Stocks Slip on Fresh Fears
Stocks slid Tuesday and some nervous investors snapped up Treasury bonds amid rumors of financial trouble at some hedge funds and after Delta Air Lines warned of a “substantial” loss for the rest of the year.
The Dow Jones industrial average slumped 103.23 points, or 1%, to 10,281.11. Analysts said the decline showed how jittery the market remained despite its recent attempt to rebound. The Dow had risen in six of the previous seven sessions.
Broader indexes also were lower: The Standard & Poor’s 500 dropped 12.62 points, or 1.1%, to 1,166.22; the Nasdaq composite fell 16.90 points, or 0.9%, to 1,962.77. Losers topped winners by 2 to 1 on the New York Stock Exchange and on Nasdaq.
Traders said the market was riled by rumors that some hedge funds were in dire financial straits after being hit by steep declines in the prices of bonds issued by General Motors and other companies.
GM’s credit rating was cut to “junk” last week by Standard & Poor’s, driving the market values of its bonds sharply lower. Many hedge funds have owned GM securities, and other corporate bonds, often as part of complex trades involving so-called derivative securities, traders say.
“The fear is that some of these funds would be forced to do liquidations” of investments to raise capital, said Todd Clark, head of listed-stock trading at Wells Fargo Securities in San Francisco.
With 8,000 hedge funds in the marketplace, holding about $1 trillion in assets, concerns have mounted this year that a financial accident might befall one or more major portfolios -- similar to the meltdown that nearly wiped out the onetime giant Long-Term Capital Management fund in 1998. Hedge funds are subject to little oversight by government regulators.
Barclay Group, which tracks hedge fund returns, said its index of fund performance showed an average decline of 0.8% in March and a 1.5% loss in April. The firm said it was only the second time in the last three years that its index had fallen two months in a row.
Worries about possible fund failures and a ripple effect throughout the financial system caused some investors to step away from the market, traders said. Delta’s warning of a large loss this year, raising anew the specter of a bankruptcy filing, added to the jitters.
But some analysts said the talk of hedge-fund troubles was overblown. “What we are seeing in the market is a reaction to a perceived future need for liquidations ... not actual events that have already occurred,” said Arvind Rajan, head of a derivatives unit at Citigroup Global Markets in New York.
“The market has been on edge,” said Carlos Asilis, who manages $150 million at New York-based hedge fund VegaPlus Capital Partners. “People still have memories about Long-Term Capital Management, and just because you can’t quantify its impact, it doesn’t mean it’s not a risk factor in the market.”
Fear of financial turmoil helped spur buying of Treasury bonds, driving yields lower.
The government saw strong demand at an auction of $22 billion in three-year T-notes. The yield on the notes was 3.82%.
The yield on the 10-year T-note slid to 4.21% from 4.28% on Monday. The government will sell five-year notes today and 10-year notes Thursday.
Among the day’s highlights:
* Delta tumbled 33 cents, or 10%, to $2.97, nearing the 52-week closing low of $2.93 reached in October. Elsewhere in the sector, Continental lost 54 cents to $12.51, Northwest slid 21 cents to $4.47 and AMR, parent of American, fell 36 cents to $11.02.
* Financial stocks were hurt by concerns over hedge-fund losses because many large financial companies lend to the funds. Goldman Sachs Group sank $3.39 to $102.11, Deutsche Bank fell $2.67 to $79.58 and Lehman Bros. dropped $3.09 to $88.83. Brokerage shares also suffered because Morgan Stanley Chief Executive Philip Purcell said the investment banking business had slowed industrywide.
* Energy stocks were broadly lower even though near-term crude oil futures rose for a fifth session, adding 4 cents to $52.07 a barrel in New York. Exxon Mobil lost 78 cents to $57.23 and Sunoco slid $1.24 to $101.67.
* Steel stocks slumped after Wheeling-Pittsburgh’s first-quarter earnings report disappointed investors. Wheeling-Pittsburgh plunged $6.99 to $17.94, Steel Dynamics dropped $1.51 to $26.79 and U.S. Steel was down $2.94 to $41.71.
* On the plus side, Domino’s Pizza surged 96 cents to $19.27 after saying that first-quarter profit jumped 36%.
* GM shares added 20 cents to $31.53. On Monday, billionaire investor Kirk Kerkorian launched his previously announced tender offer for 28 million GM shares at $31 each.
