Stocks Steepen Their Declines - TheStreet

Stocks Steepen Their Declines

All three major indices drop off sharply in late afternoon trading as traders deal with negative corporate news and revised Fed predictions.
Author:
Publish date:

Updated from 2:02 p.m. EDT

Stocks in the U.S. dug deeper into the red Wednesday after the

Federal Reserve

made somber predictions on inflation, unemployment and U.S. economic growth in the minutes from its latest gathering.

The

Dow Jones Industrial Average

was plunging 200 points, or 1.6%, to 12,629. The

S&P 500

was down 18 points, or 1.3%, at 1396, and the

Nasdaq Composite

was off 35 points, or 1.4%, to 2457.

Soaring oil and disappointing corporate news already had been weighing on equity measurers, but the declines steepened after the Fed revealed it had negatively revised a number of its 2008 forecasts in the minutes from its April 30 meeting, when the benchmark lending rate was cut by another quarter-point.

"There's been a fair amount of good news lately, and the Fed is kind of acting as a wet noodle," said Doug Roberts, chief investment strategist with ChannelCapitalResearch.com. "They're indicating that, both on the inflation front and on the economic front, it's going to be a prolonged malaise. It's one thing if you have a bad storm and then it clears up, but you're told it's going to rain for 40 days and 40 nights in the summer, you're going to get depressed."

Among the revisions, the Fed bumped up its fourth-quarter unemployment-rate forecast to between 5.5% and 5.7%, compared with the prior 5.2% to 5.3%. The central bank also raised its core inflation forecast to between 2.2% and 2.4% while slashing its 2008 prediction for real gross domestic product growth to between 0.3% to 1.2% -- down sharply from 1.3% to 2% previously.

Marc Chandler, chief foreign exchange strategist at Brown Brothers Harriman and contributor to

RealMoney.com

, a sister site to

TheStreet.com

, wrote that the revision of GDP expecations "seems exceptionally pessimistic and perhaps an over-correction. Their negativity seems to be based on view of more and marked deterioration in the labor market which will restrain spending."

The minutes also said most members of the Federal Open Markets Committee, the policymaking arm of the Fed, viewed the decision to cut the fed funds target rate even by 25 basis points as a "close call." Furthermore, most "agreed that a further, modest easing in the stance of policy was appropriate to balance better the risks to achieving the Committee's dual objectives of maximum employment and price stability over the medium run."

Still, said Roberts, "They're not making it explicit that they won't cut rates at all. The worst that can happen is that they'll adopt a hawkish a policy, and all of a sudden the market takes a downturn, the labor situation gets worse, and they look like they're behind the curve."

"They're saying that they'd like to cut rates if necessary, but not to expect it any time soon," he added.

The minutes also said most members of the Federal Open Markets Committee, the policymaking arm of the Fed, viewed the decision to cut the fed funds target rate even by 25 basis points as a "close call." Furthermore, most "agreed that a further, modest easing in the stance of policy was appropriate to balance better the risks to achieving the Committee's dual objectives of maximum employment and price stability over the medium run."

Still, said Roberts, "They're not making it explicit that they won't cut rates at all. The worst that can happen is that they'll adopt a hawkish a policy, and all of a sudden the market takes a downturn, the labor situation gets worse, and they look like they're behind the curve."

Roberts said that, had they made it explicit that the easing campaign is at an end, that would have had an even more detrimental impact on stocks, since this would have entirely removed that safety net. "They're saying that they'd like to cut rates if possible, but not to expect it any time soon," he said.

Keeping pressure on stocks earlier was oil's continued rampage into uncharged territory. The newly benchmarked July crude contract rocketed to a new all-time high of $133.14 a barrel on word stockpiles declined 5.4 million barrels last week, according to the Energy Information Administration. Recently, futures eased to a $4.16 gain at $133.14.

Gold futures were tacking on $6.80 to $927 an once. The U.S. dollar had another weak day, losing ground against both the euro and the yen. The dollar index, which measures the greenback against a basket of its major competitors, sank 0.6%.

Helping to drag down equity measures, meanwhile, was the financial sector, as the

NYSE

Financial Sector Index and the KBW Bank Index plummeted 2% and 2.5%, respectively.

The Wall Street Journal

reported that some big banks, having bet against indexes that track real estate securities and leveraged loans, may have seen their hedging strategies backfire amid the market's rebound over the past few months.

The paper named

Lehman Brothers

(LEH)

as possibly the worst hit here, and said it's likely that

Morgan Stanley

(MS) - Get Report

has also been hurt. Shares slid 4.4% and 4.1%, respectively, as fellow brokerages

Goldman Sachs

(GS) - Get Report

and

Merrill Lynch

(MER)

gave up 1.6% and 2.2%.

Elsewhere in the financial space, Dow components

Citigroup

(C) - Get Report

,

Bank of America

(BAC) - Get Report

, and

JPMorgan Chase

(JPM) - Get Report

sank 1.9% or more.

Investors also appeared jarred by a

Financial Times

report saying that

Moody's

(MCO) - Get Report

mistakenly gave triple-A ratings to billions of dollars in debt before fixing the error in early 2007. Moody's itself was sliding 15%.

At the same time, American Airlines parent

AMR Corp.

(AMR)

tumbled 23.8% after saying it will

reduce domestic flights and staff capacity

by 11% to 12% in the fourth quarter, citing agonizing fuel costs and a tough macro environment overall.

That seemed to weigh on aircraft maker

Boeing

(BA) - Get Report

, which lost 4.5% to become one of the day's worst-performing Dow components.

Soleil downgraded AMR and United operator

UAL Corp.

(UAL) - Get Report

to sell while cutting

Continental

(CAL) - Get Report

to hold from buy, and Lehman Brothers sliced its price targets on all three. UAL shares fell 25%, and Continental lost 13.2%.

Lehman Brothers eased its price targets on several other airline stocks, as well, including

U.S. Airways

(LCC)

,

Northwest

(NWA)

,

Jetblue

(JBLU) - Get Report

, and

Delta

(DAL) - Get Report

. Shares of the companies shed between 6.4% and 18%.

Meanwhile, Dow component

Hewlett-Packard

(HPQ) - Get Report

confirmed that fiscal second-quarter earnings

climbed 16%

to $2.1 billion on rising revenue of $28.3 billion. The results were in line with what the computer maker announced last week, when the company simultaneously said it had

agreed to buy

EDS

(EDS)

for $13.9 billion.

H-P shares were down 3.9%.

At the same time,

Time Warner

(TWX)

said it will

spin off

its

Time Warner Cable

(TWC)

business. Shares rose 0.5% and 2.9%, respectively.

Back in earnings, TurboTax software maker

Intuit

(INTU) - Get Report

topped Wall Street estimates

with adjusted earnings of $1.39 a share. Revenue jumped 15%, and the company issued in-line guidance for the current quarter. Shares tracked 3.2% higher.

Analog Devices

(ADI) - Get Report

, booked a climbing profit for last quarter and set out bullish guidance for the next, but the chipmaker's gross margin was also down slightly from the prior quarter. The stock gave up 3.5%.

Treasury prices were slipping. The 10-year note was off 7/32 in price to yield 3.80% and the 30-year bond lost 6/32 in price, yielding 4.54%.

The major overseas markets were mostly falling. In Asia, Tokyo's Nikkei 225 dropped 1.7% overnight, but the Hang Seng Index in Hong Kong added 1.2%. Among European bourses, London's FTSE 100 was ticking up 0.1%, and Germany's Xetra Dax surrendered 1.1%. The Paris Cac moved down 0.5%.