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Stocks Take Another Drubbing

Robert Holmes

Stocks in the U.S. slid Tuesday, closing near their worst levels of the session, as disappointing comments from two retail giants and ominous news from a Midwestern fund manager put investors back on edge.

The Dow Jones Industrial Average tumbled 207.61 points, or 1.57%, to 13,028.92. The index was pulled down by a 5.1% decline in Wal-Mart(WMT Quote), which cut its outlook for the full year amid soft consumer spending, and a 4.9% loss in Home Depot(HD Quote).

Wal-Mart said that excluding items, it had second-quarter earnings of 76 cents a share, matching the Thomson First Call estimate, but the world's biggest retailer guided lower for the third quarter and full year.

Consumers, it said, have been hurt by "economic pressure," raising concerns that the housing market and credit strife are being felt by shoppers. Wal-Mart fell $2.35 to $43.82.

Meanwhile, Home Depot also warned of ongoing troubles in the housing market, though it backed its full-year outlook. For the second quarter, Home Depot had a profit of $1.59 billion, or 81 cents a share, down 15% from a year ago. On an adjusted basis, the home improvement retailer beat estimates by a nickel.

The stock dropped $1.72 to $33.52.

As for the other major averages, the S&P 500 fell 26.38 points, or 1.82%, to 1426.54. The Nasdaq Composite shed 43.12 points, or 1.7%, to 2499.12.

Wal-Mart and Home Depot reported on the same day that investors were treated to mixed inflation data. The Labor Department's producer price index for July rose 0.6% last month, doubling expectations. However, the so-called core number, which excludes food and energy, rose 0.1%, and was half of what was anticipated.

Still, the core PPI has now risen 2.3% over the last 12 months, the biggest gain in two years, something the Federal Reserve will have to keep a close eye on.

"The headline and the year-over-year core numbers was hotter than expected, and that indicates the Fed still has a lot to do on the inflation side," said Paul Mendelsohn, chief investment strategist with Windham Financial.

"The core reading was good, but this doesn't solve the problem for the Fed," he continued. "It still makes it tough for the Fed to ease."

On Wednesday, the consumer price index, which is arguably the more important of the two, is due.

"Without a redirection of focus back to fundamentals, the selling will continue and we may drop below the 13,000 level on the Dow," said Robert Pavlik, chief investment officer with Oaktree Asset Management. "With the stabilization in the credit market yesterday the Fed thought their work was done, but it seems the market needs some additional hand-holding. They should've kept up the additional liquidity in the market."

Stocks took a further hit after Illinois-based Sentinel Management Group asked regulators for permission to stop redemptions to money-market fund investors. The Commodity Futures Trading Commission said it was aware of the situation and would continue to monitor it.

Elsewhere in the financial space, Thornburg Mortgage (TMA Quote), which saw shares plunge 46% after it said it won't accept new rate lock requests for four days. Earlier, five brokerage firms downgraded the stock, saying the company may be forced to sell assets to meet margin calls.

Banks and other lenders continued to suffer as worries over the recent credit crisis failed to abate. The NYSE Financial Sector Index finished down 2.4%, the Nasdaq Financial 100 Index was off 2.1%, and the KBW Bank Index lost 2.1%.

On the New York Stock Exchange 4.58 billion shares changed hands, as decliners topping advancers by a 5-to-1 margin. Volume on the Nasdaq reached 2.70 billion shares, with losers outpacing winners nearly 3 to 1.

Treasuries turned higher, lowering yields. The 10-year note climbed 7/32 in price, yielding 4.73%, and the 30-year bond was up 5/32 to yield 4.99%. The dollar was holding steady against the world's major currencies.

Also on the economic front, the Commerce Department said that the U.S. trade deficit narrowed to $58.1 billion in June from a revised $59.2 billion the previous month.

Overseas, European bourses declined in the wake of cautious remarks by UBS (UBS Quote). London's FTSE lost 1.2%, and Frankfurt's DAX was down 0.7%. Overnight in Asia, Tokyo's Nikkei gained 0.3%, and Hong Kong's Hang Seng added 0.5%.

Switzerland's UBS dropped 4.8% after warning that earnings for the second half of 2007 would fall from year-ago levels because of the recent market conditions. The bank, however, did post a 79% jump in second-quarter earnings, topping estimates. UBS shed $2.60 to $51.49.

Another loser was Mattel (MAT Quote), whose stock lost 2.4% following an announcement that it would recall millions of toys that were made in China, marking its second product recall in recent weeks. Mattel gave back 57 cents to $23.

One of the best performers was VMware (VMW Quote), an EMC (EMC Quote)-owned software company that jumped more than 70% in its market debut.

Away from equities, the September front-month oil contract was 76 cents higher to finish at $72.38 a barrel. Gasoline tacked on 3.5 cents at $1.97 a gallon.