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Stocks Plunge With Dollar; Dow Down 360
11/07/07 19:06 EST
By TIM PARADIS

NEW YORK (AP) – Wall Street suffered its second big drop in a week Wednesday, with investors worried about spreading fallout from the credit crisis at banks and about a dollar that just keeps getting weaker. The Dow Jones industrial average fell more than 360 points – just about matching its pullback of last Thursday.

A passel of worries tormented investors, including comments by New York Attorney General Andrew Cuomo about conflicts of interest in the mortgage industry that exacerbated declines among bank stocks.

Meanwhile, the dollar swooned amid speculation that China will seek to diversify some of its foreign currency stockpiles beyond the greenback and General Motors Corp. further dampened sentiment by posting a record loss tied to an accounting adjustment.

Oil hit a record, rising above $98 per barrel before retreating, and gold pushed higher, moves exacerbated by an anemic dollar.

The fear with a huge drop like Wednesday’s is whether it is part not just of a correction, which is a 10 percent pullback in stock prices, but that it could be the beginning of a bear market. With the huge volatility that has swept Wall Street since the summer, and triple-digit moves in the Dow becoming commonplace, no one can be sure.

Still, the concern on the Street is that the extent of the fallout from the credit market crisis that has led to billions of dollars in losses for major banks and investment firms is not yet known. With Citigroup Inc. announcing Sunday it needed to take an additional $8 billion to $11 billion in writedowns, investors are very uneasy not just about stocks, but the economy as a whole.

“The financials are the bodyguards of the market and when the bodyguards are taking shots then the market can’t do well,” said David Darst, chief investment strategist for Morgan Stanley’s global wealth management group.

“A lot of the bad stuff is known; what the markets are worrying about is the unknown,” Darst said.

The Dow fell 360.92, or 2.64 percent, to 13,300.02. The Dow, which had gained 117 points on Tuesday, had fallen 362.14 last Thursday, reflecting the extreme fractiousness on Wall Street these days. It was the third time in a month the blue chip index has dropped by more than 350 points, and leaves the Dow up 6.71 percent for the year.

Broader stock indicators also pulled back Wednesday. The Standard & Poor’s 500 index fell 44.65, or 2.94 percent, to 1,475.62 – moving below the 1,500 benchmark. The Nasdaq composite index fell 76.42, or 2.70 percent, to 2,748.76. For the year, the S&P 500 is up 4.04 percent, while the Nasdaq is up 13.81 percent.

A drop in the NYSE composite index proved steep enough to trigger trading curbs, which puts restrictions on certain kinds of sell orders and are meant to help stabilize the market.

Government bonds jumped as investors transferred money from stocks to fixed-income investments. The yield on the 10-year Treasury note, which moves opposite its price, fell to 4.34 percent from 4.37 percent late Tuesday. It was down to 4.30 percent in after-hours trading.

The pullback among the financials made clear the urgency of some investors’ concerns about balance sheets.

Washington Mutual Inc. fell after Cuomo stepped up claims that the bank shares blame for inflated home prices nationwide. The bank, which also warned it expects loan defaults to continue in the first quarter at the same pace as in the present quarter, fell $4.19, or 17.3 percent, to $20.04.

Cuomo issued subpoenas to government-sponsored lenders Fannie Mae and Freddie Mac as part of his inquiry into what he regards as conflicts of interest in the mortgage industry. Fannie Mae fell $5.60, or 10.1 percent, to $49.79, while Freddie Mac fell $4.26, or 8.6 percent, to $45.13.

In addition, American International Group fell $4.15, or 6.7 percent, to $57.90 ahead of a quarterly financial report due after the closing bell.

Other financial names fell as well. American Express Co. fell $3.20, or 5.5 percent, to $55.37. Citigroup, which like AIG and American Express is among the 30 stocks that make up the Dow industrials, fell $1.67, or 4.8 percent, to $33.41. Morgan Stanley fell $3.32, or 6.1 percent, to $51.19.

Illustrating investors’ unease, the Chicago Board Options Exchange’s volatility index, known as the VIX, and often referred to as the “fear index,” spiked, jumping nearly 24 percent.

The 13-nation euro hit a fresh record against the dollar – rising to $1.4729 – before falling back. The dollar lost ground following word that a senior Chinese political figure said China should spread its $1.43 trillion foreign exchange reserves beyond the dollar into the euro and other strong currencies.

The euro’s rally put it well above the $1.4554 the currency bought late Tuesday in New York. The previous record high, also set Tuesday, was $1.4571.

The weak dollar helped keep pressure on the price of oil during much of the session. Light, sweet crude fell 33 cents to settle at $96.37 per barrel on the New York Mercantile Exchange after the goverment reported inventories fell less than expected last week while refinery utilization remained flat.

December gold rose but also came off its highs, adding $10.10 to settle at $833.50 an ounce on the Nymex.

Comments from Federal Reserve officials didn’t give investors much reason to reconsider their bets. St. Louis Fed President William Poole said recent weeks have seen the credit markets make clear progress in returning to normal but said the Fed might have to make other rate cuts. Such a move would likely hasten the dollar’s fall as investors would seek better interest rates elsewhere. The central bank reduced the federal funds rate in September and again last month.

Corporate news likewise was depressing. GM reported a $39 billion loss for the third quarter due to an accounting shift. The company booked a $38.6 billion noncash charge largely related to establishing a valuation allowance, which is taken when the future benefit of deferred tax assets is less likely to be realized.

GM’s loss came to $68.85 per share, compared with a loss of $147 million, or 26 cents per share, in the third quarter last year. The stock fell $2.21, or 6.1 percent, to $33.95.

Overseas, Japan’s Nikkei stock average closed down 0.94 percent. Britain’s FTSE 100 fell 0.85 percent, Germany’s DAX index fell 0.35 percent, and France’s CAC-40 fell 0.46 percent.