Dow drops 165, falls below 11,000

Stocks slump on news that Bank of America may be sued over bad mortgages. China's rate hike worries traders who've bet on the country's rapid economic growth. Gold and oil slump.

By Charley Blaine Oct 19, 2010 1:59PM

Charley BlaineUpdated: 2 a.m. ET, Wednesday

Stocks fell sharply today, with the Dow Jones industrials ($INDU) falling below 11,000 for the first time in eight sessions, after China shocked global markets by raising interest rates.


The move was unexpected and sent gold and other commodity prices lower. Oil dropped below $80 a barrel. Futures trading initially suggested more market pressure on Wednesday, but trading early Wednesday now indicates a rebound at the open.


At the same time, Bank of America (BAC) shares tumbled 4.4% to $11.80 after news reports said a consortium of investment firms and the New York Federal Reserve Bank were preparing to sue the bank to buy back mortgages packed into some $47 billion in securities. The dispute battered other bank stocks as well.

Apple (AAPL) and IBM (IBM) results late Monday disappointed investors; both stocks slumped today. After the close, Yahoo (YHOO) earnings beat estimates, although the fourth-quarter guidance was weak. Shares were up 1% to $15.64 after hours.

The Dow finished down 165 points, or 1.5%, to 10,979. It was the first close below 11,000 for the blue-chip index since Oct. 7. But the Dow had been down as many as 226 points shortly before 3 p.m. ET.


The Standard & Poor's 500 Index ($INX) was off 19 points, or 1.6%, to 1,166, and the Nasdaq Composite Index ($COMPX) was off 44 points, or 1.8%, to 2,437. The Nasdaq-100 ($NDX.X) was off 34 points, or 1.6%, to 2,070. The losses for the major indexes were their worst since Aug. 11.

Among stocks seeing moves today:

  • Microsoft (MSFT), down 2.8% to $25.10. The company announced late Monday that Ray Ozzie, the company's chief software architect, will retire.
  • Abercrombie & Fitch (ANF), down 5.2% to $43.25. The teen clothing retailer was cut to "sell" from "hold" by analyst Eric Beder at Brean Murray Carret & Co.
  • VMware (VMW), down 6.7% to $73.12. The developer of software that lets computers run multiple operating systems said bookings for the quarter were $746.7 million. That missed the $771 million Wall Street consensus, according to ISI Group analyst Heather Bellini.
  • Parker Hannifin (PH), up 3.7% to $75.08. The maker of valves and pumps used in factory equipment topped analyst estimates for first-quarter profit and raised its forecast for full-year earnings from continuing operations to a range of $5.20 to $5.80 per share from an August projection of $4.40 per share at most.
  • Massey Energy (MEE), up 5% to $37.33. The coal miner is seeking "strategic alternatives, including a possible sale," The Wall Street Journal reported.
Gold settled down $36.10, or 2.6%, to $1,336 an ounce in New York. The percentage decline was gold's biggest since it fell more than 3% on July 1. Silver was off 63.3 cents, or 2.6%, to $23.78 an ounce. Copper dropped 9.8 cents, or 2.5%, to $3.76 a pound.

Crude oil fell $3.59, or 4.32%, to $79.49 a barrel, the biggest one-day loss since Feb. 4.

Interest rates were lower, with the 10-year Treasury yield falling to 2.475% from 2.491% on Monday.

The dollar was 1.1% higher against the British pound and the euro and 0.9% against the yen. It moved up 1.8% against the Canadian dollar. The U.S. Dollar Index, which measures the greenback against a basket of currencies, was up 1.7% to 78.421, its biggest percentage gain since Aug. 11.

Apple was off 2.7% to $309.49, despite earnings that beat Street estimates. The problem was that Wall Street had expected even better results, and there were concerns on how supply shortages were hurting sales of iPhone 4 devices.

IBM was down 3.4% to $138.03, in part because of concern about bookings of service contracts.

Wednesday brings a host of earnings reports from Boeing (BA), Wells Fargo (WFC), US Bancorp (USB), Delta Air Lines (DAL), US Airways (LCC) and Manpower (MAN).

The Federal Reserve will release its Beige Book report, a narrative look at the economy at 2 p.m. ET. 

Energy prices -- New York close
 

Tues.

Mon.

Month chg.

YTD chg.
Crude oil 

$79.49

$83.08

-0.60%

0.16%
(per barrel)











Heating oil

$2.1893

$2.2761

-10.27%

3.48%
(per gallon)











Natural gas 

$3.5130

$3.4310

-9.27%

-36.95%
(per mil. BTU)











Unleaded gasoline

$2.0483

$2.1515

0.17%

-0.22%
(per gallon)











Retail gasoline

$2.8290

$2.8320

5.21%

7.20%
(per gallon; AAA)












Why did the Chinese raise rates?
The Chinese rate hike was the surprise of the day. No one was expecting it, and there were all sorts of explanations on why it occurred.

As rate increases go, it wasn't large, but it was the first since 2007. The Bank of China raised its one-year lending rate to 5.56% from 5.31%. The deposit rate will increase to 2.5%  from 2.25%.

The common arguments for the move were that China has been growing way too fast. Property prices, especially in the largest cities, such as Shanghai and Beijing, are soaring, and inflation pressures are rising.

It also could be a political move, designed to mollify American and European critics who complain that the Chinese are keeping their currency way undervalued. The finance ministers of the world's largest economies are to meet Friday in South Korea.

The concern among investors is that the move is a signal that Chinese economic growth won't be as fast as expected. That will cut demand globally for raw materials and for construction and other kinds of equipment.

Freeport-McMoRan Copper & Gold (FCX) was down 3.7% to $92.72. Caterpillar (CAT) was off 2.1% to $78.55.

Separately, The New York Times said China is blocking shipments of crucial minerals to the United States. China has been blocking shipments of the minerals to Japan for the last month.

The Chinese action, involving rare-earth minerals that are crucial to manufacturing many advanced products, seems certain to further ratchet up already rising trade and currency tensions with the West.

Until recently, China typically sought quick and quiet accommodations on trade issues. But the interruption in rare-earth supplies is the latest sign from Beijing that Chinese officials are willing to use their growing economic muscle.

Bank of America's mortgage problem
CNBC reported this afternoon that the New York Federal Reserve Bank and a consortium of investment firms may sue  Bank of America to force the bank to buy back mortgages contained in some $47 billion in mortgage bonds originally packaged by Countrywide Financial, which merged with Bank of America.

The consortium includes bond giant Pimco and BlackRock BlackRock (BLK), which is 34% owned by Bank of America, TCW Group and MetLife (MET).

Investors are stepping up efforts to recoup losses on mortgage bonds, which plummeted in value amid the worst slump in home prices since the 1930s.

The investors said that some mortgages that the bank packaged into bonds should never have been sold to investors in the first place.

The group has issued a "notice of nonperformance" to Countrywide Home Loan Servicing, now part of Bank of America. The unit works on behalf of mortgage bond holders to collect payments on mortgages and work out bad loans.


The notice gives the Bank of America unit 60 days to fix the issues. If the company doesn't fix the problems, the investors can sue. It may take years before the issue is resolved, and other big banks may pressured as well, Paul Miller, a financial services analyst at FBR Capital Markets told CNBC this afternoon.


Bank of America said it would fight the charges.

Meanwhile, the company said its loss widened to $7.3 billion, or 77 cents a share, in the third quarter.

But take out a $10.4 billion charge, and the bank earned $3.1 billion, or 27 cents a share, surpassing estimates for 16 cents a share.

The charge resulted from the limits to be placed on debit interchange fees under the financial reform legislation enacted last summer.

Like Citigroup (C) on Monday, Bank of America reported that credit problems are shrinking. CEO Brian Moynihan insisted that concerns about mortgage foreclosure documentation were overblown, but the bank's review of the issue, which has engaged 1,000 staff, is not yet complete.

Goldman leads the earnings reports

Today was a big day for earnings, ending with Yahoo's (YHOO) report after the close. Here's a quick rundown:


Goldman Sachs (GS) said its third-quarter earnings dropped 40% to $1.9 billion, or $2.98 a share. But the results easily beat  expectations for a per-share profit of $2.32, and  Goldman shares were up 2% gain to $156.72.


Johnson & Johnson's (JNJ) third-quarter net income rose 2.2% to $3.42 billion, or $1.23 per share, as sales declined less than 1% to $14.98 billion. Analysts had expected the health care giant to earn $1.15 a share on $15.2 billion in revenue, according to Thomson Reuters. Shares of JNJ were down 0.9% to $63.29.

 

State Street (STT) reported third-quarter operating earnings of $540 million, or $1.08 a share, which marked an increase of $327 million, or 66 cents a share, over a year earlier. Excluding certain items, third-quarter earnings were 86 cents a share, compared with 71 cents a share a year ago. Analysts polled by Thomson Reuters had expected earnings of 83 cents. State Street shares were off 2.2% to $40.30.

 

Coca-Cola's (KO) third-quarter net income increased 8.4% to $2.1 billion, or 88 cents, as revenue rose 5% to $8.43 billion. Excluding certain items, the company earned 92 cents, beating the 89-cent average estimate. Shares were up 0.6% at $60.34.

 

UnitedHealth (UNH) said third-quarter earnings rose 23% to $1.14 a share on sales of $23.67 billion. Analysts had projected earnings of 84 cents on sales of $23.31 billion.  UNH shares were down 2.6% to $35.30.

 

Bank of New York Mellon (BK) swung to a third-quarter profit but fell short of analysts' estimates. The company reported earnings from continuing operations of 51 cents a share, compared with estimates for 54 cents. Shares were off 2.4% to $25.99.


Short hits from the markets -- New York close
 
  Tues.

Mon.

Month chg.

YTD chg.
Treasury yields




 





13-week Treasury bill

0.130%

0.140%

-13.33%

160.00%
5-year Treasury note 

1.097%

1.118%

-15.22%

-59.16%
10-year Treasury note

2.475%

2.491%

-1.94%

-35.60%
30-year Treasury bond

3.727%

3.727%

0.81%

-19.69%
Currencies







 

 
U.S. Dollar Index

78.421

77.137

-0.65%

0.26%
British pound

$1.5726

$1.5901

0.03%

-2.78%
(in U.S. $)











U.S. $ in pounds

£0.6359

£0.6289

-0.03%

2.86%
Euro in dollars

$1.3806

$1.3955

1.08%

-3.67%
(in U.S. $)











U.S. $ in euros

€ 0.7243

€ 0.7166

-1.07%

3.81%
U.S. $ in yen 

81.97

81.25

-2.05%

-11.86%
U.S. $ in Chinese

6.67

6.64

-0.75%

-2.32%
yuan











Canada dollar

$0.966

$0.983

-0.56%

1.62%
(in U.S. $)











U.S. dollar 

$1.036

$1.017

0.56%

-1.61%
(in Canadian $)











Commodities

 

 

 

 
Gold

$1,336.00

$1,372.10

2.02%

21.88%
(per troy ounce)











Copper

$3.7575

$3.8550

2.90%

12.28%
(per pound)











Silver

$23.7800

$24.4130

8.98%

41.17%
(per troy ounce)











Wheat 

$6.7150

$6.9000

-0.37%

24.01%
(per bushel)











Corn

$5.4600

$5.5725

10.14%

31.72%
(per bushel)











Crude oil 

$79.49

$83.08

-0.60%

0.16%
(per barrel)










 
69Comments
Oct 19, 2010 2:06PM
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Watch and learn boys and girls... The Chinese actually reward savings. In the U.S. savers are punished by low interest rates and inflation.
Oct 19, 2010 2:16PM
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Countries with high savings rates find a social security system pretty much unnecessary. When savings and investment are rewarded you get more savings and investment. When consumption and debt are rewarded you get more consumption and debt.

 

When the latter route is followed you will eventually end up in a Keynesian nightmare, also known as a destroyed economy

Oct 19, 2010 2:53PM
avatar

bingo -

 

 

Watch and learn boy and girls... The Chinese actually reward savings. In the U.S. savers are punished by low interest rates and inflation.
Oct 19, 2010 3:06PM
avatar

 

banks get some 8% to 25% thru various loan products but will never pay so much as 3% or 4% for basic savings.  they want ALL our money, and both parties are allowing this to happen!

 

Watch and learn boy and girls... The Chinese actually reward savings. In the U.S. savers are punished by low interest rates and inflation.
Oct 19, 2010 4:52PM
avatar

It seems to me that thanks to China (and other low cost labor markets) the American stock market and bond market have been able to produce record profits for shareholders of these companies. If the same American companies could have reinvested more of these record profits in employee pensions, worker healthcare and U.S. job market retention much of the damage of wasteful spending would have been limited. Also it seems that all government spending of our tax dollars that are appropriated by our congressmen could be required to be deficit neutral.

 

It seems that all of the money annually spent on defense by our congress could be considered a jobs program for many thousands of workers in America. It is a shame that the residue value to society of a bullet, bomb, tank or drone is zero. In comparison to bridges, roads, schools....etc..

 

What a sad position our country finds itself in. Our financial institutions caused immense damage to the world markets. Many of the CEO's at fault have committed a moral crime that is not punishable by time in jail. Their crime is small in comparison to the Madoff scandal, in my opinion.

 

President Obama inherited the worst mess I have ever witnessed in my lifetime. Congress is clearly struggling with their moral allegiance to the working people of America and corrupted by corporate interests. Capitalism is good, but the pendulum has swung to the extreme in favor of non persons.

 

Our country has destroyed all the wealth created in the past 30 years. Remember the story about the WW2 vet (probably a white guy) that bought his first home financed by the FHA and obtained a SBA loan to start his business, his kids received a student loan from Sallie Mae, and retired with his company's defined benefit plan, social security and medicaid happily ever after? This person probably voted for President Reagan and yelled for big government to get off his back.

 

Just my opinion for now.

 

Oct 19, 2010 3:50PM
avatar
I agree with the posts about the negative effects of low interest rates.  I lay the blame at the feet of the Fed and their policies for the last 15 years.

Maybe it's better for the economy if people pay 8% for a mortgage if that means granny can buy CDs paying 5-6%.

Maybe it's better for the economy if an entrepreneur has to borrow at 10% to start a business if that means a regular savings account will pay 2-3% and a 10 yr treasury note will pay 7%.

The various bubbles started getting over-inflated when we were incentivized to borrow as much as possible and save little to nothing.

Oct 19, 2010 3:35PM
avatar

China will control this country through economics and militarily.  The American People are being sold out on a dailey basis. Both parties have the interests of the Lobbyists at heart. Funny how all the blame is now put on the America worker. I don't believe this country ever had 100% Union membership.

 

Entitlements? Would that be the right to have slave labor produce goods for American Corporations? Or destroy the middle class? Is that what Corporations BELIEVE they are entitled to do?

 

When the Capitalist are being executed by the Chinese will the money have been worth it? After all they are selling the technology and knowledge to the Chinese to do just that.

Oct 19, 2010 3:20PM
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Tie the loan interest rate to the saving/CD rate. The banks and finance groups are entitled to a spread; however, .5% interest for savings and 29.99% for credit cards is highway robbery...
Oct 19, 2010 4:14PM
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China raises interest rates...contractionary policy, curbing that old inflation and taming rapid growth. Don't you just miss those days when we had to control growth. Is a Chinese bubble on the way, or are their fiscal and monetary policy makers in-tune with their economy? Sounds like a proactive move more than a reactive move. Maybe we should start to outsource economic forecasting jobs to China rather than manufacturing? They say winning isn't everything, so I guess we can be comfortable with the no. 2 spot. To bad no.2 is always the 1st loser.
Oct 19, 2010 3:07PM
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So we should impeach everyone that we (you) don't agree with?  I thought thats why we vote via the electoral college system.  every four year we say yay or nay to an individual right to hold office.  That isn't enough for you.  You are right and 70 million people are wrong.  Wow! All hail the exalted Money wise for he has wisdpom beyond the masses.   Sound like a messiah complex to me.
Oct 19, 2010 3:38PM
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Island with a palm treeA sudden downward market movement today , will trigger a sudden upward movement the next day. market volatility is here, traders love this kind of market.Wilted roseMoney
Oct 19, 2010 4:27PM
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Buy at the open, but sell within 6 hours.  stocks go up due to the new color of panties Ms Obama has decided to wear but will go down later in the day when it's announced dog food companies will reduce their number of flavor offerings. 

 

well, should we be buying at 9:15 tomorrow or should we remain on the sidelines with our funds secure?
Oct 19, 2010 4:20PM
avatar

Characterizing the economic system that we have in the U.S. as LAISSEZ-FAIRE shows the rest of us just how dense some people are.

 

The government is the largest

mortgage holder

insurance company

owns the largest automobile manufacturer

regulates commerce

 

and so much more that it would take days to list all the government intervention in the economy. This is not LAISSEZ-FAIRE.

avatar

The power of the world has spoken and we see the reaction. China's increasing dominance in this world has me (and thankfully) others worried. There is a reason to be worried. The American empire is falling and all we Americans are concerned about is how much money do I have, where my next hambuger is coming from and keeping my BMW payments on-time. The others are too worried about partisan politics. China is marching on. 

Oct 19, 2010 5:15PM
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The New York Times said China is blocking shipments of crucial minerals to the United States
Gun powder and things like that, getting ready for the take over
Oct 19, 2010 4:49PM
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  Island with a palm treeThere are a lot of foreign companies including american doing manufacturing businesses in China,

This companies made china their temporary host and as soon as they exhausted whatever they are after in that country they'll move on to another prospective host in the third world economy. I am just wondering who is the villain here is it the Gov't hosting this greedy companies, is it this plundering companies that knows no boundary when it comes to greediness or both?AutoMoney

 

 

Oct 19, 2010 3:11PM
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Moneywise....I totally agree...I am 60 years old and never thought I would live to see such a poor excuse for president in office in a time we need some real leadership and fiscal responsibility in this country. I just hope that the people who vote at the midterm elections send a message loud and clear. We have listened to the lies and hope and change mantra for 3 years while this country continued to spiral down. We need jobs and clarity instead of entitlement programs and spending sprees.
Oct 19, 2010 2:22PM
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ever notice when china speaks, dow listens, got us by to gonads folks!!! ain't gonna be pretty in near future when inflation from obama mania sets in!!!
Oct 19, 2010 3:19PM
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~ that was me when Bush got elected.  now i don't have such high expectations. 

 

I ..... never thought I would live to see such a poor excuse for president in office in a time we need some real leadership and fiscal responsibility in this country.
Oct 19, 2010 4:49PM
avatar
What is with people bashing big business all the time? Where do/did you people work? Where do you buy your stuff from? Where do you eat? What do you drive? We are all part of this country's economy, not just the fat cats. Special interest money is rampant in our system, how do you figure to eliminate that?
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