis by making billions in capital available to banks. Several key lending measures reacted, with shorter-term

Libor, the overnight bank-to-bank lending rate, fell to 1.51% from 1.67% late Friday, according to Bloomberg.com, a more than four-year low. The three-month Libor, what banks charge each other to borrow for three months, fell to 4.06% from 4.42% Friday.

Another indicator, the Libor-OIS spread, a measure of cash scarcity, fell to 2.93% from 3.28% Friday.

The TED spread, which is the difference between what banks pay to borrow from each other for three months and what the Treasury pays, narrowed to 2.97% from 3.63% Friday. The spread hit a record 4.65% earlier this month. The wider the spread, the more reluctant banks are to lend to each other.

Treasury prices rallied, lowering the yield on the 10-year note to 3.85% from 3.92% late Friday. Treasury prices and yields move in opposite directions.

The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, rose to 1.09% from 0.80% late Friday as investors began to pull money out of the safer investment and put it back in stocks. Last month, the yield on the 3-month bill skidded to a 68-year low around 0%.

Company news: AIG (AIG, Fortune 500) said it will start selling off pieces of its business by the end of the year. The troubled insurer also said it expects to be able to repay the $85 billion bridge loan it got from the government last month after it nearly collapsed. AIG shares gained 6%. (Full story)

Ericsson (ERICY) reported weaker profit and higher revenue versus a year earlier, both of which topped estimates. Shares of the telecom gear maker rallied 15%.

Halliburton (HAL, Fortune 500) said it swung to a net loss in the third quartet on debt charges and the impact of a tough hurricane season. However without one-time items, the oilfield services provider reported a profit that was higher than what analysts were expecting. The stock gained 8% and gave a lift to other oil services firms.

Yahoo (YHOO, Fortune 500) slipped after the Wall Street Journal said the company could announce layoffs and other cost-cutting measures Tuesday when it releases quarterly results.

Other markets: U.S. light crude oil for November delivery rose $2.40 to $74.25 a barrel on the New York Mercantile Exchange after hitting a 13-month low last week.

Bets that demand is slowing have sent oil prices lower since crude hit an all-time high of $147.27 a barrel on July 11. So far, instead of providing relief to investors, the decline has been seen as another indication of the global economic slowdown.

Gasoline prices fell another 3.1 cents overnight, to a national average of $2.923 a gallon, according to a survey of credit card activity by motorist group AAA. It was the 33rd consecutive day that prices have decreased - in the past month alone, they're down more than 93 cents a gallon.

COMEX gold for December delivery rose $2.30 to settle at $790 an ounce

U.S. stocks were trading higher Monday, jumping back to earlier highs after Fed chief Ben Bernanke's testimony on signs of loosening in the credit crisis. Investors responded positively to some positive earnings reports and to a narrowing in credit market spreads, which suggests that the government's efforts to stabilize the banking system are starting to work.

European stocks were higher as banks lined up to tap state rescue packages to shore up their finances, part of measures to stem a global financial crisis.

Bonds were slightly lower, with yields moving a bit higher. The dollar index was lower. Gold futures were sharply higher. Oil futures were up on speculation OPEC will cut output at emergency meeting.

On Monday, the Dow Jones industrial average was trading 199.60 points, or 2.25%, to 9,051.82. The S&P 500 index was up 24.36 points, or 2.59%, at 964.91. The tech-heavy Nasdaq composite index rose 21.03 points, or 1.23%, to 1,732.32.

On the New York Stock Exchange, 22 stocks were trading higher for every seven that were in negative territory, while on the Nasdaq the ratio was 17-8 positive, amid moderate trading, according to S&P MarketScope.

Major European indexes were trading higher Monday. In London, the FTSE 100 index surged 5.41% to 4,282.67. In Paris, the CAC 40 bounced 3.56% to 3,448.51, while Germany's DAX index rose 1.12% to 4,835.01.

In Asia, Japan's Nikkei 225 jumped 3.59% to end at 9,005.59, while Hong Kong's Hang Seng index surged 5.28% to close at 15,323.01.

President Bush, looking for answers to an economic emergency with just three months left in office will host an international summit to discuss ways to fix the world financial system but warned against reforms that threaten capitalism. "We will work to strengthen and modernize our nations' financial systems so we can help ensure that this crisis doesn't happen again," Bush said at the Camp David presidential retreat, according to an Associated Press dispatch. Bush, meeting with French President Nicolas Sarkozy and European Commission President Jose Manuel Barroso, did not announce a date or site for the summit. But Sarkozy suggested it be held in the shadow of Wall Street before the end of November.

Governments continued to announce measures to shore up financial institutions. Germany's cabinet approved strict conditions for banks that make use of its €500 billion rescue package, including limits on managers' salaries, bonuses and severance. "The criteria for appropriate (remuneration) are based on responsibilities and personal performance, business conditions and the success and outlook of the company compared to others in its field," the provisions agreed by cabinet stated, according to a Reuters dispatch.

Bavaria's public sector bank, BayernLB, was ready to ask for funds, Bavaria's finance minister said. Commerzbank said it would take a close look at using the funds. Societe Generale led a steep fall by France's top three banks as concern heightened they may be next in line for state funds. On Sunday, the Dutch government agreed a €10 billion cash injection into financial group ING (ING), powering its shares higher by almost 23%. ING said it had agreed to sell its Taiwan Life insurance unit to Fubon Financial for $600 million, increasing its capital in a deal analysts said would benefit shareholders. In Sweden, the government outlined a plan worth more than 1.5 trillion crowns ($271.5 billion) that would include credit guarantees and a bail-out fund. "The government is proposing powerful measures to ease the effects on Swedish households and companies of the financial turbulence," said Financial Markets Minister Mats Odell.

Traders listened to Bernanke's testimony on the U.S. economic recovery to the House Budget Committee. Saying that uncertainties around the economic picture are unusually large, the Fed chief said it would be appropriate for Congress to pass a second fiscal package to stimulate growth. While recovery from what he expects to be a protracted economic slowdown will depend on how quickly confidence returns to the financial system, he said he was confident that the measures the government is taking would help restore people's trust in the financial system.

Also on the Fedspeak calendar Monday: Atlanta Fed President Dennis Lockhart on the U.S. economic outlook and Fed Gov. Randall Kroszner on risk management.

Offering more detail about the Treasury's plan to inject $250 billion into banks, Secretary Henry Paulson said the the new capital should be deployed, not hoarded, though the government hasn't defined the type of lending to avoid forcing bad lending decisions. Paulson also said he expects lenders to step up efforts to aid homeowners in avoiding foreclosures. So far interest has been pretty broad in the program and he emphasized that these are investments, not expenditures, which should ultimately not come at a cost to taxpayers.

In economic news Monday, U.S. leading indicators rebounded by a better than expected 0.3% in September, from a revised 0.9% decline in August (-0.5% previously). That left the 6-month annualized rate of change at -2.5% from -2.1% previously. Positive contributions from money supply, consumer expectations, and the yield curve more than offset negative contributions from building permits, initial jobless claims, stocks, and the factory workweek, notes Action Economics

FINANCIAL MARKET SUMMARY
Symbol Lookup: Companies & Funds

	DJIA 8,979.26  +401.35    NASDAQ 1,717.71  +89.38    SPX 946.43  +38.59    S  3.33 0.00    LMT  92.61 +5.14    FNM  0.99 -0.01    DJIA 8,979.26  +401.35    NASDAQ 1,717.71  +89.38    SPX 946.43  +38.59    S  3.33 0.00    LMT  92.61 +5.14    FNM  0.99 -0.01

Personalize Ticker | Updated 4:00 PM, 10/16/2008	Disclaimer | © MarketWatch Inc. Source: Interactive Data Corp

The Dow Jones industrial average was down as much as 376 points at one point, but closed up 4.7 percent, or 401 points, at 8,979. The Standard & Poor's 500-stock index gained 4.3 percent, or 39 points, to end the day at 946.

The tech-heavy Nasdaq rose 5.5 percent, or 89 points, to 1,718. It was helped by a 10.5 percent surge in Yahoo's share price. The Internet firm received a boost from reports that Microsoft's chief executive, Steve Ballmer, said a deal between the companies might still make economic sense. Yahoo rejected a previous offer from Microsoft, which closed up 6.8 percent. Both firms were among the most actively traded companies in the Nasdaq today.

There is a battle between investors who are confident stocks have reached their bottom and others who see more downside to come amid gloomy economic data and corporate earnings. "This is a sucker's rally," said Joseph Brusuelas, chief U.S. economist at California-based Merk Investments. "There's a very difficult period ahead."

Today's gains follow the markets' huge dive yesterday, when the Dow fell more than 700 points.

Analysts said investors no longer question whether there will be a recession, but instead are worried about how long it will last and how deep it will be.

The government's responses to the financial crisis, from lowering interest rates to taking stakes in major banks, are good steps toward stability, economists and analysts have said. But they do not address the more immediate economic problems and have yet to drastically impact the credit squeeze as lenders remain reluctant to lend to each other.

Market volatility has become the new norm, said Doug Roberts, chief investment strategist for New Jersey-based Channel Capital Research. "Right now people are worried things are going to fall off a cliff. Every bit of news moves the market," he said.

Economic data released by the Labor Department today was mixed. New claims for jobless benefits dropped by 16,000 last week to a seasonally adjusted 461,000. That was a bigger drop than expected, but unemployment claims remain high by historical standards. And consumer prices were flat in September, according to the Consumer Price Index, a closely watched barometer of inflation.

Two Federal Reserve-related reports today painted a more bleak economic picture. Factory activity in the mid-Atlantic region is experiencing its largest one-month decline this month, according to the Federal Reserve Bank of Philadelphia, and the region's manufacturing executives expect no growth during the next six months. Also, the Federal Reserve reported today that industrial production fell 2.8 percent in September, the biggest plunge since December 1974.

"While the collapse in the U.S. housing sector and simultaneous drop in consumer confidence has prompted U.S. manufacturers to cut back sharply this summer, it has been the recent banking crisis and credit freeze that has turned the manufacturing recession into a outright collapse," said Michael Woolfolk, senior currency strategist for Bank of New York Mellon, in a research note this morning.

The collapse in industrial production parallels the sizable drop in retail sales released yesterday, punctuating the onset of a recession, analysts said. Retail sales in September took their steepest monthly decline in three years, according to a report released yesterday. Those concerns were amplified by Nation Retail Federation survey today showing that consumers planned to increase holiday-related shopping by 1.9 percent this year, a paltry sum that is the smallest increase since the survey began in 2002.

Investors have also been spooked by the impact of the financial crisis on many firm's balance sheets and their outlook through the rest of the year. Merrill Lynch, which is being acquired by Bank of America, reported a $5 billion loss during its third quarter this morning, while Citigroup reported a loss of $2.8 billion. Both firms have been battered by the credit crisis.

Merrill Lynch was basically flat, registering a 0.6 percent gain, and Citigroup was down 2 percent.

The financial crisis also continues to help drive down crude oil prices as the economic turmoil saps demand. The price of oil fell 6 percent, or $4.55, to $70 a barrel today. Before yesterday, oil had not traded below $75 a barrel in more than a year. But with demand dwindling, many analysts now expect prices to fall to as little as $50 a barrel.

The financial crisis also continues to churn overseas. Swiss authorities moved to stabilize financial giant UBS today, agreeing to move $60 billion in troubled assets from the company's books into a special government-backed fund.

Foreign markets were down. London's FTSE 100 and the CAC 40 in Paris were down more than 5 percent, and Germany's DAX fell 6.7 percent today. But the losses were larger in Asia as the Nikkei stock average in Japan closed down more than 11 percent.

AIG at Risk; $700 Billion In Shareholder Value Vanishes

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Wall Street in Chaos

As U.S. stocks plunged this morning, Lehman Brothers, the 158-year-old investment bank, filed for bankruptcy protection -- a move that signifies a major shakeup of the financial sector that has yet to recover from the mortgage crisis.

» LAUNCH PHOTO GALLERY

The Federal Reserve and Treasury Department struggled yesterday to contain the fallout from an upheaval among the country's largest investment banks as they moved on to their next challenge -- engineering a $75 billion private rescue of the nation's largest insurance company.

This Story

• Stocks Plunge as Crisis Intensifies
• Transcript: Pearlstein: Wall Street Turmoil
• LEHMAN BROTHERS: Massive Shifts on Wall St.
• BANK OF AMERICA: A Play for Wall Street
• SYSTEM IN CRISIS: A New Architecture For the Financial World
• The Effects at Home After Wall Street's Shake-Up
• LEHMAN BROTHERS: Massive Shifts on Wall St.
• MERRILL LYNCH: Weekend Merger Struck With Bank of America
• Special Report: Credit Crisis
• Lehman's Chapter 11 Bankruptcy Filing Documents (PDF)

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This Story

• BEHIND THE SCENES: No Bailout: Feds Made New Policy Clear in One Intense Weekend
• Stocks Plunge as Crisis Intensifies
• ANALYSIS: Economy Becomes New Proving Ground For McCain, Obama
• Crisis Prompts Calls for Federal Rescue Entity
• Fannie, Freddie's Former CEOs to Lose $12.6 Million in Severance Pay
• Wall Street in Chaos
• More News: Turmoil on Wall Street
• Special Report: Credit Crisis

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The insurer, American International Group, faces a cash crunch that grew more severe last night when the major credit-rating agencies warned investors that the company could have greater difficulty in meeting its obligations. It was unclear whether the downgrades by the agencies would force AIG to post additional collateral at a time when it is having difficulty raising money.

Investors sent the Dow Jones industrial average plunging more than 500 points, or 4.4 percent, for the biggest point loss since the Sept. 11 terrorist attacks seven years ago. About $700 billion in shareholder value disappeared in a single day of trading.

The wrenching reshaping of Wall Street -- which over the weekend included the demise of one big firm and the sale of another -- also pushed the value of the dollar lower. It sent the price of crude oil below $100 a barrel for the first time since Feb. 15 as traders bet a global downturn would reduce the demand for energy.

Wall Street's biggest shakeout since the Great Depression stems from a collapse in housing prices, which spread losses among firms that bet on securities linked to mortgages. Twice in the past year, regulators intervened to save financial firms and prevent further erosion in the housing markets. But over the weekend, officials drew the line at rescuing the storied investment bank Lehman Brothers, which yesterday filed for bankruptcy protection.

"We had a very, very tough day on the market," said Art Hogan, chief market analyst at Jefferies & Co. "Investors are anxious about the spillover effect of Lehman and what is the next shoe to drop."

As investors digested the news, some economists worried whether Wall Street's troubles were spilling over into other parts of the economy, renewing pressure on the Federal Reserve to cut interest rates when it meets today.

Fed leaders, however, believe it is too early to tell what the impact might be, and they are unlikely to cut rates for now.

In the meantime, Treasury Secretary Henry M. Paulson Jr. signaled yesterday that taxpayer funds could still be used broadly to "maintain the stability and orderliness of our financial system" but that he was pressing healthier Wall Street firms and commercial banks to join together to assist in rescuing individual firms -- much like the purchase of Merrill Lynch on Sunday by Bank of America.

Goldman Sachs, for instance, was asked by the Federal Reserve Bank of New York to help AIG, a $1 trillion-asset insurance company that serves 74 million consumers in 130 countries. AIG had been heavily involved in the business of issuing complex insurance contracts to investors in securities backed by mortgages, and the collapse of subprime and other home loans threatened to hobble the company and trigger a chain reaction in the financial system.

J.P. Morgan Chase, which is serving as AIG's financial adviser, was seeking support for a credit line of $70 billion to $75 billion that would involve multiple lenders, spreading the risk, according to two sources familiar with the discussions. They spoke on condition of anonymity because the talks were private.

New York's governor, meanwhile, said his state would allow AIG to use $20 billion from its own insurance subsidiaries to ease a financial crunch. By posting the assets as collateral, AIG can borrow money to run its day-to-day operations, Gov. David A. Paterson (D) said. The move required special dispensation from state insurance superintendent Eric R. Dinallo, who is responsible for protecting the stability of AIG insurance companies in New York and their policyholders