Rally Fizzles as S& P, Dow And Nasdaq Fall Back 2%

By Alejandro Lazo and David Cho
Washington Post Staff Writers
Thursday, March 20, 2008

U.S. stocks markets continued a turbulent ride yesterday as investors dumped shares on worries over high commodity prices and the growing toll of the credit crunch roiling Wall Street.

The Dow Jones industrial average fell 293 points, or 2.4 percent, to 12,099.66, cutting deeply into its huge rally Tuesday. The Standard & Poor's 500-stock index, a broader measure of stocks, fell 32 points, or 2.4 percent, to close at 1298.42. The tech-heavy Nasdaq closed down 58.3, or 2.6 percent, at 2209.96.

Traders and economists said they expected some pullback following Tuesday's 420-point rise in the Dow, its largest one-day gain of the year, but the size of yesterday's decline signaled ongoing unease with the underlying strength of the U.S. economy and global financial system.

Reacting to Wall Street's fall, Hong Kong's Hang Seng index and China's benchmark Shanghai composite index initially plummeted today and were down more than 3 percent in late morning trading. Japanese markets were closed today.

The pessimism overtook a good earnings report from the nation's second-largest investment bank, Morgan Stanley, and a landmark stock offering by credit card titan Visa, which raised $17.9 billion in the largest initial public offering in U.S. history. Recent efforts to shore up confidence in the financial system, including a steep cut in interest rates by the Federal Reserve on Tuesday, did not cheer investors.

"Yesterday, it appeared the Fed had rescued the financial system and the economy because all of the financial company stocks went up, and all the energy and industry stocks went up," said Robert Barbera, chief economist at ITG. "Today the message is the Fed is rescuing the financial system but can't stop the recession."

While every sector had losses, industrial and energy companies were pummeled as investors retreated on fears that commodity prices had risen too quickly.

Shares of Monsanto, a global provider of agricultural products, fell 12 percent. Freeport-McMoRan Copper & Gold, a metals mining firm, dropped 11.2 percent. Peabody Energy, a large coal company, declined 9.4 percent.

"What you are seeing is fast money moving out of the commodities group," said Robert Pavlik, chief investment officer of Oaktree Asset Management.

Financial stocks fared better. Morgan Stanley rose 1.4 percent after its earnings beat analysts' expectations by a wide margin. The firm reported a 42 percent drop in profit yesterday and a $2.3 billion write-down of assets, notably securities linked to troubled mortgages. But it also said it recorded near-record revenue from its trading divisions.

Morgan Stanley profit fell 42 percent, to $1.55 billion, or $1.45 a share, in its first quarter, compared with $2.31 billion, or $2.17 a share, in the first quarter a year earlier. Most analysts forecast $1.03 a share.

The report followed reassuring earnings reports from Lehman Brothers and Goldman Sachs on Tuesday. These firms also beat expectations and said they have more than enough cash to survive.

Concerns about the health of Wall Street firms accelerated earlier this week after investment bank Bear Stearns was forced into a buyout by J.P. Morgan Chase to avoid bankruptcy. Now a battle appears to be shaping up among Bear's shareholders over whether to approve the deal. Some are considering a campaign to scuttle it or seek a higher price from another bidder. About a third of Bear Stearns's shares are owned by employees.

Many are angry that the firm sold itself for $2 a share. Bear Stearns had been trading at $30 Friday and as high as $70 earlier last week.

Some analysts said speculation over a shareholder revolt is keeping Bear Stearns's stock well above $2. Yesterday it closed at $5.33. Others conjectured that Bear Stearns's bondholders, who would get their money back if J.P. Morgan buys the firm, are buying up shares to prevent shareholders from scuttling the deal.

On Sunday, as it was overseeing the Bear Stearns buyout, the Fed for the first time allowed investment banks to borrow short-term cash in exchange for putting up collateral. Normally, that's only open to regular, commercial banks, through the "discount window."

Analysts and Fed insiders worried that this new lending program may not have its intended effect of bolstering confidence in top financial firms if those companies felt there was too much of a stigma in borrowing money this way. Fed leaders also worried that Wall Street firms would become too reliant on it.

Early indications were that neither fear has materialized. Goldman Sachs, Morgan Stanley and Lehman Brothers told Bloomberg News that they have used the new window, which is similar to the discount window for regular banks but has some technical differences.

Staff writer Neil Irwin contributed to this report.

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