Stocks Plunge On Bailout Shift, Retail Weakness

By Kim Hart and Sholnn Freeman
Washington Post Staff Writers
Thursday, November 13, 2008

Stocks tumbled yesterday after Treasury Secretary Henry M. Paulson Jr. said the government is shelving its initial plans to buy banks' toxic assets and is instead focusing on injecting capital into banks and companies that lend to households and businesses. That news, along with a steep drop in oil prices and fresh evidence of a severe slump in consumer spending, drove the three major indexes down more than 4 percent in the market's third straight day of losses.

The market got off to a weak start over worries that consumers will continue to curb spending. Losses widened mid-morning when Paulson said he wanted to expand the government's $700 bailout program to include credit card, student loan and car loan companies to enable consumers and businesses to borrow the money they need.

The Dow Jones industrial average closed down 4.73 percent, or 411.30 points, at 8282.66, its lowest level since Oct. 27. The broader Standard & Poor's 500-stock index fell 5.19 percent, or 46.65 points, to close at 852.30. The tech-heavy Nasdaq composite index closed down 5.17 percent, or 81.69 points, at 1499.21.

"The market is once again focusing on negative news," said Peter I. Cardillo, chief market economist with New York-based Avalon Partners. "The fact that Paulson has made a left turn has got this market thinking and wondering, does Washington know what it's doing? That's what's got the markets upset here."

Some analysts have been predicting a market retreat to October lows, said Andrew Brooks, vice president of U.S. equity trading at T. Rowe Price. "We're getting closer to that every day," he said. "The market's facing a lot all at once."

Paulson said automakers would not receive any money from the $700 billion program but added that Congress could alter the $25 billion already approved for retooling auto factories to be used as direct aid. General Motors, whose stock price was down nearly 9 percent in morning trading yesterday, rose 7.5 percent after Paulson's remarks and closed up 5.5 percent. Shares of Ford Motor rose 5.6 percent and closed up 2.2 percent. The House will hold a special session next week to consider a plan to provide emergency cash to the auto industry.

Driving investors' fears of sharp drops in consumer spending were more gloomy earnings reports released yesterday by major retailers. Department store Macy's said it lost $44 million in the third quarter, and Best Buy said it reduced its 2009 outlook in anticipation of further drops in spending. The grim reports come on the heels of Circuit City's filing for bankruptcy protection Monday.

In another sign of a severe global slowdown, the price of benchmark crude oil fell 5.3 percent, or $3.14, to $56.16.

The decline represents a dramatic turnaround from oil prices this summer when analysts were predicting that growing global demand would propel oil prices to $150 to $200 a barrel.

The U.S. Energy Information Administration, in a forecast of oil pricing and consumption, said it expected the United States next year to record the steepest year-over-year drop in petroleum consumption since 1980. In the report, the EIA projected an average gas price of $2.37 per gallon in 2009 and a home heating oil price of $2.75 for October 2008 through March 2009, both significantly down from previous forecasts.

Negative economic data kept piling up in October, leading to the downward revisions in agency projections, said Tancred Lidderdale, an EIA senior economist.

Analyst Phil Flynn of Alaron Trading in Chicago said oil traded lower yesterday partly in response to deflationary fears voiced by the Bank of England. Flynn said investors feared that the Bank of England would try to spur economic growth by aggressively cutting interest rates, a move that could lead to a stronger U.S. dollar and more oil price declines.

Globally, the EIA expects oil demand to grow by a mere 50,000 barrels per day in 2009, down from an 800,000 barrel per day forecast a month ago.

"It is absolutely so small," Flynn said of the new forecast. "It's sort of like what spills over when you fill up your gas tank."

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