Stocks Plummet on Credit Worries

The Wall Street Journal Online

It's like Johnny Cash's "Ring of Fire" – stocks just keep going "down, down, down."

Widening credit-market worries and surging oil prices forced the major indexes down more than 2% each on Thursday, as strong earnings from Apple and Ford Motor weren't enough to overcome a palpable sense of unease among investors.

The Dow Jones Industrial Average fell 296.86 points to 13488.21. The S&P 500 declined 37.25 to 1480.84, and the Nasdaq Composite Index was off 63.98 to 2584.19.

Trading curbs, which are meant to reduce volatility, were put into effect on the NYSE by midmorning. Volatility was high, with the VIX index over 20, continuing a trend that has gone on for over a week. And breadth was poor, with decliners outnumbering advancers on the NYSE by more than twelve to one.

"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."

"The major, major thing 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, the Commerce Department said. Inventories stayed about even, and the median price of a new home fell 2.2% to $237,900. The data were worse than expected, failing 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 11% after it swung to a loss of $123 million, or $3.20 a share, compared with earnings of $102.6 million, or $2.37 a share, a year earlier. D.R. Horton fell 4.1% after the company said it swung to a net loss for the period as it took land-related writedowns amid the continuing downturn in the housing market. Pulte Homes shares fell 4.9% after the company said it too swung to a net loss in the second quarter and that its revenue fell 40% to $2.02 billion. Also, WCI Communities tumbled 21% after it said there are no definitive proposals to buy it.

Oil prices rose 56 cents to $76.44 a barrel, near Nymex crude's record closing high last July of $77.03, continuing an upward trend that gained momentum Wednesday after weekly government inventory data showed a drawdown in oil stocks.
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Apple shares rose 6.9% after the company reported a 73% profit rise on sales of Macintosh computers. The computer maker forecast that it will have sold one million iPhones by the end of its fiscal fourth quarter.

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 acquisitions from private-equity firms. 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 and the home-builders reinforcing the market's problems.

Shares of Exxon Mobil fell 4.7% after the world's biggest publicly traded oil company posted a 1% drop in second-quarter net income as lower natural-gas volume was offset by higher refining, marketing and chemical margins. This was particularly puzzling for investors, because usually high oil prices are a boon for oil titans like Exxon Mobil.

Other Dow-component decliners reflected woes in their sectors. Alcoa, which is still coming off a buyout-fueled rise, suffered a 7.3% decline, as the aluminum and airline sectors faltered amid higher oil prices. Other heavy industrials such as Boeing, Dupont and General Motors were off, too. Financials Citigroup and J.P. Morgan Chase lost 4.5% and 3.4% respectively as that whole sector weakened on the subprime and 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 2.4%.

There were isolated bright spots. Ford Motor reported its first profit in two years as North American losses substantially narrowed amid its ongoing 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 2.9%. And the Chinese Web search company Baidu.com reported that its profit doubled, sending its shares up 15%.

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. After all, it wasn't long ago that the Dow breached 13000 for the first time.

Shares of Kraft Foods fell 4.1% after news that Berkshire Hathaway, run by billionaire Warren Buffett, has acquired a small stake in the company, joining veteran Wall Street raiders Carl Icahn and Nelson Peltz.

In other economic news, the Commerce Department said durable-goods orders increased in June by 1.4% to a seasonally adjusted $217.07 billion. Wall Street expected a 1.6% gain in durable-goods orders last month. And initial jobless claims fell 2,000 to 301,000 on a seasonally adjusted basis in the week ended July 21, the Labor Department said. Economists, on average, had expected claims would increase by 9,000.

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. Yields on Treasury bonds fell, a sign of further safe-haven buying.

At a business-taxation and global competitiveness conference sponsored by the Bush administration, 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 end of the year to 76%.

In major market action:

Stocks retreated. On the New York Stock Exchange Thursday, 256 stocks gained and 3,083 declined, on volume of 1.26 billion shares traded on the exchange.

Bonds rose. The 10-year note rose 29/32, or $9.0625 for every $1,000 invested, yielding 4.785% Thursday. The 30-year bond gained 1-11/32, yielding 4.939%.

The dollar weakened. The euro was trading at $1.3764 from $1.3716 late Wednesday, while the dollar was at 118.88 yen from 120.51 yen.