Terrible Tuesday - TheStreet

Terrible Tuesday

Disappointed by a hotter-than-expected PPI report and digesting retail earnings, investors start the session selling and stay that way. Frank Curzio (above) examines the day's action in The Real Story.
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Updated from 3:37 p.m. EDTStocks in New York spent the entire session in negative territory Tuesday and closed lower as investors, still fretting about the turmoil in the financial sector, received another blow from a steeper-than-expected increase in wholesale-level inflation.

The

Dow Jones Industrial Average

lost 130.84 points, or 1.1%, at 11,348.55, and the

S&P 500

slipped 11.92 points, or 0.9%, to 1266.68. The

Nasdaq

dropped 32.62 points, or 1.4%, to 2384.36.

Providing pressure to the major indices, the Bureau of Labor Statistics' producer price index showed a 1.2% increase for July, much more than the 0.6% expected by economists. The core rate jumped 0.7% for the month, also exceeding expectations of a 0.2% increase. Year over year, the core PPI increased 3.5%.

Doug Roberts, chief investment strategist for ChannelCapitalResearch.com, said that if inflation were a true concern for the market, Treasury yields would be higher. He said the major concern is that the credit markets have a long way to go before resolving their problems.

"We're scraping along the bottom, but the interesting thing about this bottom is that it's going to be volatile," he said. "Every time you think the patient's stabilized, there's another organ failure."

In a separate report, the Census Bureau revealed that housing starts decreased 11% to an annual rate of 965,000 in July, a result that was slightly ahead of analyst forecasts. Building permits declined 17.7% to an annualized rate of 937,000.

"Every report is always how far they're off from a year ago. That doesn't tell you anything about whether they're getting better or worse," said Jim Paulsen, chief investment strategist for Wells Capital Management. "I think both are showing some bottoming patterns after full-fledged collapse during the last half of last year."

He pointed out that in the previous month housing permits and starts were both up, and are now basically the same as they were three to four months ago.

As for concerns over the impact of housing on the broader economy, Paulsen said that although the market has deteriorated significantly in the past two-and-a-half years, its problems have largely been contained. In a newsletter, he said that real demand remains above recessionary levels and that real GDP excluding housing and autos remains strong.

On the other hand, Roberts said that the market is pulling back from a substantial rally last week. He said investors remain concerned that the economy isn't getting better anytime soon, and the credit crisis remains a threat. "You can say that this situation may resolve itself, it's all been priced in, but you really don't know," he said.

On Monday, the major indices took a tumble after an article in

Barron's

suggested that the government would need to bail out housing- and financial-sector lynchpins

Fannie Mae

(FNM)

and

Freddie Mac

(FRE)

. Fannie dropped 2.3% at $6.01, and Freddie gave back 5% to $4.17.

Selling pressure in the sector continued Tuesday, as traders broadly shunned financial-services names.

Dow component

AIG

(AIG) - Get Report

was suffering after a Goldman Sachs analyst predicted the insurance company would need to raise fresh capital and faced additional downgrades, saying investors should not buy the stock. Shares slumped 5.9% to $20.32.

Ahead of the new session,

The Wall Street Journal

reported that brokerage

Lehman Brothers

(LEH)

is looking to sell portions of its investment-management segment, including Neuberger Berman, to a several buyers.

JPMorgan added that, thanks to a continually deteriorating market, Lehman is due to write off another $4 billion in credit assets in the third quarter. Lehman stock tumbled 13% to $13.07.

In a broader development concerning the financials, a former chief economist for the International Monetary Fund, Kenneth Rogoff, said he expects a large U.S. bank to go under in the coming months. Rogoff said that further consolidation among the financials will have to take place before the credit crisis abates.

Paulsen expressed skepticism about renewed jitters about the financials. "You're rehashing old fears, not creating new ones," he said. "I'm not sure this thing wasn't pretty much over in May, if you didn't have the oil spike, which renewed fears that the consumer's going to die," he said.

A report that indicates a more robust consumer could offer a substantial catalyst for the market, he said. "Are we in a position where that could happen? Absolutely."

A series of quarterly earnings reports weren't enough to encourage buying sentiment. Home-improvement retailer

Home Depot

(HD) - Get Report

announced a declining quarterly profit, but beat analysts' expectations and reaffirmed its guidance for the full year. The stock dropped 3.7% to $25.96.

Fellow retailer

Target

(TGT) - Get Report

reported a year-over-year decline in earnings, but beat estimates, while department-store operator

Saks

(SKS)

suffered a widening loss that was worse than Wall Street expected. Target lost 0.7% to $49.72, and Saks fell 8.3% to $10.29.

Medical-equipment maker

Medtronic

(MDT) - Get Report

, meanwhile, delivered income that improved year over year and exceeded expectations, sending the stock up 2% to $54.48.

Several analyst actions were setting other individual names in motion. Goldman Sachs downgraded information-technology company

Affiliated Computer Services

(ACS)

to neutral from buy. Software-services provider

Automatic Data Processing

(ADP) - Get Report

also caught a Goldman downgrade to neutral. Both stocks were edging downward. ACS slipped 1.6% to $49.69, and ADP gave back 2.5% to $44.18.

Meanwhile, Credit Suisse cut its price target on telephone company

AT&T

(T) - Get Report

, but maintained a neutral rating on the stock. Ma Bell skidded 1.9% to $30.80.

Credit-card concern

Mastercard

(MA) - Get Report

, on the other hand, got a Goldman upgrade to buy on the heels of a recent decline in its share price. Shares rose 0.3% to $238.57.

In mergers and acquisitions, aerospace firm

General Dynamics

(GD) - Get Report

is set to buy Swiss company

Jet Aviation

for $2.25 billion. The stock was down 0.3% at $91.99.

Chicago commodities exchange owner

CME Group

(CME) - Get Report

succeeded in acquiring

Nymex

(NMX)

as shareholders in the New York trading floor agreed to the purchase. CME was down slightly at $336.55, and Nymex added 0.2% to $80.14.

Bay Harbour Management

may be set to buy recently bankrupt clothing vendor

Steve & Barry's

, according to

The Wall Street Journal

.

Away from stocks, longer-dated U.S. Treasuries were declining in value. The 10-year note was shedding 5/32 to yield 3.83%. The 30-year was losing 16/32, yielding 4.47%. The dollar was weaker vs. the euro, yen and pound.

As for commodities, the price of crude oil climbed $1.66 to close at $114.53 a barrel. Gold climbed $11.10 to settle at $816.80 an ounce.

Global exchanges were broadly selling off. London's FTSE, Frankfurt's DAX, Japan's Nikkei and Hong Kong's Hang Seng were all trading lower.