Consumer spending worries clobber stocks

By: MADLEN READ, AP Business Writer
By: MADLEN READ, AP Business Writer

NEW YORK – Volatility slammed Wall Street again Tuesday as the reality hit investors that few industries are safe from the consumer spending slump — whether they're building homes, making cars or selling coffee. The Dow Jones industrial average fell about 150 points.

The market did bounce off its lows of the day after a media report that a BlackRock executive said a $30 billion Bear Stearns mortgage portfolio could be worth more than its market value suggests. And the government and the mortgage industry announced the largest moves yet to help homeowners renegotiate hundreds of thousands of delinquent loans held by Fannie Mae and Freddie Mac.

Still, the market had much to contend with. Although the mortgage crisis that spawned the current downturn is being addressed, the economy remains extremely troubled.

It's becoming clear that it's going to be hard to rely on the average consumer to pull the economy out of its downturn. Late Monday, Starbucks Corp. reported lower sales across the coffee chain, and early Tuesday, Toll Brothers Inc. posted a sharp drop in revenue and said it was too difficult to predict what the luxury homebuilder's profit would be next year.

Investors are also jittery as the nation's feeble automakers try to get a bailout from the federal government, much like the ailing insurer American International Group Inc. has. General Motors Corp., whose shares have plunged to 60-year lows, said late Monday it would cut 1,900 factory jobs on top of the 3,600 cuts it announced Friday.

There were no economic reports released Tuesday, since the government and bond markets were closed for Veterans Day. But investors didn't need government data to see that the economy's downward slide isn't over — the litany of troubling corporate news was enough. Wall Street has been anticipating grim results from corporate America, but it cannot gauge yet how bad they could get.

"We're in a situation where we really don't know how deep a recession we're in," said Jim Herrick, manager of equity trading at Baird & Co. "Until there's some clarity on the economy and clarity with earnings, we'll definitely be stuck in this trading range."

Herrick referred to the fact that the market has been giving back gains recently — including a 248-point advance last Friday — as it tries to recover from October's heavy selling. In a similar fashion, the market pared nearly all of its losses on the report that BlackRock President Robert Kapito said a Bear Stearns mortgage portfolio is generating cash flow, but then quickly sank again.

In midafternoon trading, the Dow Jones industrial average shed 146.08, or 1.65 percent, to 8,724.46 after falling by more than 300. The blue chip index has not dipped below the 8,000 mark in trading since Oct. 10, but is down about 35 percent since the start of the year.

Broader stock indicators were lower as well. The Standard & Poor's 500 index fell 13.29, or 1.45 percent, to 905.92; and Nasdaq composite index dropped 21.71, or 1.34 percent, to 1,595.03.

The Russell 2000 index of smaller companies rose 2.93, or 0.59 percent, to 496.03.

The credit markets have eased a bit since Lehman Brothers Holdings Inc.'s bankruptcy in mid-September, but they remain tight. Investors are impatient to see positive developments — in the real economy, not just in market borrowing rates — from the massive government interventions over the past two months, said Alan Gayle, senior investment strategist and director of asset allocation for RidgeWorth Capital Management.

"The market is wondering," Gayle said, "how far does the line go out the door for government assistance?"

The insurer American International Group Inc. got more bailout money Monday, and later that day, American Express Co. got approval from the government to become a commercial bank. The credit card lender will now be able to accept deposits and access the government financing other banks have been using.

American Express fell $1.15, or 4.8 percent, to $22.83.

Starbucks shares fell 2 cents to $10.18 after the coffee retailer released its earnings, while Toll Brothers rebounded 39 cents to $19.34.

GM shares fell 39 cents, or 12 percent, to $2.97, while Ford Motor Co. fell 18 cents, or 9.3 percent, to $1.75.

"It's just not pretty," said Ken Mayland, president of research firm ClearView Economics. "When the alternatives are either socializing GM or having it go through a very painful bankruptcy, neither of those are happy outcomes."

Corporate bankruptcies have been piling up: soon after Circuit City Stores Inc. filed for Chapter 11 protection Monday, the Yellowstone Club — a mountain retreat for the wealthy — said it filed for bankruptcy after failing to secure new financing.

Wall Street is waiting to find out if the government will send another round of stimulus checks to consumers, who have been curbing their spending — and not just discretionary spending — in the face of lost jobs, plunging home prices, and tight credit.

Third-quarter earnings declines from Vodafone Group PLC, the world's biggest mobile phone company by sales, and InterContinental Hotels Group PLC, the owner of the Holiday Inn hotel chain, revealed sharp pullbacks in consumer spending. And another round of job cuts were announced Tuesday from companies including Altria Group and Swedish vehicle maker Volvo AB; when companies slash jobs, consumer spending falls further.

It's possible the market is in the process of bottoming out after October's massive losses, but analysts say it will likely keep trading erratically until it starts to see promising signs that Americans are in healthier financial shape.

That could happen, perhaps, if enough homeowners get help with their mortgages. Citigroup became the latest major bank, after similar actions by JPMorgan Chase & Co. and Bank of America Corp., to announce that it will try to keep borrowers at risk of foreclosure in their homes.

Citigroup fell 38 cents to $10.83.

Americans are also getting a bit of a break from falling fuel prices. Crude sank below $60 a barrel Tuesday for the first time in about 18 months as optimism waned that a huge economic stimulus plan in China will avert a prolonged slowdown in the global economy. Light, sweet crude for December delivery fell $3.30 to $59.11 a barrel on the New York Mercantile Exchange.

The dollar was mostly higher against other major currencies, while gold prices dipped.

The Russell 2000 index of smaller companies fell 1.04, or 0.21 percent, to 492.06.

Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange, where volume came to a light 814.8 million shares.

Overseas, Japan's Nikkei fell 3 percent and Hong Kong's Hang Seng fell 4.77 percent. In European trading, Britian's FTSE 100 lost 3.57 percent, Germany's DAX gave up 5.25 percent, and France's CAC-40 decreased 4.83 percent.


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