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Wall Street Tumbles Into Earnings Season

Elizabeth Trotta

Wall Street faltered Monday as investors prepared to take in the first key report of the fourth-quarter earnings season.

Led by declines in Citigroup (C Quote) and Bank of America (BAC Quote), the Dow Jones Industrial Average lost 125.45 points, or 1.5%, to 8473.73, and the S&P 500 gave up 20.09 points, or 2.3%, at 870.26. The Nasdaq shed 32.80 points, or 2.1%, to 1538.79.

President-elect Obama called Monday for lawmakers to release the second half of the Troubled Asset Relief Fund (TARP), hoping to change the practices of the program which has funneled bailout money into ailing banks.

Investors, meanwhile, held focus on earnings, anticipating steep declines in fourth-quarter reports, which would be led off by Alcoa's (AA Quote) report after the market close.

Analysts, on average, were expecting Alcoa, which traded down 6.9% to $10.06 Monday, to report a loss of 10 cents a share for the quarter, according to Thomson Reuters. Deutsche Bank downgraded the aluminum producer stock to sell from hold and reined in its price target by $2 based on revised commodity estimates and Alcoa's recently announced production cuts.

"We believe these factors will likely lead to significant net losses for Alcoa in the short term and note the downside from current prices, near-term negative free cash flow and large net debt position in our sell rating," wrote DB analysts.

Companies with large debt positions are going to be in trouble in a deflationary environment, notes Matt Smith, chief investment officer of Smith Affiliated Capital. You have to add debt interest back into operating earnings -- and keep in mind that the interest expense is going to increase for any debt that's coming due in the next two years, he says. "So what you'll have is a crumbling of balance sheets."

Chevron (CVX Quote), Wal-Mart (WMT Quote) and Intel (INTC Quote) tempered expectations last week, shaking investor confidence. And Alcoa and Boeing (BA Quote) announced they would cut thousands of workers in an effort to better handle the economic downturn.

Shares of Harley Davidson (HOG Quote) tumbled 11.7% to $14.13 Monday after Goldman Sachs downgraded the stock to sell, noting that unprecedented headwinds in global luxury motorcycle demand and credit have yet to be fully realized in the shares.

UBS (UBS Quote) was also in retreat, shedding 3.3% to $14.43 on reports that the bank will announce record full-year losses next month.

Financials led the decliners on the Dow, with Bank of America losing 12% to $11.43 and Citigroup falling 17% to $5.60.

Reports emerged late Friday that Citi was discussing a sale of Smith Barney, its 11,000-adviser financial brokerage, to Morgan Stanley (MS Quote).

Earlier, the bank announced Robert Rubin, senior counsel and a director at the bank, was resigning. The former Treasury Secretary has come under fire over the past two months for his role in encouraging the New York bank's foray into toxic debt.

President-elect Barack Obama last week pledged accountability and transparency in a pitch for his administration's $800 billion economic stimulus plan, dubbed the American Recovery and Reinvestment Plan. Obama said late Monday that he is also moving forward with efforts to gain approval to allocate the second half of the TARP and has contacted the leadership in the Senate and the House.

The president elect has promised to better monitor the second $350 billion, and said he aims to change some of the practices in the next phase of the program. It will focus specifically on housing, foreclosures and small businesses, making sure that credit is flowing to consumers, he said.

"This is one more aspect to a broader approach to reinvigorating our economy and we're absolutely going to get it done," said Obama.

Last week, Harvard Law School Professor Elizabeth Warren, who chairs a panel charged with overseeing the TARP money, urged Congress to consider whether prospective beneficiaries will be accountable and transparent in their use of the money and whether it will be used for the purpose for which it was intended.

Meanwhile, Mideast tensions, signs that OPEC supply restrictions are being implemented and the Gazprom-Ukraine gas dispute were outweighed by concerns that the economic downturn would continue to weigh on demand. Oil fell 17% last week, and started the new week on a downward course, declining $3.24 to close at $37.59 a barrel Monday.

Gold fell $34 to settle at $821 an ounce. Longer-dated Treasuries reversed; the 10-year note was adding 24/32 to yield 2.3%, and the 30-year was up 1 16/32, yielding 3%.

The dollar was stronger against the euro, pound and yen.

Overseas, the FTSE in London and the DAX in Frankfurt lost ground Monday, while Japan's Nikkei Hong Kong's Hang Seng ended with losses as well.