Stocks Decline as Earnings Reveal Fallout From Credit Crisis

Wednesday 22 October 2008

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by: Michael M. Grynbaum, The New York Times

Outside the New York Stock Exchange. (Photo: Getty Images)

The malaise on Wall Street simply will not lift.

Despite cheaper oil and looser credit, stock investors on Wednesday could not shake their fears about the consequences of an economy that many believe is already in a recession. Worries about the corporate sector sent the Dow Jones industrials down more than 500 points for the day.

The broader stock market fell almost 6 percent, a plunge that in any other financial environment would be considered extraordinary. Instead, it counted only as the worst loss since last Wednesday, when the Dow plunged 733 points.

At its weakest point in the final hour Wednesday, the Dow was off by nearly 700 points. It ended at 8,519.21, down 514.45.

The bloodletting began early after a batch of weak earnings from some of the nation's largest industrial giants. Boeing, Merck, and Wachovia - major businesses across a range of industries - all reported poor earnings for last quarter and warned about a bleaker outlook for the remainder of the year.

The poor earnings blotted out improvements in the credit markets, including the third straight day of declines in bank borrowing rates.

The declines in stocks overshadowed an encouraging milestone for oil prices, which fell below $68 a barrel - a low for the year - before climbing back slightly. Crude oil was more than $4 lower in New York trading at $68.15 a barrel.

Meanwhile, the American dollar continued to strengthen against foreign currencies. The British pound fell to a five-year low against the American currency, and the euro has stumbled to a two-year low over the past few weeks.

The cost at which bank lends to one another, as measured by the closely watched Libor rate, fell again for 3-month and overnight loans. Yields on Treasury bills fell, however, a sign that investors were returning to the safety of government notes.

Wednesday's market jitters began earlier overseas, although the sharp declines on Wall Street sent European shares into free fall. As trading ended, the FTSE 100 index in London was down 4.5 percent. Stocks on the CAC-40 in Paris were off 5.1 percent and the DAX in Frankfurt slipped 4.5 percent.

In Tokyo, the benchmark Nikkei 225 stock average plunged 6.8 percent after three days of gains as the yen surged. NEC Electronics plummeted about 20 percent. The electronics company shocked investors by slashing its annual operating profit forecast by 90 percent to 1 billion yen, or $10 million, citing weak demand.

In Sydney, the S&P/ASX 200 closed 3.4 percent lower. The Hang Seng index in Hong Kong closed more than 5 percent lower, as Citic Pacific fell 24 percent. The company this week predicted a trading loss of up to $2 billion caused by what it said were unauthorized bets on foreign exchange markets.

"The main story is that deleveraging among financial institutions is continuing," Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi UFJ in London, said. "Banks worried about funding are selling assets to reduce their balance sheets."

The wave of coordinated global bailouts has helped banks' capital ratios, he noted, but there is a painful readjustment under way that will require some time to work through.

The dollar soared against European currencies. The euro fell to $1.2858, its lowest since November 2006, from $1.3063 late Tuesday in New York. The dollar rose to 1.1665 Swiss francs from 1.1512 francs.

Expectations that European central bankers will cut interest rates to stimulate growth has reduced the incentive for investors to buy short-term assets based in those currencies.

In Britain, the pound fell to $1.6260 from $1.6707, after the Bank of England governor, Mervyn King, warned that the British currency could come under pressure, and acknowledged that the country had entered what could be a painful recession.

"Taken together, the combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand," Mr. King said Tuesday in Leeds, England.

But the yen trumped all other currencies. The dollar fell to 99.27 yen from 100.13, while the euro fell to 127.69 from 131.58. Mr. Halpenny said the yen was benefiting from its position as a safe-haven currency, supported by the fact that Japan is running a large current-account surplus.

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David Jolly and Bettina Wassener contributed reporting.

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