Dow drops 165, falls below 11,000

Updated: 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.

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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)