By Simone Baribeau
Washington Post Staff Writer
Friday, June 27, 2008
Surging oil prices combined yesterday with mounting anxiety over the health of such disparate industries as banking, auto manufacturing and technology to send the Dow Jones industrial average tumbling by 3 percent to its lowest level in almost two years.
Crude oil futures reached a record high of $140 a barrel in New York trading after the head of OPEC projected that prices could hit $170 this summer, prompting concern that energy prices will continue to pressure consumers and drag down the already sluggish economy.
Meanwhile, Goldman Sachs offered a new, grim prognosis for Citigroup and Merrill Lynch, two of the country's largest banks, concluding that they still face billions of dollars in write-downs of troubled assets on their books and even more bad debt on the horizon.
The steep decline in stocks underscored the twin perils facing the economy: a credit crisis far deeper than Wall Street bankers had promised just months ago and a broader economic slowdown rooted in high energy prices, growing unemployment and flagging retail sales.
Those high oil prices, along with weak demand, took their toll yesterday on U.S. automakers, including the largest, General Motors, whose stock fell to its lowest level in decades after Goldman Sachs downgraded it because of slowing sales. Even technology stocks, which had escaped the worst of the recent slump, fell in part because of weakening business demand for computer products.
"It's a confluence of long-running events all coming to a head at the same time. It's not pretty," said Joseph Brusuelas, chief economist at Merk Investments.
The Dow Jones industrial average closed down 358 points, or 3 percent, to 11,453.42, the lowest since September 2006. All 30 companies in the average were off for the day, as the decline sent the Dow to its worst June since the Great Depression. The tech-heavy Nasdaq composite index was down almost 80 points, or 3.3 percent, to 2321.37. The Standard & Poor's 500-stock index, fell 38.82, or 2.9 percent, to 1283.15.
Concerns about the credit crisis had eased in March after the Federal Reserve arranged an emergency rescue of Bear Stearns from imminent bankruptcy, which had threatened to upend global financial markets. Afterward, the stock market clawed its way upward for nearly two months.
But since mid-May, the market has been trending downward again on rising oil prices, anemic economic activity and lingering anxiety about the credit markets. The steep decline in stocks yesterday was initially triggered, analysts said, by the downgrade of Citigroup and Merrill Lynch.
"The market was probably right on the edge of having a big move down anyway. All it needed was a little nudge," said Robert B. MacIntosh, chief economist at Eaton Vance.
Both commercial and investment banks have struggled with deteriorating portfolios and consumer loan write-offs since the downturn in the subprime mortgage market last year. Investors hoped that banks like Citi and Merrill had already written down most of their troubled assets, which have consisted mainly of securities linked to subprime mortgages. Financial firms have written down $400 billion worth of subprime assets.
Instead, Goldman yesterday added Citi to its "conviction sell" list, raising its estimate of the bank's future write-downs. "We see multiple headwinds for Citigroup including additional write-downs, higher consumer provisions as a result of rapidly deteriorating consumer credit trends," Goldman Sachs analyst William F. Tanona said.
Tanona also projected another quarter of significant write-downs for Merrill Lynch, which has written off $30 billion.
Even Goldman suffered a setback yesterday when it was downgraded by Wachovia despite a relatively strong showing recently.
"The resolution of the credit crisis is not in the eight or ninth inning but rather in the middle innings," said John G. Lonski, chief economist for Moody's Investors Service.
The market swoon came the day after the Fed left a key interest rate unchanged and indicated a deepening concern about inflation. Some analysts said the Fed's statement also contributed to the stock sell-off because the heightened focus on inflation signaled a greater likelihood of interest rate increases later in the year. Higher interest rates can depress growth.
After its policymaking meeting Wednesday, the Fed said that "recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending." To some analysts, that suggested complacency about risks facing the economy.
Crude oil prices passed $140 before settling at $139.64 after Chakib Khelil, president of the Organization of the Petroleum Exporting Countries told French television that oil would probably reach $150 to $170 this summer. Libya added to supply concerns by saying it might cut production. The threat came in response to a U.S. law that permits victims of terrorist attacks to receive compensation by seizing foreign assets, according to Bloomberg News.
In response to high gas prices, sales of big pickup trucks came almost to a halt last month. That contributed to Goldman's downgrade of GM from neutral to sell. GM's stock fell 11 percent yesterday. Ford Motors also fell. Chrysler, in the meantime, dismissed speculation that it planned to file for bankruptcy.
U.S. automakers have been adjusting by cutting production of larger vehicles and ramping up production of smaller, more fuel-efficient cars, but they cannot do it overnight.
"They have to find the cash to do it. They will find the cash to do it. It's not an either-or situation, and they know that," said Tom Libby, an analyst with Power Information Network. "In the short term, they're going to suffer because these actions take awhile."
Technology companies Oracle and BlackBerry manufacturer Research In Motion also fell based on disappointing forecasts.
Staff writers Neil Irwin and Peter Whoriskey contributed to this report.