Updated from 4:06 p.m. EDTA storm of fear and dread hit stocks in New York Thursday, as tight credit markets and pessimism regarding the financial sector walloped the major indices and sent the Dow Jones Industrial Average below the 9000 mark for the first time in five years. The bears emerged in force at the final hour of trading. The Dow, which earlier had risen as much as 190 points, ended down 678.91 points, or 7.3%, at 8579.19. The S&P 500 sank 75.02, or 7.6%, to 909.92, and the Nasdaq lost 95.21 points, or 5.5%, at 1645.12. October has proved a brutal month thus far for the market. The Dow has been down every day since the start of the month, losing some 2,000 points in that short time. It was just one year ago to the day that the Dow closed at an all-time record high of 14,164. The last time the index traded below 9000 was on Aug. 6, 2003. On Wednesday, markets sold off even after the Federal Reserve, along with central banks in Europe and Canada, orchestrated a coordinated cut in interest rates to help free up the credit markets.
Traders were looking ahead to a meeting of the Group of Seven industrial nations in Washington Friday, in hopes of seeing Treasury Secretary Henry Paulson and other finance ministers and central bankers work together to further shore up the financial sector. On Thursday, South Korea and Taiwan cut their interest rates. In an effort to further prop up the financial system, the Treasury was considering buying equity stakes in U.S. banks to try to bolster their capital levels, according to media reports. Financial firms have been crippled by their exposure to illiquid mortgage-backed securities, and the Treasury's previous plan, known as the Troubled Asset Relief Program, was designed to buy those assets from banks in exchange for fresh capital. Bloomberg reported that BlackRock ( BLK) and Pimco, a unit of Allianz ( AZ), had both proposed to manage mortgage-backed securities to be bought by the Treasury as part of its $700 billion financial-sector rescue plan. BlackRock dropped 8.1% to $153.55, and Allianz tumbled 11% to $9.88. Neil Hennessy, manager of Hennessy Funds, said that the assistance package will bring up the value of mortgage-backed assets, which he said are currently undervalued. "We know for a fact that 93% of people are paying their mortgages on time," he said. Even if only 50% were paying, mortgage-backed securities are worth more than their current market value, he said.
Furthermore, Hennessy said, investors have irrationally fled stocks. The total dividend return on the entire Dow Industrials index is currently at 3.5%, and every company in the index but Citigroup ( C) and General Motors ( GM) is highly profitable, he said. Over the long term, said Hennessy, stocks are a good value. "Tell people to turn off their TV for the next week," he said.
For the day at least, GM was one of the biggest losers on the Dow, plunging 29% to $5.02, its worst print in more than five decades. Partly to blame was a decision by S&P to put the automaker and GMAC on CreditWatch Negative. "Are we at a bottom or at a point of capitulation or despair? I don't know. It could get worse before it gets better," said Brian Gendreau, investment strategist at ING Investment Management. Financial stocks were holding the spotlight as a three-week ban on short-selling of stocks in the sector lifted just before midnight. The Securities and Exchange Commission had implemented the rule on Sept. 19 as an emergency measure to help stem massive selling in bank stocks. Morgan Stanley ( MS) shares fell 26% to $12.45, and Goldman Sachs ( GS) plummeted 10% to $101.35. Citigroup and Wells Fargo ( WFC) appeared stuck in their battle over a buyout of Wachovia ( WB). Negotiations between Citi and Wells, the potential acquirers were stagnating over how to divide Wachovia's assets. Citi shares dropped 10% to $12.93, Wells plummeted 17% to $26.49 and Wachovia took a 29% hit to $3.60. Meanwhile, The Wall Street Journal reported that National City ( NCC) was in discussions with other banks, perhaps PNC Bank ( PNC) or Bank of Nova Scotia ( BNS) about potentially selling itself. National City finished down 3.6% to $2.15, while PNC gave back 12% to $59.85 and Bank of Nova Scotia dropped 11% to $35.95. Insurance firms were also facing investor scrutiny after MetLife ( MET) earlier this week said it wasn't offering earnings guidance and intended to raise capital. Shares of Prudential Financial ( PRU) tumbled 23% to $33.27.
MetLife, however, was buoyed by a report in the Journal that it has recently discussed a potential merger with Hartford Financial ( HIG). The report said the discussions didn't lead to a deal, but that they indicate the strain the credit crunch has exacted from insurance firms. MetLife added 3.7% to $28, while Hartford lost 19% to $20.11. Separately, the Fed said it would grant insurance company AIG ( AIG) up to $37.8 billion in exchange for fixed-income securities. The cash infusion comes on top of the $85 billion already lent out in September to keep the company from going bankrupt. AIG dropped 25% to $2.39. Looking at corporate earnings, Dow component IBM ( IBM) preannounced its third-quarter results, saying it made a profit that increased year over year and topped analyst estimates. Shares ticked down 1.7% to $89. As for economic data, initial jobless claims for the week ended Oct. 4 came in at 478,000, down from 498,000 the previous week but slightly above economists' estimates for 475,000 jobs lost. The Commerce Department reported that wholesale inventories for August were up 0.8%, a larger increase than anticipated by economists. In commodities, crude oil was losing $1.64 at $87.31 a barrel. Gold declined $20 to settle at $886.50 an ounce.
Longer-dated U.S. Treasury securities were declining in price. The 10-year note was down 1-6/32 to yield 3.78%, and the 30-year was down 30/32, yielding 4.1%. The dollar was gaining ground on the yen and pound, but softening and euro. Overseas, European indices, such as the FTSE in London and the DAX in Frankfurt, were mostly lower. Asia was mixed, as the Nikkei in Japan closed on the downside while the Hang Seng in Hong Kong finished with gains.