Stocks Drop on Sagging Earnings

By Renae Merle
Washington Post Staff Writer
Wednesday, October 22, 2008

Sagging corporate profits weighed on investor confidence yesterday, sending stocks tumbling, despite further signs that the credit crisis is easing.

The sell-off wiped away more than half of the 413-point gain in the Dow Jones industrial average on Monday. It is not unusual for investors to lock in profits after a rally by selling some shares, but the broad-based declines yesterday suggested growing concern about the impact of the financial crisis on corporate balance sheets, analysts said.

The Dow fell 2.5 percent, or 232 points, to close at 9033.66, while the broader Standard & Poor's 500-stock index fell 3 percent, or 30 points, to 955.05.

The Nasdaq composite index took the biggest hit yesterday, falling 4.1 percent, or 73 points, to close at 1696.68. It was led down by disappointing earnings reports from Texas Instruments, the semiconductor giant, and Sun Microsystems. Both said they expected the economy to continue to affect their results. "Sun and its customers are seeing the impact of a slowing economy," Jonathan Schwartz, Sun's chief executive, said in a statement.

Sun lost 17 percent, or $1.01 a share, to close at $4.77. Texas Instruments was down 6 percent, or $1.13 a share, to close at $16.85.

Analysts were also looking to Yahoo earnings yesterday for a signal on the impact of the economic downturn on online advertising. After the markets closed, the tech-sector bellwether reported a 64 percent drop in third-quarter profit.

The weak tech earnings overwhelmed continuing evidence that government efforts to thaw the credit markets are making headway. A benchmark rate for loans between banks -- the London interbank offered rate, or Libor -- fell to 3.8 percent yesterday from 4 percent Monday for a three-month loan. In normal times, that rate would be closer to the 1.5 percent bank lending rate set by the Federal Reserve.

"I think it's a sign that perhaps we're seeing a glimmer of some sort of easing in credit crunch," said E. William Stone, a Philadelphia-based chief investment strategist for PNC Wealth Management. "It's still not what normal would be, but it's headed in the right direction."

Federal regulators announced another new program yesterday to backstop money-market mutual funds.

But investors focused yesterday on a drumbeat of poor earnings reports. One bright spot was 3M, which reported a 3.2 percent increase in third-quarter profit, sending its stock up 4 percent, to $60.04 a share.

US Bancorp reported that third-quarter net income fell 47 percent, to $576 million, from $1.1 billion in the year-ago period. Its shares closed at $30.20, down 3 percent. Shares of chemical maker DuPont fell 8 percent, to $33.28, after the company reported that net income fell 30 percent, to $367 million from $526 million. The company lowered its earnings forecast for the year and led the Dow lower.

Caterpillar, the farming and construction equipment maker, pointed to "recessionary" conditions in North America and "growing weakness" overseas, reporting a 6 percent drop in third-quarter profits. The company said it still expects to report revenue of more than $50 billion this year, up from $44.96 billion in 2007, but it was less confident about the future.

"The 2009 economic outlook is extremely uncertain at this time, with substantial turmoil in financial markets and unprecedented government intervention around the world," James W. Owens, Caterpillar's chairman and chief executive, said in a statement. Caterpillar shares fell 5 percent, to $38.83 a share.

The declines spread to Asia today, with Japan's benchmark Nikkei average down as much as 4 percent in early trading.

The dollar moved higher, hitting a 1 1/2 -year high against the euro. The euro fell to $1.3133.

Crude oil prices continued their slide on the New York Mercantile Exchange, falling 3.36 percent, to $70.89 a barrel. After reaching a high of $147 a barrel in July, many analysts have said, crude oil prices could fall as low as $50 a barrel this year.

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