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. 

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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


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Oct 19, 2010 5:50PM
Me too, Mozart66, me too!  It's like I'm Rip VanWinckle waking up from a long dream.  Whatever happened to the America with swagger I knew when I was a boy?
Oct 19, 2010 5:47PM
OK.  Let's take a little un-scientific, pre-election poll on Congressman Barney Frank by giving him either a "Thumbs-up" or "Thumbs-down" based upon how you'd vote as a resident of his district if the election were held today.  This should be interesting!
Oct 19, 2010 5:43PM
Here we go again.  One bad day in the Markets and the doom and gloomers come out from under their rocks.  The headlines are just idiotic.  This was a pull back and maybe even the beginning of a moderate correction.  But to talk about crashes and all this nonsense is just so far off base as to not be worthy of consideration.  The reasons are simply a mildly overbought market and some accelerant from China, IBM and Apple.  BOA is not a real issue.  That stuff is gaming by PIMCO and NYFED.  It will dissipate soon.
Oct 19, 2010 5:29PM
Island with a palm treeI don't think that the much awaited market correction is here yet, but it could get a lot volatile here.I use options to hedge my position, sell covered calls,or sell put.  I am not  buying at this point either because the market looks toppy. Market going up or down no problem. Bring it on. this is just an opinion not influencing anybody's decision .Beer mug
Oct 19, 2010 5:20PM
American Revolution II and WW III both taking place at the same time. Should be a blast! Party 
Oct 19, 2010 5:16PM
obamanomics at its best. clinton started the down fall with nafta and obama is going to finish off the country with nazi style of government of not listening to the people but just doing what he thinks should be done. all this from a man who never had a real job in his whole life. when he did attempt to work he found things to do that allowed him to be a leech and live off tax payers money.
Oct 19, 2010 5:15PM
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 5:01PM
Buy Gold The CRASH IS HERE!! The fall off the CLIFF is a long one. Chaos in the Street! De-value the Dollar IN FRONT OF THE AMERICAN PEOPLE. Not Doom and Gloom. Just Reality we have been Had !!
Oct 19, 2010 4:52PM

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 4:50PM

If the FED and the government keep going as they have over the past 80 years ....There will come a time when Chinese mothers will tell their children, "eat your vegetables there are children starving in America"

Oct 19, 2010 4:49PM
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?
Oct 19, 2010 4:49PM

  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 4:32PM
hopefully it will fall below 500 and stay there.bust the oil companies and the banks.
Oct 19, 2010 4:27PM

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 4:26PM
It is complicated. What a mess. Conflicting opinions between adults and their children. War. Unemployment. Tight Money. Sounds like the period of time around the Vietnam War. The 1960's.
Oct 19, 2010 4:25PM
Well, if you quit using credit cards, keep all your money in cash, none of the banks have it.  Don't have a checking, savings or investments with any of them.  Can you imagine if everyone pulled all their money out at once?  I have.  No more banks for me.  I'm rebelling against the greedy bastards!!
Oct 19, 2010 4:22PM
Then one wonders why retail investors shy away from the market----no stability. Wild point swings like a yo-yo.
Oct 19, 2010 4:21PM
I totally agree that Pres Obama has done more harm to the office of the President than any other person since Calvin Coolidge.  He has absolutely no moral compass, no political compass, and economic compass.  He relies solely on information from his cabinet because he cannot figure things out for himself.  He has no idea of what he is doing.  Now he wants to give free healthcare to 37 million more Americans who cannot afford it.  How will he pay for it?  By making the healthcare that you and I pay for more unaffordable.  Obamacare is a complete joke.  I cant go to the doctor even though I have healthcare.  I cant afford the deductibles and copays that would amount to roughly 8% of my gross annual income...8 freaking percent.  Now he wants to add a bunch of preventative services for free.  If everyone who is eligible under his new plan signs up and takes advantage of all of the free services, every family practice doctor in America would spend 34.8 hours each week providing those services to those people while those with private insurance would be in the waiting rooms not getting cared for.  Obama is a joke, Pelosi is a joke, Biden is a joke and all of those 70 million idiots who put them office are a joke!!!  You people want socialism...move to Canada or somewhere in Europe.  Me...I'll take good ole American Democracy and I'll fight for it to the death just like my ancestors did if necessary.
Oct 19, 2010 4:20PM

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.

Oct 19, 2010 4:18PM
well, should we be buying at 9:15 tomorrow or should we remain on the sidelines with our funds secure?
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