Updated from 4:10 p.m. EDT
U.S. stocks plummeted violently Monday, as it became apparent that the credit crisis had spread beyond America into Europe and Asia. In the last hour, the major indices rallied off the worst of their lows for the day, but they still ended in deeply negative territory.
The Dow Jones Industrial Average broke below 10,000 for the first time since October 2004, falling as much as 800 points during the session. In the end, however, the index closed with a loss of 369.88 points, or 3.6%, at 9955.50. The S&P 500 gave back 42.38 points, or 3.9%, to 1056.85. The Nasdaq dropped 84.43 points, or 4.3%, to 1862.96.
In a sign of a global financial crunch, leaders from France, Germany, Italy and the U.K. met Saturday and agreed to coordinate efforts to prevent failures by Europe's banking institutions.
A scramble ensued to help troubled institutions. Germany rescued lending company Hypo Real Estate, and France's BNP Paribas said it would take over Benelux bank Fortis NV. Germany's chancellor, Angela Merkel, announced that Germany would guarantee all of its private bank deposits. On Monday, Denmark followed suit.
Back in the U.S., the Federal Reserve was initiating its own plans Monday to prop up stagnant credit markets. The central bank announced it would pay interest on bank reserves it holds and expand its term auction facilities program.
Meanwhile, The Wall Street Journal said that Treasury Secretary Henry Paulson would appoint adviser Neel Kashkari to supervise the $700 billion bailout program for the financial system. Paulson's proposal passed the House of Representatives and was signed by President Bush on Friday. Stocks sold off sharply shortly after the bill passed.
"What's different today is the bailout package came and went, and it's not going to solve the problem," said Bill Fleckenstein, hedge fund manager at Fleckenstein Capital Management. He said the selloff into the close Friday indicated that stocks are trending lower. "If we wind up having a crash the next couple days I wouldn't be surprised. That's what the tipoff from Friday was," he said.
Ted Weisberg, floor trader with Seaport Securities, was less dire. "Like getting a cold or whatever it happens to be ... sometimes you just have to let things run their course," he said. Fear has gotten a hold of the market and emotion is driving the market, he said.
Stocks eventually will be oversold if they haven't reached that level already, said Weisberg. "Unfortunately, they don't ring a bell and tell us when we're going up," he said. "Market conditions like this create more opportunities than you can shake a stick at. You just have to have a little patience."
"We better bottom today or tomorrow, or we're into a crash," said Jeff Saut, managing director at Raymond James. Saut said the market is facing a crisis of confidence right now, and that passage of the original Paulson plan, without sweeteners, would have instilled optimism into the markets. As it is, he said, the market has lost confidence in financial institutions, the broader economy, and now the government's ability to intervene. "Odds are near 100% we're going into a recession now," he said.
"I'm getting calls from brokers who are getting calls from the public, who's saying sell everything," said Saut. However, when the market experiences the kind of negativity seen today, it's typically near a low, he said.
Technical traders often buy when a stock tests a low, and then put a stop order below that level, said Marc Pado, U.S. market strategist at Cantor Fitzgerald. That results in a great deal of selling if stocks break below their initial lows, he said.
Historically, said Pado, a tough Friday for stocks can lead to a worse Monday, followed by a recovery on Tuesday. "You get people reading the paper and just calling in their redemptions over the weekend," which results in hedge funds and mutual funds selling out of equities to raise capital.
"Now everybody's talking about we're back down to the 2004 lows, but the reality is that we're also at the point where, in January of 1998, the market first broke out to the upside." That means that the last decade of gains has been wiped out, said Pado. "There's some disillusion in the equity markets as a result of that.
In the banking sector, Wells Fargo (WFC) - Get Wells Fargo & Company Report said it intended to go ahead with its purchase of Wachovia (WB) - Get Weibo Corp Sponsored ADR Class A Report . Wells Fargo said an appeals court vacated a ruling that extended an exclusivity agreement between Citigroup (C) - Get Citigroup Inc. Report and Wachovia. Later during the session, Citi announced a $60 billion lawsuit against Wells Fargo.
Early Monday, analysts at both Keefe Bruyette and Friedman Billings upgraded Wells Fargo to market perform from underperform.
Wells Fargo lost 1.3% to $34.11, Citi dropped 5.1% to $17.41. Wachovia sold down 6.9% to $5.78.
On the home-loan front, Bank of America (BAC) - Get Bank of America Corp Report announced it would modify about 400,000 mortgages to help borrowers who had taken out loans from Countrywide Financial, which BofA acquired on July 1. BofA shares lost 6.6% to $32.22.
Insurance company Hartford Financial (HIG) - Get Hartford Financial Services Group, Inc. (HIG) Report said it garnered a $2.5 billion investment from Allianz( AZ), is reducing its dividend and will register a third-quarter loss. Hartford gained 13% to $30.90, while Allianz dropped 11% to $12.19.
Money markets were showing strain. Bloomberg.com said three-month Libor, a measure of the cost of borrowing among banks, was at 4.29%, near a high last seen in January. Overnight Libor climbed to 2.37% from 2% Friday.
Outside the financials, Reuters reported that ImClone (IMCL) agreed to a merger with Eli Lilly (LLY) - Get Eli Lilly and Company (LLY) Report . ImClone gained 3% to $66.89, while Lilly slipped 7% to $38.42.
Among technology stocks, online auctioneer eBay (EBAY) - Get eBay Inc. Report said it would be cutting its staff by 10% and would buy online payment processor Bill Me Later. The stock lost 5.4% to $17.89.
Breadth was frightful. Decliners trounced advancers 32-to-1 on the New York Stock Exchange. On the Nasdaq, decliners beat advancers 11-to-1.
In the commodities space, the price of crude oil dropped $6.07 to $87.81 a barrel, and gold climbed $33 to settle at $866.20 an ounce.
Longer-term U.S. Treasury securities were climbing in price. The 10-year was up 1-12/32 to yield 3.44%, and the 30-year was climbing 2-12/32, yielding 3.96%.
Overseas markets were broadly falling. The FTSE in London and the Dax in Frankfurt were trading lower. Asian exchanges, including Japan's Nikkei and Hong Kong's Hang Seng, closed on the downside.