[NYTr] "Persistent Fear" Drives Stocks Down

[All the News That Doesn't Fit]

The New York Times - Aug 29, 2007
http://www.nytimes.com/2007/08/29/business/29econ.html


Persistent Fear Drives Stocks Down

By EDMUND L. ANDREWS and JEREMY W. PETERS

The stock market plunged late in the afternoon yesterday, registering
its biggest drop in three weeks as investors were hit by fresh worries
over declining consumer confidence, falling house prices, shrinking
profits on Wall Street and uncertainty about the Federal Reserve.

Stocks were down most of the day, but the biggest drop came in the last
half-hour of trading as computerized trading programs, which
automatically sell when stocks fall by predetermined percentages,
amplified the gloomy mood that had prevailed from the start. The Dow
Jones industrial average closed down 280.28, or 2.1 percent, at
13,041.85. It was the steepest one-day decline in the Dow since Aug. 9,
when it shed 387.18 points.

The Standard & Poor’s 500-stock index and the Nasdaq composite were
each down 2.4 percent, with all but 13 of the stocks in the S.& P. 500
down for the day.

Analysts said there appeared to be no specific catalyst for the
decline. Rather, investors received a steady drumbeat of discouraging
news about the intertwined woes of the housing industry, the mortgage
market, hedge funds and a broader credit crunch that the Federal
Reserve might have difficulty alleviating in the short run without
creating longer-term problems for the economy.

“Concern about the credit issue is dominant across all the markets,”
said John Shinn, a senior economist at Lehman Brothers. “Everything is
dominated by concerns about the unknown.”

Two separate reports released yesterday showed that consumer confidence
fell this month and that home prices nationwide continued their slide
in June.

Later in the day, minutes from the Federal Reserve’s policy meeting on
Aug. 7 showed that policy makers were keenly aware of escalating
distress in financial markets and discussed the possibility of taking
action 10 days before the Fed reduced the interest rate at which banks
can borrow from its discount window.

But the Fed minutes also highlighted the central bank’s reluctance to
simply soothe investors in the stock market, and offered no additional
clues about the likelihood of a broader, more important cut in the
Fed’s benchmark federal funds rate in the near future.

The Conference Board, in its monthly survey of 5,000 households, said
its consumer-confidence index dropped sharply in August after surging
in July to a six-year high.

Separately, a closely watched measure of home prices provided
additional evidence that residential real estate could be poised for a
substantial nationwide price decline for the first time in at least 50
years.

The S.& P./Case-Shiller index, which measures prices in 20 major
metropolitan areas, declined 0.4 percent in June. That was its steepest
monthly drop in five years and left the index 3.5 percent below its
level a year earlier.

In all, 15 of the cities surveyed experienced a drop. Detroit
experienced the steepest slide, with property values falling 11 percent
from a year earlier. In San Diego they fell 7.3 percent, and in Phoenix
6.6 percent.

A significant nationwide drop in housing prices would aggravate the
turmoil among mortgage lenders and firms that own mortgage-backed
securities. Delinquency and foreclosure rates have already climbed
sharply, particularly in subprime mortgages for home buyers with weak
credit, but worries have widened to the so-called Alt-A mortgages made
to people who have good credit ratings but have overstretched their
borrowing.

Yesterday, Merrill Lynch cut its ratings on the shares of three Wall
Street powerhouses, Lehman Brothers, Citigroup and Bear Stearns, to
neutral from buy on concerns about their exposure to bad subprime
loans. Their stock prices all fell: Lehman was down 6 percent,
Citigroup 3.5 percent and Bear Stearns 3.4 percent.

The entire financial sector — which until recently was one of Wall
Street’s strongest performers — has been particularly hard hit since
credit markets started tightening sharply last month.

“It’s a difficult situation for financial firms right now,” said
William E. Rhodes, chief investment strategist of Rhodes Analytics, a
market research firm. “Financial firms prosper when there’s a lot of
liquidity because they can conduct transactions. But right now there’s
not very much liquidity.”

Investors had been fixated on the release of minutes from the Fed’s
policy meeting on Aug. 7, which was 10 days before the central bank
abruptly reversed its hands-off stance toward the markets and reduced
its discount rate on temporary loans to banks.

The meeting notes show that Fed officials contemplated the possibility
of cutting rates in the future if the credit markets continued to
deteriorate. But although Fed economists had just shaved their forecast
for growth this year, partly because of slowing growth in productivity,
policy makers remained more worried about the risk of higher inflation.

The minutes suggest that Fed officials paid close attention to the
storm signals that had been building in financial markets for several
weeks.

Policy makers noted that the markets for subprime mortgages had largely
dried up, as investors became much more uncertain about the ability of
borrowers to repay. Fed officials fretted that the downturn in housing
“could well prove to be both deeper and more prolonged than had seemed
likely.”

But the participants in the Fed meeting also took comfort that people
with good credit were having little trouble getting conventional
mortgages, noting that interest rates on 30-year fixed mortgages had
declined slightly. And they remained confident at that time that
increases in wages and salaries would continue to support consumer
spending. Business investment looked to be on an upward track.

“Recent financial market developments were thought unlikely to have an
appreciable adverse effect on capital spending,” Fed officials
concluded.

The central bank began changing its position just a few days later.
First, it joined other central banks around the world by intervening in
financial markets to prevent their benchmark interest rates on
overnight lending from climbing above their official targets.

But the big move came on Aug. 17, when the central bank expanded the
collateral it would accept from commercial banks and reduced the
interest rate on borrowing from its discount window, a source of
financing for banks that is usually reserved for temporary emergency
purposes.

Fed policy makers are next scheduled to meet on Sept. 18, but it is
unclear whether markets will remain calm enough in the meantime to
allow them to delay any big decisions until that date.

Copyright 2007 The New York Times