Stocks plunge as subprime concerns renewed
EmptyNEW YORK -- Wall Street fell sharply again Thursday after a French bank said it was freezing three funds that invested in U.S. subprime mortgages because it was unable to properly value their assets. The Dow Jones industrials had been down more than 240 points, but pared their losses.
The announcement by BNP Paribas raised the specter of a widening impact of U.S. credit market problems. The idea that anyone -- institutions, investors, companies, individuals -- can't get money when they need it unnerved a stock market that has suffered through weeks of volatility triggered by concerns about available credit and bad subprime mortgages.
A move by the European Central Bank to provide more cash to money markets perhaps intensified Wall Street's angst. Although the bank's loan of more than $130 billion in overnight funds to banks at a bargain rate of 4% was intended to calm investors, Wall Street saw the step as confirmation of the credit markets' problems.
The Federal Reserve followed suit, adding $12 billion to U.S. markets to help ease liquidity constraints, according to Dow Jones Newswires.
"This is a mini-panic," said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co., calling the banks' injection of money into the system an unprecedented move, and evidence that the problems in subprime lending are, in fact, spilling into the general economy.
"All the things that had been denied up until this point are unraveling," Battipaglia said. "On top of this, retail sales were mediocre, which shows that indeed, the housing collapse is affecting the consumer."
Retailers were releasing their July sales figures Thursday, and overall, the figures were disappointing.
Bonds rose sharply as investors again sought the relative safety of Treasurys, with the yield on the benchmark 10-year note falling to 4.80% from 4.89% late Wednesday. Bond prices move opposite yields.
Thursday's pullback continued an erratic pattern of triple-digit moves in the Dow for several weeks. There has been more panic and gambling in those moves rather than conviction -- even when the Dow has finished up more than 280 points in a session, those gains have evaporated at the first mention of trouble in housing, subprime lending or the credit markets.
In late morning trading, the Dow fell 107.96, or 0.79%, to 13,549.90 after earlier falling as much as 241 points.
The Dow on Wednesday finished 2.45% below the record close of 14,001.41 reached on July 19. Since passing 14,000, the blue chip index has been highly volatile -- in the 14 trading days since that record close, 10 have seen a triple-digit gain or loss.
Some on Wall Street have been calling for a textbook correction -- a pullback of at least 10%. At its lowest close since the market's high last month, which was Friday's finish of 13,181.91, the Dow was 5.85% below the record.
Also Thursday, the broader Standard & Poor's 500 index fell 12.10, or 0.81%, to 1,485.39, while the Nasdaq composite index fell 3.63, or 0.14%, to 2,609.35.
The dollar was mixed against other major currencies, while gold prices fell. Light, sweet crude fell 72 cents to $71.43 per barrel on the New York Mercantile Exchange.
The Chicago Board Options Exchange's volatility index, known as the VIX, and often referred to as the "fear index," rose in early trading Thursday to its highest level since April 2003.
News that Home Depot Inc. might amend the terms of the sale of its HD Supply business added to Wall Street's unease. The company said it could end up making substantial changes to the terms and financing of the deal and could reduce the $10.33 billion price tag. Home Depot said in June it would sell the business, which serves contractors, homebuilders and other business customers, to a group of private equity firms.
Home Depot, which fell $1.70, or 4.5%, to $36.10, also said it plans to lower the price of a modified Dutch tender offer. In July, Home Depot announced the tender offer to repurchase up to 250 million shares.
But the subprime and credit market concerns dominated investors' minds in the U.S. and abroad.
Stocks in Europe fell but came off their lows. Britain's FTSE 100 lost 1.79%, Germany's DAX index fell 1.92%, and France's CAC-40 fell 1.92% after being down more than 3%.
The pullback came as the BNP Paribas unit, BNP Paribas Investment Partners, said it was suspending three funds together worth about $3.79 billion and wouldn't make investor redemptions until it could determine net asset values. The funds are Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia. The suspended funds represent roughly 0.79% of the $482.79 billion in assets the Paribas division holds.
"The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating," BNP Paribas said in a statement.
The funds invest in subprime mortgages through a process known as securitization. Investment banks bundle together mortgages -- including those from subprime borrowers -- and sell them off to investors such as hedge funds, mutual funds and other institutional investors. Buyers of such securities are seeking the steady flow of income from homeowners making their mortgage payments.
With credit concerns dominating Wall Street, investors appeared little moved by a Labor Department report that the number of workers seeking jobless benefits rose 7,000 to 316,000 last week.
In corporate news, American International Group Inc., one of the world's largest insurers, said Wednesday its second-quarter profit jumped 34% amid growth in its general and life insurance businesses and its asset management group. The company said it remains comfortable with its exposure to the U.S. residential mortgage market. AIG rose 81 cents to $67.29.
Internet telephone company Vonage Holdings Corp. on Thursday reported a narrower second-quarter loss as it trimmed marketing costs. However, the company also saw a sharp drop in new subscribers. The stock rose 20 cents, or 9.1%, to $2.40.
Retailers weighed in with monthly sales results and some reports were likely to only further sour Wall Street's mood. Pacific Sunwear of California Inc. fell $1.93, or 11.2%, to $15.30 after reporting its same-store sales, or sales at stores open at least a year, fell rather than rose as Wall Street had expected. Same-store sales are regarded as a key measure of a retailer's health.
American Eagle Outfitters Inc. also surprised Wall Street and fell 82 cents, or 3.4%, to $23.02.
Not all news was bad, however. Children's Place Retail Stores Inc. reported stronger-than-expected results. The stock rose $2.42, or 7.7%, to $33.67.
In other market action abroad, Japan's Nikkei stock average rose 0.83%, Hong Kong's Hang Seng index fell 0.43%. The often volatile Shanghai Composite Index rose 1.95%.
Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange, where volume came to 854.9 million shares.
The Russell 2000 index of smaller companies fell 2.64, or 0.33%, to 792.86.