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Probing the Depth of the Downturn
Market Volatility Expected to Continue

By Tomoeh Murakami Tse
Washington Post Staff Writer
Sunday, November 11, 2007

NEW YORK -- The gloom is spreading.

For weeks, credit worries had weighed on the stock market. Investors fled from financial shares as the nation's giant banks wrote down billions of dollars against losses from the subprime debacle. With the financial shakeout still far from over, fresh anxieties surfaced last week as General Motors reported a staggering loss and the lofty tech sector started sinking back to earth.

When the stock market opens again tomorrow, investors will be looking for signs of the depth of the downturn. Earnings reports from two industry leaders this week, Wal-Mart and Home Depot, will help provide a picture on consumer spending. Data on home sales, retail sales and inflation also will give the markets some direction. One key will be the impact of rising oil and commodities prices on inflation. A sharp uptick could prevent the Federal Reserve from lowering interest rates if the economy weakens.

The drumbeat of grim news last week -- initial reports of poor retail sales, slumping consumer sentiment and no evidence of a letup in the slide of the dollar -- has heightened concerns about the state of the U.S. economy. On Thursday, Federal Reserve Chairman Ben S. Bernanke weighed in, testifying before Congress that growth is likely to slow through the first half of 2008.

"The fear that the economy might be close to a recession loomed very large, at least intermittently," last week, said Stuart Schweitzer, global markets strategist for J.P. Morgan Private Bank. "It's just overall not a pretty picture."

Stock and debt markets took a beating, with the Dow Jones industrial average posting the worst weekly decline since credit market troubles bubbled to the surface in late July.

After triple-digit losses on Wednesday and Friday, the Dow is off nearly 8 percent from the record high it set last month when the financial markets appeared to enter a recuperative stage.

Now analysts expect the market's uncertainty and volatility to continue for the foreseeable future. A slew of further write-downs of subprime mortgage-related securities by financial institutions has sharpened the focus on the fallout from the summer's credit crunch. Citigroup added up to another $11 billion in write-downs; Morgan Stanley added $3.7 billion and Wachovia tallied $1.1 billion.

The sense at trading desks across Wall Street is that more credit troubles are looming, as rating agencies continue to downgrade chunks of hard-to-value securities linked to subprime loans. On Friday, Moody's Investors Service said it cut ratings on $10 billion worth of such securities in October and expected more downgrades in November.

"When you come in in the morning, most people see the glass as half empty right now," said Bart Barnett, head of equity trading at Morgan Keegan. "They're looking for a reason to sell something."

Investors are pulling away from riskier assets, traders and analysts said, forcing several companies to postpone their offering of high-yield bonds.

"In the credit markets, it's kind of returned to the uncertainty that we saw in the summer," said Stephen Carter, senior analyst with Thomson Financial. "You get this negative sentiment, and that makes it very difficult to sell new issues into that market."

The sell-off of tech stocks last week was particularly unnerving to some investors because the sector had led the market's recovery to all-time highs after the summer's credit turmoil. Investors had seen tech companies, with healthy growth forecasts, as better able to weather the slowdown in domestic spending. That's because they can rely on global consumers and on spending by companies investing in technology after having built up healthy balance sheets over the last several years.

But Cisco threw water on that notion Thursday, warning that weakening demand from customers, including the financial firms weighed down by big losses, would likely affect the networking equipment maker's future.

Bernanke will be in public again this week, speaking at the Cato Institute in Washington on Wednesday morning, after the release of the retail sales figures and a report on inflation at the producer level.

"The Fed wants to be iron-clad sure, as sure as they can be, that inflation will not take hold" before it moves again to lower rates, Schweitzer said. "They need to see evidence of a pullback by consumers or a pullback in business hiring. Either one will do the trick."

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