Friday, August 10, 2007

Dow Plunges On Rising Credit Fear

Credit fears erupted again, this time in France, generating panic stock and bond selling at times and sending the Dow Jones Industrial Average to its second-heaviest one-day plunge since 2003.

Amid continuing losses at some hedge funds, the heavy stock selling dashed hopes that the nascent three-day rebound earlier this week might mark an end to the stock rout that began last month.

Corporate-bond markets were badly roiled, with investors sometimes finding it impossible to sell for a lack of willing buyers. The price of the 10-year Treasury note rose, as investors fled to its relative safety.

The selling accelerated at day's end as some investors tried to close out positions to avoid being exposed to what the markets may bring today.

Imports of gasoline and blending components, which averaged less than one million barrels a day from February to April, averaged 1.3 million in June, as refiners around the world shipped product to the U.S. to take advantage of higher prices.

The Dow industrials, which had risen for three days, plunged 387.18 points, or 2.83%, to 13270.68. The blue chips still are up 6.5% for the year, and are above Friday's finish of 13181.91. But they are down 5.2% from the record finish of 14000.41 July 19. The only larger one-day drop in the past four years came on Feb. 27 of this year, when the Dow fell 3.3%.

The selling was part of a global plunge in response to news that BNP Paribas, a major French bank, halted withdrawals from three investment funds holding securities linked to risky subprime loans -- loans to low-quality borrowers. It said it couldn't determine a price for those securities in a market with few buyers.

The news shocked investors, who were barely recovering from the announcement that two Bear Stearns hedge funds had lost virtually all their value due to similar investments, and fears spread that other investment funds could be hit as well.

Contributing to the day's selling were continuing rumors that several large hedge funds also were sustaining losses linked to the market's recent volatility, and facing closure.

Investors showed signs of hope early on, pushing stocks off their lows, but by afternoon money managers were calling traders and telling them to sell shares for whatever they could get.

"People weren't as much concerned with price as with just getting out," said Todd Leone, head of listed stock trading at New York brokerage firm Cowen.

"We couldn't get bids on many bonds," said Marc Frank, head trader at Group G Capital Partners, a New York hedge fund that invests in high-yield bonds.

France's CAC-40 stock index fell 2.17%.

Investors fear a global crisis, said Arthur Cashin, director of floor operations for UBS Financial Services at the New York Stock Exchange. Some people were shocked that BNP would announce now that it didn't know the value of its assets. "For this to have come as a surprise to them was a shock to the market," Mr. Cashin said. "This is the fear of the unknown."

Some investors were hoping that stocks would resume their recovery, and others were hoping that the Federal Reserve would rescue markets with an interest-rate cut. But many analysts pointed out that the Fed's commentary after Tuesday's meeting didn't suggest any plan for a rate cut.

Not surprisingly, financial stocks led the declines. The Standard & Poor's 500-stock index, more exposed to financial stocks than is the DJIA, fell 2.96%, or 44.40 points, to 1453.09, now up only 2.5% in 2007.

The Nasdaq Composite Index declined 2.16%, or 56.49 points, to 2556.49, up 5.8% this year.

Making things worse, Home Depot said it may reduce the $10.3 billion price it is charging a group of private investors for its contractors' supplies subsidiary. That reinforced fears that corporate buyouts could be hurt by the market trouble.

Outside the U.S., stocks declined in dollar terms. The Dow Jones World Stock Index, excluding U.S. stocks, fell 1.37%, or 3.66 points, to 264.15.

In major U.S. market action:
Stocks retreated. On the New York Stock Exchange, 721 stocks rose and 2,624 fell.

Treasury-bond prices were mixed. The 10-year Treasury note rose 14/32, or $4.38 for each $1,000 invested, pushing the yield down to 4.788%. The 30-year bond was down 4/32 to yield 5.030%.

The dollar was mixed. Late in New York, it traded at 118.20 yen, down from 119.69, while the euro fell against the dollar to $1.3679 from $1.3797.

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