Big losses on Wall St today, as investors reacted in a big way to the downgrade of Citi by a Goldman analyst, who warned of further write-downs on collateralized securities. Lowe's, the home improvement store released another round of disappointing results, which exacerbated fears that the real estate market will get worse before getting better. HP announced a big increase in revenue, mainly as a result of increased sales in China. While the stock was dragged down by the rest of the market during the day, it is trading ahead of yesterday's closing price in after-hours trading. However, investors questioned whether global growth, especially in China, will be able to buffer American companies from a domestic downturn, as Chinese officials announced a freeze on bank lending aimed at curbing an investment boom that threatens to overheat the economy in that country.
From the WSJ:
Stocks took a beating Monday, with the Dow Jones Industrial Average falling below 13000, as two old culprits -- financials and housing -- contributed to the market's widespread distaste for equities.
"We are seeing a continuation of the unwinding of investor optimism that we have been seeing since October," said Chris Johnson, chief executive of Johnson Research Group in Cincinnati.
All three major indexes were down more than 1% and decliners outnumbered advancers on both the New York Stock Exchange and the Nasdaq Composite Index by about five to one.
Citigroup was among the stocks casting the longest shadow over the market. The giant bank's shares dropped 5.8% after Goldman Sachs analyst William F. Tanona cut the stock to "sell" from "neutral" and estimated that Citigroup faces $15 billion in write-downs on collateralized debt obligations over the next two quarters.
Citi's fall weighed heavily on the Dow Jones Industrial Average, pushing it down 218.35 points to 12958.44, only the second time since Aug. 16 that the blue-chip barometer closed below 13000.
Mr. Tanona also lowered his target price on shares of Merrill Lynch, Morgan Stanley, Lehman Brothers, Bear Stearns, J.P. Morgan Chase and E*Trade Financial. Shares of all those companies declined more than 2%. E*Trade was down more than 11%. Meanwhile, Countrywide Financial, which was not mentioned in the report, was down almost 9%.
"Investors are trying to catch a falling knife moving at terminal velocity with financials," said Mr. Johnson. "They keep saying they can't go lower. But a couple of write-downs later and, guess what, they can go lower."
Other market gauges also fell sharply. The S&P 500 dropped 25.47 to 1433.27, and the Nasdaq Composite Index declined 43.86 to 2593.38.
Goldman's sweeping downgrade compounded renewed credit-market jitters stirred in part by Swiss Re's announcement earlier Monday that it accrued after-tax losses of about $876 million on its subprime credit exposure.
Meanwhile, woes in the housing market hit Lowe's. Shares of the No. 2 U.S. home-improvement retailer dropped 7.6% after it posted a 10% decrease in fiscal third-quarter net income and again lowered fiscal-year expectations due to turmoil in the housing market. Lowe's warned that industry pressures will continue into 2008.
Compounding the housing-related gloom, the National Association of Home Builders' index for sales of new, single-family homes was unchanged at 19 in November. David Seiders, the trade group's chief economist, said that while builders "continue to work down inventories of unsold homes and reposition themselves for the market's eventual recovery, they realize it will be some time before market conditions support an upswing in building activity -- most likely by the second half of 2008."
The news, which was released at 1 p.m. EST, helped push stocks down even further and sent investors scurrying into Treasurys as they sought the safety of the government bond market.
"The professional money manager, who had terrific gains up until the end of October, is trying to protect some of those gains in order to salvage out what they can for the rest of the year," said chief investment officer at Oaktree Asset Management. "And there doesn't seem to be a catalyst out there to cause them to step up and start buying."
Tony Dwyer, equity-market strategist at FTN Midwest Research, also noted concern about slowing global economic growth and new restrictions placed on lending in China. Chinese officials announced a freeze on bank lending aimed at curbing an investment boom that threatens to overheat the economy.
Dow component Hewlett-Packard, which reported a 28% jump in fiscal fourth-quarter net income after the markets closed, finished down 2.6%. But in recent after-hours trading, its shares were at $50.35, versus Monday's close of $49.44.
Monday did see a few winners. EchoStar Communications shares jumped 19% after Barron's reported that AT&T is putting together a bid to buy the satellite-television provider before year end. And shares of Pharmion, a maker of blood-cancer treatments, jumped 32.1% to $65.12 after it agreed to be bought for $72 a share, or $2.9 billion, of cash and stock by Celgene. The offer marked a nearly 50% premium to where its shares closed on Friday.
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