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Credit Worries Clobber Stocks

Robert Holmes

Stocks were slammed Thursday as news of a fund freeze in Europe renewed fears about the tightening liquidity markets and a spread of the subprime meltdown.

The Dow Jones Industrial Average plunged 387.18 points, or 2.83%, to 13,270.68, ending at session lows as a triple-digit slide steepened near the close. It was the biggest one-day point loss for the Dow since Feb. 27, when a selloff in China contributed to a 416-point decline.

The S&P 500 slid 44.40 points, or 2.96%, to 1453.09, and the Nasdaq Composite sank 56.49 points, or 2.16%, to 2556.49.

The steep declines came after French bank BNP Paribas said it has suspended three of its funds that have exposure to U.S. credit markets because of the inability to accurately value the mortgage-backed securities. The bank is just the latest financial firm to warn about exposure to liquidity problems in the U.S. credit market amid widespread defaults of subprime mortgage borrowers.

"With fresh evidence of the exposure of credit risk, the market can't get any traction and drops," said Art Hogan, chief market analyst with Jefferies. "The response may be overdone, but no one wants to get in the way when the ball starts rolling. This is consistent with what we've seen over the last couple weeks. This is the other shoe we've been waiting to drop."

Despite the slide, the major averages are still higher for the week. For the year, the Dow is still up 6.5%, the Nasdaq has gained 5.8%, and the S&P 500 has added 2.5%.

Trading curbs were put into effect on the New York Stock Exchange for the fourth time in 2007. A record 5.48 billion shares changed hands on the NYSE, as decliners toppled advancers by a 13-to-4 margin.

Volume on the Nasdaq reached 3.51 billion shares, with losers outpacing advancers 2 to 1.

The latest credit concerns hammered the battered financial sector even further. The NYSE Financial Sector Index lost 3.5%, and the Nasdaq Financial 100 Index fell 2.9%.

Among individual names, JPMorgan Chase (JPM Quote), Lehman Brothers (LEH Quote), Citigroup (C Quote) and Bear Stearns all slid by 5% or more.

BNP's action also punished European bourses. Paris' CAC 40 lost 2.2%, Germany's Xetra Dax was down 2%, and London's FTSE 100 fell 1.9%.

In an unprecedented move, the European Central Bank provided a loan overnight of 95 billion euros, or about $130 billion, to banks to help inject funds into the market. Back in the U.S., the Federal Reserve put $12 billion in reserves into the banking system.

Treasuries, viewed as a safe harbor in turbulent times, rallied, reversing the previous session's decline. The 10-year note rose 21/32 in price, yielding 4.78%, and the 30-year bond added 5/32, yielding 5.03%.

"This is more of the same continued uncertainty," said Robert Pavlik, chief investment officer with Oaktree Asset Management. "The extent of this credit issue and exposure for the rest of the market is unknown at this time, and the market hates that."

Adding to the concerns was news that Home Depot(HD Quote) is in talks with the private-equity buyers of its supply unit to amend the terms of the deal, including a potential price cut. The retailer also cut the price of its Dutch tender offer, citing the financial market conditions. The Dow component fell $2.01, or 5.3%, to close at $35.79.

Before the latest setback, fears of a credit crisis had cooled this week, allowing the Dow to rally nearly 500 points over the past three days.

Last time out, the Dow was higher most of the session, briefly turned negative, then rallied to close up 153.56 points, or 1.14%, to 13,657.86.

The Nasdaq was the big winner Wednesday, jumping 51.38 points, or 2.01%, to 2612.98 following Cisco's (CSCO Quote) earnings beat and strong outlook. The S&P 500 finished higher by 20.78 points, or 1.41%, at 1497.49.

Retail reports flooded in to start the new session. The world's biggest retailer, Wal-Mart (WMT Quote), surprised analysts after it said comparable-store sales climbed 1.9% in July. Analysts had expected a 1.5% rise. The company also said it expects same-store sales to climb 1% to 2% in August. Wal-Mart slid $1.97, or 4.1%, to end at $46.45.

Rival Target's (TGT Quote) same-store sales rose 6.1% last month, coming in just ahead of estimates. The retailer also said it expects August comp sales to be up 4% to 6%. Shares of Target shed $2.69, or 4.1%, to $62.52.

Among other retail winners, J.C. Penney (JCP Quote), Saks (SKS Quote) and Macy's (M Quote) all reported comp-store sales that beat estimates.

On the losing side were specialty apparel chains, with American Eagle Outfitters (AEO Quote), Limited (LTD Quote) and Gap (GPS Quote) all reporting weaker-than-expected July results.

Among earnings, Dow component AIG (AIG Quote) after the prior close posted a 34% jump in second-quarter profit, easily topping estimates. Still, AIG gave back $2.18, or 3.3%, to $64.30.

News Corp. (NWS Quote) also reported late Wednesday, matching the Thomson First Call average estimate, as strong cable network results outweighed weakness in the company's movie and television businesses. News Corp. lost 39 cents, or 1.7%, to $22.41.

Elsewhere, Urban Outfitters (URBN Quote) reported a second-quarter profit that was in line with expectations, and HealthSouth (HLS Quote) swung to a second-quarter profit and beat forecasts. Shares of Urban Outfitters were off 4.6% and closed at $23, while HealthSouth was higher by 5.9% at $17.52.

Away from stocks, oil prices continued their recent tailspin. The front-month September crude contract, which has fallen 4.4% so far this week, shed another 56 cents to $71.59 a barrel.

The Labor Department released the lone economic report for the day before the opening bell, which showed that initial jobless claims rose by 9,000 to 316,000. The data came in above expectations.