Crude, Spitzer Squish Stocks

Renewed fears about economic growth and huge losses in insurance stocks can't be overcome.
Author:
Publish date:

Updated from 5:12 p.m. EDT

Stocks slid from the get-go on Thursday as oil again reached record heights. The market also got hit by New York Attorney General Eliot Spitzer, who unveiled the third leg of his investigative probe into finance-sector corruption. His lawsuit against insurance broker

Marsh & McLennan

(MMC) - Get Report

slammed insurance stocks.

The

Dow Jones Industrial Average

finished the day down almost 108 points, or 1.1%, to 9,894.45, with half the loss coming from

AIG

(AIG) - Get Report

, an insurance giant Spitzer says is "implicated" in his latest fraud probe. AIG fell $6.99, or 10.4%, to $60 while Marsh & McLennan tumbled $11.28, or 24.5%, to $34.85.

The

S&P 500

lost 0.9% to 1103.29 and the

Nasdaq Composite

dropped 0.9% to 1903.02.

Declining stocks bested advancers by 19 to 12 in

Big Board

trading, where 1.5 billion shares changed hands, and by a sharp 21 to 9 in Nasdaq activity, where 1.6 billion shares traded.

Thursday's losses came as several technical signs flashed warnings of further declines to come. The S&P 500 closed below both its 200-day and 50-day moving averages, a bearish signal of possible additional deterioration.

Fundamentally, oil was the market's problem at the open. Crude futures rose as high as $54.88 intraday before closing at $54.76. While an Energy Department report showed that inventories of plain old oil rose more than expected, inventories of home heating and diesel fuel dropped lower ahead of the high-demand winter cold season.

Oil's ability to sap the economy helped bonds push to lows for the month. The yield on the 10-year Treasury note dropped to 4.01%, as investors anticipate less growth and thus fewer

Federal Reserve

interest rate hikes.

But there's an embedded conflict between the two. If oil is going to slow the global economy (or even just the Chinese economy as the market feared on Wednesday), then demand for oil is going to crater. It's a lot like earlier in the summer, when stocks rose anticipating stronger growth and bonds rose anticipating slower growth. Bonds won that round and they're set to do the same here.

Stephen Roach at Morgan Stanley cut the firm's 2005 global growth estimate by 0.3% to 3.6% this week. The oft-pessimistic Roach cited oil and warned that the "relatively modest" trimming masked worrisome development. The economy is getting close to stall speed.

"History tells us that is a very precarious place to be -- it doesn't take much to tip a stalling global economy into outright recession," he wrote. "As I see it, that remains the major risk as we peer into 2005."

Oil demand tends to tail off when sharp economic slowdowns curb business activity and recessions hit. Worldwide oil demand grew by 1.5% in 1989 and then only 0.3% as the U.S. economy slipped into recession in 1990. Demand grew by 2% in 1999 and then only 0.9% in 2000 and 2001.

The International Energy Agency this week already shaved its forecast for oil demand growth in 2005 to 1.8% from 2.2%. A further slowdown in growth can only bring the forecast lower.

It will certainly be interesting to hear Fed chairman Alan Greenspan's take on oil on Friday. Greenspan has previously described the impact of the oil spike as "transitory." But one of the underpinnings of the Fed's forecast was continued strength in housing activity -- a sector that is now looking weaker by the day -- and oil prices have not leveled off, but are instead rising even faster.

Oil stocks rose modestly on Thursday along with crude's price.

Exxon Mobil

(XOM) - Get Report

gained 0.5% and

ChevronTexaco

(CVX) - Get Report

added 0.2%.

A.G. Hammer

Spitzer's lawsuit against Marsh for bid-rigging when it acted as an insurance broker also implicated AIG,

Ace

(ACE)

,

Hartford Financial Services

(HIG) - Get Report

and a subsidiary of Munich Re.

As noted above, Marsh shares plummeted almost 25%. They were still struggling to recover from last year when the mutual fund investigation started by Spitzer spread to Massachusetts regulators, who nailed the company's Putnam subsidiary.

In addition to AIG's loss, Ace lost 9.5% to $36.47 and Hartford fell 6% to $58.40. But almost every company in the industry got hit as Spitzer gave a fire-and-brimstone news conference. The S&P Insurance Index fell 7%.

That's not a crazy reaction by investors, because Spitzer proved in his investigations of biased stock research and mutual fund conflicts of interest that he isn't whistling

Dixie

when he makes allegations. In the mutual fund investigation, some of the highest fines paid to settle were from companies like

Alliance

(AC) - Get Report

and

Sun Life's

(SLF) - Get Report

MFS unit, which weren't mentioned by name in his opening volley against the industry.

And other state and federal regulators will pile in after Eliot, as Connecticut and California have already announced that they are doing in the insurance probe.

The investigation involves "virtually every line of insurance," Spitzer said. He said he plans to bring "numerous" civil and criminal cases. "Trust me, this is Day One," Spitzer said.

Other companies have admitted that they were questioned by Spitzer over the past six months. While investors may want to go bargain-hunting amid the wreckage, there are other firms that could possibly become targets.

They are

Axis Capital

(AXS) - Get Report

,

Chubb

(CB) - Get Report

,

Aon

(AOC)

,

Willis Group

(WSH)

,

National Financial Partners

(NFP)

,

Aetna

(AET)

,

Cigna

(CI) - Get Report

,

MetLife

(MET) - Get Report

and

UnumProvident

(UNM) - Get Report

.

That's not to say by any stretch that they will be named -- but it's a serious risk worth considering.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

your feedback.