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Market Instability Continues In Sell-Off

By Renae Merle
Washington Post Staff Writer
Thursday, July 10, 2008

U.S. stocks staged a steep sell-off yesterday as widening concerns about the health of the financial sector continued to deflate investors' hopes for an economic rebound later this year.

The Dow Jones industrial average lost 236.77 points, or 2.1 percent, to close at 11,147.44. The Standard & Poor's 500-stock index fell 29.01 points, or 2.3 percent, to 1244.69. The tech-heavy Nasdaq composite index took an even greater hit, losing 59.55 points, or 2.6 percent, to close at 2234.89.

After declining modestly for the majority of trading yesterday, stocks took a deep dive at about 3:30 p.m., more than erasing Tuesday's gains.

Economists said investors were snatching back those gains on fear over the stability of the troubled mortgage industry giants, Fannie Mae and Freddie Mac, as well as other financial companies. Recent declines in oil prices have not been enough to offset long-term economic concerns or to persuade consumers to step up their listless buying, they said.

Merrill Lynch declined 9.3 percent, while Lehman Brothers lost 11.4 percent. Bank of America, which recently completed its acquisition of subprime mortgage giant Countrywide Financial, lost 6.3 percent yesterday.

"The fear is that conditions among financial firms are far worse than is commonly understood," said Joseph Brusuelas, chief U.S. economist at California-based Merk Investments. "Sometimes it's about greed. This afternoon it's about fear."

Shares of Fannie Mae and Freddie Mac, companies that are vital to the functioning of the housing market, fell to their lowest levels in years. Fannie Mae's stock price sank 13.1 percent, to $15.31, while Freddie Mac's share price plummeted 23.8 percent, to $10.26. That left the stocks even lower than they were before a massive sell-off Monday and erased the gains the stocks achieved Tuesday when a federal regulator made reassuring public comments about the two companies.

Investors concluded that the two companies will have to raise more capital to shore up their finances and that doing so will dilute the value of their stock, said analyst Josh Rosner of Graham Fisher. Investors are also waking up to the fact that insurers on which Fannie Mae and Freddie Mac depend to cover losses on troubled mortgages have problems of their own, he said.

The market jitters are also being fueled by the start of the second-quarter earnings season, analysts said. Credit Suisse said in a report yesterday that earnings for regional banks would fall about 31 percent in the quarter compared with a year earlier and that 30 to 40 percent of the top 50 banks would probably cut dividends and be forced to raise capital over the next few quarters. Analysts also expect S&P 500 companies to report a 13.5 percent drop in second-quarter earnings, according to Thomson Reuters.

The market downturn also reflects growing skepticism that the economy will soon begin to recover, economists said. "There was a widespread perception that the second half of the year would show improvement; now investors are starting to doubt that," said Ed Yardeni, chief investment strategist for Yardeni Research.

Staff writer David S. Hilzenrath and researcher Robert E. Thomason contributed to this report.

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