Stocks Dive 208 on Credit Problems

(Aug. 14) - Wall Street pulled back sharply Tuesday as investors worried about fundamental economic problems as well as the ongoing fallout from credit market problems and stocks' own volatility. The Dow Jones industrials skidded more than 200 points.

The downturn in stocks was first triggered by a report from Wal-Mart Stores Inc. that profit will fall below expectations this year as consumers rein in spending. Home Depot Inc., the world's biggest home improvement chain, added to the slide when it said weakness in the housing market caused quarterly profit to slide.

Confirmation that Sentinel Management Group Inc., which oversees $1.6 billion in assets, is seeking to halt investor redemptions exacerbated the selling. Other funds are said to have similar problems as they face withdrawal demands at a time it has become difficult to value low-quality debt.

Hedge funds and other big institutional investors have taken a beating in recent weeks due to the market turbulence. On Monday, Goldman Sachs Group Inc. said three funds it manages have had significant losses — and infused $3 billion in capital into one of them.

Wall Street has been pummeled as a deepening credit crunch spooked the market, and led to unease about potential losses at financial firms and funds. The Federal Reserve, which has injected some $64 billion of liquidity into the U.S. banking system since Thursday, said Tuesday it stood ready to act again should market conditions warrant.

While the market seemed to be looking past most economic news in recent weeks, on Tuesday the earnings reports and their implications for consumer spending compounded an already high state of anxiety on Wall Street.

"The market is very, very sensitive at this point, and any news about a potential financial problems is going to affect the way that the market trades," said Scott Fullman, director of investment strategy for I.A. Englander & Co. "We've been seeing extreme sensitivity in the financials, but also in the consumer stocks and industrials during the session."

According to preliminary calculations, the Dow fell 207.61, or 1.57 percent, to 13,028.92. The benchmark index is now on the verge of falling back below the psychologically-important 13,000 mark, which it first crossed in late April.

Broader stock indicators were lower. The Standard & Poor's 500 index shed 26.38, or 1.82 percent, to 1,426.54, and the Nasdaq composite index fell 43.12, or 1.70 percent, to 2,499.12.

Bonds rose, with the yield on the benchmark 10-year Treasury note falling to 4.73 percent from 4.78 percent late Monday. The fixed-income market has rallied as stock investors move into securities deemed less volatile.

Stocks originally were lifted in early trading on government data that indicated that inflation remains in check. But, that gave way to further concerns about consumer spending and widening credit worries.

The Labor Department said wholesale prices rose in July for the fifth time in six months. Its producer price index advanced 0.6 percent amid higher energy costs. Excluding often volatile food and energy costs, however, what's known as core PPI rose a modest 0.1 percent.

Meanwhile, the Commerce Department said the U.S. trade deficit fell to a four-month low in June. The deficit dropped to $58.1 billion in June, a 1.7 percent decrease from May and the lowest imbalance since February.

Mike Malone, a trading analyst at Cowen & Co., said efforts by central banks to stabilize the markets had been somewhat successful. On Tuesday, the European Central Bank injected another $10.5 billion into money markets and said conditions were normalizing after several days of volatility. There was no action Tuesday by the Fed.

He said "there is still a tremendous amount of risk out there."

Among the hardest hit sectors on Tuesday were financial services stocks, which have been sliding as worries mounted that subprime loan trouble could spread to other parts of the economy. Major investment banks have reported losses linked to mortgage-backed securities.

Goldman Sachs fell $7.75, or 4.4 percent, to $169.75 — extending losses from Monday. Bear Stearns Cos., which earlier this summer disclosed that two of its funds were all but wiped out, fell $3.60, or 3.3 percent, to $106.

Sentinel Management said in a letter to clients that it cannot meet investors' requests to withdraw their money without selling investments at a steep discount. Sentinel did not respond to calls for comment. The firm sent a request to the Commodity Futures Trading Commission for permission to stop investors from cashing out, but it was rejected.

Retail stocks were also hit after Wal-Mart, one of the 30 stocks included in the Dow, lowered its profit forecast amid weak economic conditions that it blames for hurting consumer spending globally. The retailer said some of its customers were straining under economic pressures such as higher oil prices.

Wal-Mart shares tumbled $2.35, or 5.1 percent, to $43.82.

Home Depot warned that it expects profit to decline for fiscal 2007 because of a sluggish housing sector. Shares fell $1.72 cents, or 4.9 percent, to $33.52.

Mattel Inc. shares fell 57 cents, or 2.4 percent, to $23 after it announced the recall of 8.8 million toys. It was Mattel's second big recall of Chinese-made toys in two weeks.

Declining issues outpaced advancers by a 3 to 1 on the New York Stock Exchange, where volume came to 1.6 billion shares.

Light, sweet crude rose 76 cents to $72.38 on the New York Mercantile Exchange. The dollar was lower against other major currencies, while gold prices fell.

The Russell 2000 index of smaller companies fell 16.94, or 2.17 percent, to 762.87.

Overseas, Japan's Nikkei stock average rose 0.27 percent. Britain's FTSE 100 fell 0.10 percent, Germany's DAX index slipped 0.52 percent, and France's CAC-40 fell 0.82 percent.