July 26, 2007 3:34 p.m.
It's like Johnny Cash's "Ring of Fire" -- stocks just keep going "down, down, down."
Widening credit-market worries forced the major indexes down about 2.5% each on Thursday, with the losses getting steadily bigger until near the end of trading, when selling pressure cooled a bit.
The Dow Jones Industrial Average fell 348.97 points to 13436.10, at one point exceeding its biggest one-session point loss so far in the year, the 416-point meltdown on Feb. 27. The S&P 500 declined 40.78 to 1477.31, and the Nasdaq Composite Index was off 66.51 to 2581.66.
Trading curbs, meant to reduce volatility, were put into effect on the NYSE by midmorning. Volatility was high, with the VIX index at 23.27, continuing a trend that has gone on for more than a week. And breadth was poor, with decliners outnumbering advancers on the NYSE by more than 13 to one.
"For highly leveraged players there is suddenly not enough liquidity to go around, and positions are being forcibly liquidated in this maelstrom," wrote Brian Barish, president of Cambiar Investors, in an email. Also "the 'private-equity put' that has been underpinning a lot of stocks may be disappearing," he said, referring to some stocks for which prices may have been pumped up in recent months on speculation about possible buyouts.
"Everybody's so nervous," said Anthony Conroy, head trader at BNY Brokerage. "You have high energy prices, you have problems with mortgage financing.… The dollar/yen broke 120, hurting the carry trade, and there are worries about the takeover game coming to an end."
Credit-market woes have filtered into the stock market, as banks have been hurt by having to take loans onto their balance sheets instead of passing them on to outside investors. Wall Street is also concerned that a lack of funding will slow the wave of private-equity buyouts. These concerns have been around for months, but signs of real problems have been accelerating in recent weeks, with major acquisitions unable to find financing.
"People are assessing their own risk and deciding there may be too much negative talk to take a chance on losing profits made so far this year," said Doreen Mogavero, president and CEO at Mogavero, Lee. "They are taking some money off the table, then taking another look."
The subprime-mortgage sector has been another source of worry for months, but recently it has become more acute, as hedge funds invested in mortgage-backed securities have struggled – with some even melting down – and as default rates have risen, even among prime borrowers. It has been difficult to measure the extent of the problem, though, because of relatively opaque investment arrangements, as well as the illiquidity of some of the investments.
It "all goes back to weakness in the mortgages," said Larry Peruzzi, equity trader at Boston Company Asset Management.
More poor housing data only underlined the mortgage worry. Sales of single-family homes dropped 6.6% to a seasonally adjusted annual rate of 834,000 units, the Commerce Department said. Inventories stayed about even, and the median price of a new home fell 2.2% to $237,900. The data failed to meet even low expectations.
Adding to the misery, builders got hammered as three major players fell into the red in the recent quarter after posting year-ago profits. Beazer Homes USA fell 12% after it swung to a loss of $123 million. D.R. Horton fell 3% after the company said it swung to a net loss for the period as it took land-related writedowns. Pulte Homes shares fell 4.3% after the company said it too swung to a net loss in the second quarter and that its revenue fell 40%. Also, WCI Communities tumbled 20% after it said there are no definitive proposals to buy it.
Oil prices fell $1.08 to $74.80 a barrel, well off the session's highs near $77, as the stock market's declines indicated that oil demand might weaken. On Wednesday, weekly government inventory data showed a drawdown in oil stocks, which had sent prices higher.
Shares of Exxon Mobil fell 5.6% after the world's biggest publicly traded oil company posted a 1% drop in second-quarter net income despite rising oil prices.
Dow-component decliners reflected woes in their sectors. Alcoa, which is still coming off a rise fueled by buyout speculation, suffered a 7.7% decline, as the aluminum and airline sectors faltered amid higher oil prices. General Motors fell 5.3%. Financials Citigroup and J.P. Morgan Chase lost 4.5% and 2.9% respectively as that whole sector weakened on credit worries.
In other news for the financial sector, Wells Fargo said it will close its nonprime wholesale lending business, which processes and funds subprime loans for third-party mortgage brokers. Shares were down 2.8%.
There were isolated bright spots. Apple shares rose 5.5% after the company reported a 73% profit rise on sales of Macintosh computers, and the computer maker forecast it will have sold one million iPhones by the end of its fiscal fourth quarter. Ford Motor reported its first profit in two years as North American losses substantially narrowed amid its restructuring. The No. 2 auto maker in the U.S. also said it is exploring the potential sale of Jaguar and Land Rover. Ford shares rose 1.6%. And the Chinese Web search company Baidu.com reported that its profit doubled, sending its shares up 14%.
Mr. Conroy said "earnings are a strong catalyst for the future" because they have been coming in better than expected. "It's probably a good buying opportunity in the long term."
Indeed, many investors are still bullish, citing price-to-earnings ratios that are reasonable by historic standards, as well as the remarkable bull run stocks have enjoyed in recent months. In addition, the global economy still appears to be strong, which could help particularly for multinational companies.
The dollar dropped sharply against the yen. Yen strength can be an indicator of diminished risk appetite, as some investors borrow in the Japanese currency to invest elsewhere. Its weakness indicates some unwinding of the carry trade, in which investors borrow money in low-yielding currencies to invest in countries with higher-yielding currencies. The unwinding "could be the subprime-mortgage issue," said Patrick Fearon, currency analyst at A.G. Edwards & Sons. "The thinking is that it's going to lead to wider problems in the U.S. economy."
Mr. Fearon said that the currency action could be affecting gold, too, which was down 1.8% to $661.70. "Maybe what this is saying is that the carry trades have been financing positions in the precious metals," he said.
Yields on Treasury bonds fell, a sign of further safe-haven buying. The Treasury market "is trying to resist a further move down" in yields, said George Goncalves, Treasurys and agency strategist at Morgan Stanley, "but it's hard to get in the way."
At a business-taxation and global competitiveness conference sponsored by the Bush administration, former Federal Reserve Chairman Alan Greenspan said he expects global interest rates will rise. "The cost of capital is not going to stay down at this level," he said. However, in the U.S. fed-funds futures market, investors raised the odds of a quarter-percentage-point cut by the Oct. 30-31 policy meeting to 52%.
In major market action:
Stocks retreated. On the New York Stock Exchange Thursday, 236 stocks gained and 3,159 declined, on volume of 2.15 billion shares traded on the exchange.
Bonds rose. The 10-year note rose 30/32, or $9.375 for every $1,000 invested, yielding 4.781% Thursday. The 30-year bond gained 1-3/32, yielding 4.953%.
The dollar weakened. The euro was trading at $1.3740 from $1.3716 late Wednesday, while the dollar was at 118.67 yen from 120.51 yen.
Write to Joanna L. Ossinger at Joanna.Ossinger@wsj.com
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