January 17, 2008
Dow Plunges More Than 300 Points on Grim Outlook
By MICHAEL M. GRYNBAUM
NYT

The year is not starting off well on Wall Street.

Stocks plunged on Thursday as investors confronted new indications of
the depth of subprime losses and housing woes. The Dow Jones industrial
average lost more than 300 points, bringing its decline to 15 percent
since its peak in October.

Since Jan. 1 alone, the Standard & Poor’s 500-stock index, a broad
measure of the financial markets, is down more than 9 percent. And the
Russell 2000 index, which tracks small companies, is now officially in a
bear market, 20 percent below its peak.

A dismal report on manufacturing activity caught investors by surprise
on Thursday morning, sending the main indexes into the red after an
early stint in positive territory.

The report, from the Federal Reserve, found that Philadelphia-area
manufacturers had contracted much more than expected in a January
survey, reaching a six-year low. A similar drop in the index occurred in
early 2001, just before the onset of the last recession.

“Basically every day now, you have more and more investors leaning
toward the camp that yes, this is going to be a recession, and it could
be a severe one,” said David Kovacs, a quantitative investment
strategist at Turner Investment Partners in Berwyn, Pa.

The distress in the financial markets manifested itself on many fronts.
Shares of MBIA and Ambac, two bond guarantors that have big exposures to
faltering mortgage securities, tumbled Thursday after credit ratings
firms said they would re-examine the companies financial health weeks
after affirming the firms’ ratings. Ambac fell 52 percent, and MBIA
closed down 31 percent.

The Dow industrials ended the day at 12,159.21, down 306.95, or 2.5
percent. The S.& P. 500 shed 2.9 percent, and the technology-heavy
Nasdaq composite was off 2 percent.

In testimony in Washington on Thursday, Ben S. Bernanke, the Fed
chairman, reiterated recent warnings about an imminent drop-off in
consumer spending. Mr. Bernanke also hinted that the Fed would lower
interest rates, perhaps by half a point, at its meeting later this
month, saying that the central bank would “stand ready to take
substantive additional action as needed to support growth.”

Investors usually react favorably to evidence of a rate cut, but they
appeared unimpressed by Mr. Bernanke’s promise to support a fiscal
stimulus package to prop up the ailing economy.

“By the time they actually pass anything, it will be past the time we
need it,” said James Paulsen, a strategist at Wells Capital Management,
who echoed some of the skepticism on Wall Street about the plan.

Other analysts said the chairman was leaning on the government in lieu
of aggressively cutting rates. “The market is frustrated with Bernanke,”
Mr. Kovacs said. “Bernanke said it would be nice to have an economic
stimulus package to help him with his fight. You didn’t see Greenspan
asking for help.”

Regardless of where that help comes from, investors agree that the
economy could use a shot of adrenaline. Anxieties were stoked again on
Thursday by the release of yet another round of bad data on the housing
industry. Groundbreakings for new homes fell last month to their slowest
pace in 16 years, the government said, and economists expect the market
to soften well into the middle of this year.

Meanwhile, traders were reminded that the fallout from last year’s
subprime collapse is still spreading. Merrill Lynch, which ousted its
chief executive in the wake of substantial losses from the troubled
mortgage market, reported a $9.8 billion loss for the fourth quarter,
the worst performance in company history.

The news came on the back of similar write-downs at Citigroup, which was
also badly hurt by bad bets on soured mortgage-backed securities.
Investors are worried that Wall Street write-downs will make banks less
willing to lend, a trend that would cut off a primary source of
lifeblood for the economy.

“It’s compounding investors’ fears about how widespread the losses
really are,” said Hayes Miller, an analyst at Baring Asset Management in
Boston.

Still, some analysts said that jaded investors may have been unfazed by
Merrill’s loss, which reiterated much of what market watchers already
know about problems at the big Wall Street banks. The poor housing
report may have been met by a similarly sleepy reaction, analysts said,
who noted that too much bad news can sometimes leave investors numb.

Crude oil slipped 71 cents, settling at $90.13 a barrel, in trading on
the New York Mercantile Exchange. The yield on the 10-year Treasury
note, which moves opposite to its price, ticked down slightly.

The euro was up slightly against the dollar, and the price of gold fell
after several days of gains.

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It's the economy, stupid.