Stock markets plunged Tuesday as fears for Lehman Brothers' future helped erase nearly all of a rally fueled a day earlier by the takeover of mortgage giants Fannie Mae and Freddie Mac.
Today's Market
The Dow Jones Industrial Average fell 280.01 points, or 2.43% to 11230.73, the Standard & Poor’s 500 dropped 43.28 points, or 3.41%, to 1224.51 and the Nasdaq Composite lost 59.95 points, or 2.64%, to 2209.81. The FOX 50 slid 22.15 points, or 2.42%, to 893.38.
The day's losses centered around the worries about LehmanBrothers (LEH) but the stock market wasn't helped by diving energy stocks and a worse-than-expected report on new home sales.
The selloff comes just a day after the Dow soared 289 points in response to the Treasury Department shoring up Fannie Mae (FNM) and Freddie Mac (FRE). The government seized control of the companies that own or back more than three-quarters of the nation's mortgages as Wall Street and foreign investors became worried the critically-important companies would run out of cash.
“Even though the government has waved its wand over the mortgage-backed market, the problems still persist," said PaulNolte, director of investments at Hinsdale Associates. “The mortgage market and all the various financial conduits are still broken.”
Insurance giant AIG(AIG) plunged almost 20% to lead the way down on the benchmark index on Tuesday. Citigroup (C) and American Express(AXP) also suffered sharp declines on the Dow. A handful of blue chips managed to close in the green, led by McDonald's (MCD).
The biggest loser of the day was clearly Lehman Brothers, the investment bank whose shares plummeted to levels unseen in more than a decade on its uncertain fate.
The market was spooked by a Dow Jones Newswires report indicating South Korea’s state-run Korea Development Bank has decided not to invest in the embattled investment bank. However, a South Korean financial regulator denied telling the wire service talks had ended, according to Reuters.
Fortune magazine reported that Lehman will announce “key strategic initiatives for the firm” when it reports third-quarter results next week.
"We are declining comment on all rumors and speculation," Randy Whitestone, a Lehman spokesman told FOX Business.
Lehman has seen its shares dive by 80% this year as CEODick Fuld has come under increasing pressure to raise money through asset sales or less conventional methods ahead of another expected quarterly loss.
“The stock-price action is almost speaking for itself about the problems facing Lehman currently. The lack of news is adding to that uncertainty," said Michael James, senior equity trader at Wedbush Morgan Securities.
"Investors are very leery about watching a bad situation spiral out of control into nothing. I’m not saying that’s going to happen…but the concerns about something really bad happening is certainly adding to the anxiety for Lehman holders.”
Washington Mutual (WM) lost nearly a quarter of its value a day after the Seattle-based savings-and-loan replaced CEO Kerry Killinger with Alan Fishman. WaMu also disclosed on Monday it entered into a memorandum of understanding to give the Office of Thrift Supervision new financial documents such as a multiyear business plan.
Insurance giant AIG (AIG), which like WaMu and Lehman has heavy exposure to the mortgage market, suffered very steep losses on Tuesday as well. New AIG CEO Robert Willumstad is scheduled to unveil a turnaround plan later this month.
The stock market didn't benefit from a $3 slide in crude oil futures, which fell ahead of an expected decision by OPEC to hold output steady. Crude closed down $3.08 to $103.26 a barrel -- its lowest level since April 1.
Since hitting an all-time record of $147.27 a barrel on July 11, crude oil has plunged almost 30% as the dollar strengthened and global demand weakened. The energy market also shrugged off Hurricane Ike, the Category 1 storm that doesn't appear to pose a major threat to the Gulf of Mexico's oil production apparatus.
Energy stocks fell even further than the tumultuous financial sector, closing the day down 7%. Names like Hess(HES) and Marathon Oil (MRO) fell sharply.
DataDump
Wall Street received an update on the nation's ongoing housing slump via the National Association of Realtors. The industry group said July pending home sales fell 3.2% from the month before. Experts had been expecting a more modest 2.1% decline following June's rebound.
Pending home sales, which make up the majority of the market, tumbled by 6.8% from a year ago. "Pending home sales are oscillating month-to-month, with the long-term trend essentially flat," said Lawrence Yun, NAR's chief economist.
Homebuilders stayed in the red following the NAR report. Earlier in the day Credit Suisse downgraded the sector to "market weight" from "overweight" and cut DR Horton (DRI), KB Home (KBH), TollBrothers (TOL) and Pulte Homes (PHM) to "neutral."
Corporate Movers
Wachovia (WB) fell double-digit percentages after Merrill cut the fourth-largest U.S. bank to “underperform” from “neutral.” Merrill now expects Wachovia to lose 10 cents per share in the third quarter, downgrading its previous forecast for a 28-cent-per-share profit. Wachovia also saw its price target fall by $2 to $16 as Merrill cut its 2008, 2009 and 2010 earnings estimates on more expected credit losses and increased loan loss provisions.
Apple (AAPL) unveiled a new version of its iPod Touch MP3 player during an event in San Francisco on Tuesday. The tech giant said the new model is the thinnest iPod yet and has new features, including a stop watch and voice recorder. CEOSteve Jobs, whose health has been a hot topic of late, joked about it by saying: "The reports of my death are greatly exaggerated."
McDonald’s (MCD) rallied after posting an 8.5% increase in August global same-store sales, topping analyst estimates. As has been the recent trend, McDonald’s saw weaker sales growth in the U.S., where sales rose 4.5%. In Europe sales at the fast food giant increased by 11.6%.
Pfizer (PFE) announced plans to withdraw all global applications for skin drug Dalbavancin to allow for additional Phase 3 clinical testing. The drug giant made the decision following feedback from regulators.
Global Markets
In the global markets, both Japan and Hong Kong's stock markets quickly reversed directions in overnight trading after Monday's big rally. After rising 3.4% on Monday, Japan's Nikkei was down 1.7% overnight, while the Hang Seng lost 1.5% after being up more than 4%the previous today.
