Stocks slide on default fears
Stock prices tumbled Thursday, driving some key indexes below the lows they set in January, amid deepening worries about the effect of debt problems on the economy.
The sell-off was triggered in part by revelations by two mortgage investors that they couldn’t meet margin calls -- requests from lenders for extra capital to make up for the declining value of their holdings.
The stock market has feared just such a scenario for months, worrying that the inability of some hedge funds or others to make good on their financial obligations could set off a cascade effect that would ripple through financial markets.
The Standard & Poor’s 500 index slumped 29.36 points, or 2.2%, to 1,304.34 -- an 18-month low and below the close of 1,310.50 on Jan. 22, which some market bulls had believed would mark the worst of Wall Street’s decline.
The Dow Jones industrial average plunged 214.60 points, or 1.8%, to 12,040.39, holding above its Jan. 22 close of 11,971.19.
Losers swamped winners by 8 to 1 on the New York Stock Exchange.
Carlyle Capital, a mortgage investment fund affiliate of private equity giant Carlyle Group, disclosed that it had received margin calls from lenders and said it was unable to meet all of them. The fund’s Amsterdam-listed shares plunged 58%.
Another mortgage investor, Thornburg Mortgage, also said it couldn’t meet margin calls. Its shares sank $1.75, or 51%, to $1.65 on fears it could file for bankruptcy protection.
The margin call announcements continued a pattern of fresh news seemingly every day showing the credit crunch intensifying and the economy weakening.
“There seems to be no respite,” said A.C. Moore, chief investment strategist at Dunvegan Associates Inc. in Santa Barbara.
The core of the problem remains soaring home loan defaults. Fresh data Thursday showed U.S. home foreclosures at an all-time high in the fourth quarter.
Another record high for oil, which rose 95 cents to $105.47 a barrel in futures trading in New York, added to the gloom in markets. And the dollar tumbled again, with the euro surging to a record $1.538 from $1.526 on Wednesday.
Yields on Treasury bonds sank as investors once again sought the perceived safety of government securities. The 2-year T-note yield sank to 1.51% from 1.63% on Wednesday. The 10-year note fell to 3.58% from 3.68%.
“People are absolutely afraid of the next headline, and it feeds on itself,” said Robert W. Bissell, president of Wells Capital Management.
The S&P; 500 now is down 16.7% from its record high reached in October. Some other stock indexes already are down more than 20% from their highs, the threshold that generally marks a bear market decline.
The tech-dominated Nasdaq composite index, which fell 52.31 points, or 2.3%, to 2,220.50 on Thursday, is down 22.3% from its multiyear high reached in October.
A key test for the market will come today, when the government reports on February employment data.
A weak number could set off another plunge in the stock market and raise the possibility of an emergency interest rate cut by the Federal Reserve, some analysts said.
Among the day’s market highlights:
An index of financial stocks in the S&P; 500 sank 3.7% to its lowest level since May 2003. Goldman Sachs slumped $6.32, or 3.8%, to $158.65, Merrill Lynch fell $3.46, or 7%, to $45.86 and Lehman Bros. declined $2.03, or 4.2%, to $46.03.
Shares of housing giants Fannie Mae and Freddie Mac extended their recent steep decline as the value of their bonds plunged. Fannie Mae sank $2.57, or 11%, to $21.70, while Freddie Mac dropped $1.50, or 6.9%, to $20.14.
Citigroup slid 98 cents, or 4.4%, to $21.17. The country’s biggest banking company said it planned to slash its home-loan holdings by $45 billion, or 20%, during the next year, mainly by making fewer mortgages that can’t be sold.
Washington Mutual fell $1.04, or 8.1%, to $11.76, a nearly 12-year low after Standard & Poor’s downgraded the debt of the giant savings and loan.
The Russell 2,000 small-stock index lost 20.96 points, or 3.1%, to 662.78. It is down 22.6% from its peak last year.
Overseas, key stock indexes lost 1.5% in Britain, 1.4% in Germany and 1.7% in France. Shares in Japan gained 1.9%.
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tom.petruno@latimes.com
