The Wall Street Journal-20080116-World Rides to Wall Street-s Rescue- Broad Market Still Worried- Dow Falls 2-
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World Rides to Wall Street's Rescue; Broad Market Still Worried; Dow Falls 2%
The market's message: The worst isn't over.
Fears about the resilience of U.S. consumers and worries about Citigroup Inc.'s mounting losses sent stocks sharply lower yesterday. The Dow Jones Industrial Average sank 277.04, or 2.17%, to 12501.11. It's now down 5.8% this year. All 30 of its component stocks were down yesterday, led by Citigroup, which tumbled 7.3%. Chip maker Intel Corp., which reported disappointing results after the close, seems likely to open sharply lower today.
Investors overall were flocking to safe havens as a new wave of risk-aversion swept through the market. U.S. Treasury securities and the Japanese yen -- both barometers of risk-taking sentiment -- rose sharply. In late New York trading, the dollar was changing hands at 106.83 yen, down 1.3% from the day before and around its lowest level against the yen since June 2005. The yield on 10-year Treasury notes dropped to 3.701%, the lowest level in nearly four years.
Tuesday's selloff demonstrates that the housing turmoil and credit woes have morphed into a threat to the broader economy. Banks such as Citigroup have absorbed many of the losses previously lurking off their balance sheets and shown that they can attract billions of dollars in fresh investment from Asia and the Middle East, but that isn't enough to reassure markets.
Disappointing data on unemployment and manufacturing point to increasing odds of a U.S. recession. Yesterday, retail-sales data added to the gloom, with December sales falling 0.4% over the previous month, worse than economists expected. For all of 2007, retail sales rose 4.2%, the softest annual gain in five years.
When credit markets first shuddered last summer, many investors saw the problem as one mainly affecting the liquidity of financial institutions. The Dow even set a record high in early October, and banks tried to put their troubles behind them by recording big write- downs in the third quarter of 2007. But the third-quarter problem soon extended to the fourth quarter, and it now appears likely to last well into this year.
Many parts of the economy -- including retailers and tech companies -- are feeling the pain. Electronics retailer Best Buy Co. said last week that its U.S. same-store sales rose just 0.3% in the five weeks ending Jan. 5., while rival Circuit City Stores Inc. saw same-store sales fall 11% in December.
"The real economy will ultimately tell the story," said Alan Ruskin, chief international strategist at RBS Greenwich Capital. "The U.S. consumer has been a bulwark against riskier times, and if the consumer is turning over, that has massive repercussions."
The economy has proved surprisingly resilient in recent years to shocks including 9/11, and it might still muddle through with slower growth rather than tipping into recession. That would be good news for stocks. Even amid investors' disappointment yesterday about Intel, which reported strong earnings but not enough to meet expectations, Stacy Smith, the company's chief financial officer, said it hasn't experienced any significant weakening of its business.
Still, worries about a possible U.S. recession rippled across the globe. Markets in Japan, Hong Kong, China, India, and Korea all fell Tuesday. In Europe, the FTSE 100 tumbled 3.1%, its largest percentage decline since last August.
In another sign that investors are concerned about repercussions of slower U.S. growth, crude oil futures on the New York Mercantile Exchange fell $2.30 to $91.90 a barrel. A recession could mean reduced demand for energy.
Doug Cliggott, chief investment officer at Dover Management, a Connecticut investment firm, said the government-linked investors pouring money into U.S. financial institutions have to put their big dollar holdings to work someplace. These white-knight investments are one way to do that, but not necessarily a sign that markets are hitting bottom, he said.
"I'd be paying a lot more attention if it was Warren Buffett pouring all of his money into these firms," he said.
Yesterday's selloff, which erased all of the gains from a rally Monday, extended the stock market's dismal run recently. The S&P 500 index is now down 6% this year. The tech-heavy Nasdaq is down 8.8%. And the Russell 2000, which tracks small stocks, is down 18.5% from its July peak -- close to the 20% fall that marks the traditional definition of a bear market.
"You do see some good values out there in the market," said Kim Caughey, senior investment analyst at Fort Pitt Capital Group, a Pittsburgh portfolio-management firm. "But then you think, ugh, I don't know what's going to happen to the economy."
Other markets signaled that investors' appetite for risk is flagging. The yen has become a proxy for investors' willingness to take chances with their money. If investors get worried, the yen often strengthens.
The yen's unique role is tied to Japan's remarkably low interest rates. In a maneuver known as a "carry trade," risk-taking investors are enticed to borrow cheaply in yen, then invest the borrowed money in other countries where returns can be higher. When investors get risk-averse, they tend to undo these bets and pay back their yen borrowing, making it stronger.
The yen "now is totally being driven by notions of risk aversion," said Jerome Abernathy, chief investment officer of Stonebrook Capital Management, a New York currency manager. He says he doesn't expect to re-enter carry trades until stock markets stabilize somewhat.
That could happen if the Federal Reserve delivers a much-anticipated interest-rate cut of a half percentage point or even three-quarters of a percentage point when its policy-making committee meets at the end of this month. Such a move "is like using a defibrillator on the market," said Mr. Abernathy. "You'll get a pulse back for a while."
Fed Chairman Ben Bernanke indicated last week that he had the defibrillator ready when he said the Fed could take "substantive" new actions to provide insurance against a recession.
Gold prices slipped yesterday, but remained around $900 an ounce, a sign of investors' desire for alternative assets that are seen as stable.
The Chicago Board Options Exchange's Volatility Index -- the market's so-called "fear" gauge -- jumped 2% to a reading of 23.34. The index uses listed derivatives prices to gauge investors' expectations of big stock-market swings.
Despite today's jump, the index remains well below the levels the index hit in mid-August, when fears about subprime mortgages led to a meltdown of some credit markets.
"It's clear to me that this market is still in a downtrend," said Steve Wolf, managing director at asset-management firm Source Capital Group in Westport, Conn. "Things are bad today, but you would expect to see more gripping fear," if the selling were about to run its course, he said.
(See related article: "Citigroup, Merrill Tap Foreign-Aid Lifelines; Damage Tops $90 Billion" -- WSJ Jan. 16, 2008)
