In its worst selloff in nearly a month, the Dow plunged more than 250 points on Monday as the markets gave back a chunk of last week's huge gains amid fears about the future of the U.S. auto and banking industries.
Today’s Markets
The Dow Jones Industrial Average slid 254.16 points, or 3.27%, to 7522.02, the S&P 500 lost 28.41 points, or 3.48%, to 787.53 and the Nasdaq Composite sank 43.40 points, or 2.81%, to 1501.80. The consumer-friendly FOX 50 fell 19.88 points, or 3.25%, to 592.53.
"People are looking at the distinct possibility that one or both [auto makers] will cease to exist,” said Richard Sparks, senior equities analyst at Schaeffer's Investment Research. “That’s enough to spook the markets."
In addition to uncertainty concerning General Motors (GM) and ChryslerLLC, the markets were under heavy pressure from banking stocks like Citigroup (C), which plunged on concerns about the need for more government aid.
Monday represented the Dow's worst one-day slide since March 5.All but two of the Dow's 30 components landed in the red, led by double-digit dives from GM, Bank of America (BAC), American Express (AXP) and Alcoa (AA). On the other hand, Johnson & Johnson (JNJ) and IBM (IBM)ended marginally higher.
The ugly start to the week comes after the Dow surged nearly 500 points last week, capping its first three-week win streak since May.Amid new government rescues and rare signs of hope for the economy, the beaten-down Dow soared 17.34% over that span, its best three-week gain since Sept. 1982.
"You had a very significant rally over a very short period of time. That rally met a point of resistance," said Sparks, pointing to the S&P's 80-day moving average. "We were overbought to some degree."
On the upside, trading volume was relatively low, indicating a potential lack of conviction. Also, the markets ended off their worst levels of the day, though still deeply in the red.Traders will now be watching to see how much, if any, of the markets' recent gains will be preserved.
"If we can get a pullback but a higher low, it would set us up nicely for future months," said Frank Davis, director of sales and trading at LEKSecurities.
Auto Fears Mount
Shares of General Motorslost one-quarter of their value after the U.S. said GM and Chrysler's restructuring plans do not go far enough to make the auto makers viable. The government is giving GM 60 days to reach new concessions with the union and bondholders and also pushed out GM CEORickWagoner, who will be replaced by Fritz Henderson, GM's chief operating officer.
"The government is taking a more heavy-handed approach. The market never sees that to be good," said Davis.
The White House said it is prepared to withhold any additional aid if Chrysler is unable to finalize a partnership with Italian auto maker Fiat by April 30.Chrysler said Monday it reached an agreement on a framework for a global alliance with Fiat that has the blessing of the U.S.
Bankruptcy on the Horizon?
GM said Monday afternoon it will take whatever steps are necessary to successfully restructure the company, including a court-supervised process. The White House's leading plan would use bankruptcy filings to essentially split GM and Chrysler into their "good" and "bad" components, The Wall Street Journal reported Monday afternoon.
But there was growing skepticism on Wall Street about the ability of the auto makers to quickly reorganize and about potential ripple effects stemming from bankruptcy filings.
“This will be devastating in the short term; to many lives, to the stock market, to our economic performance. But in the long term, our country will benefit from more productive and innovative companies which no doubt will spring up to take the place of GM, Ford and Chrysler,” Dan Greenhaus, equity analyst at Miller Tabak, wrote in a note.
Banks, Energy Add to Gloom
Meanwhile, financial stocks tumbled 8.6% as a sector and banks like PNCFinancial (PNC) , Citigroup (C) and Bank of America (BAC) fell even harder after Treasury Secretary Timothy Geithner said on ABC's "This Week" that some banks are going to need "large amounts" of additional government aid to stay afloat.
Energy stocks were under almost as much as pressure as names like Valero (VLO) and ConocoPhilips (COP) tanked after crude oil plunged below $50 per barrel. Slammed by a stronger dollar, crude oil fell $3.97 per barrel, or 7.58%, to settle at $48.41 -- the lowest settle since March 18. Gold was also under pressure, sinking $7.70 per ounce, or 0.83%, to $915.50.
Fears about the length and depth of the 16-month recession were also evident as shares of basic material companies like BHPBilliton (BHP) and U.S. Steel (X) plunged.
At the same time, the start of earnings season looms large over Wall Street as expectations are for many companies to report steep drops in profit due to the recession.
Corporate Movers
Lincoln National (LNC) lost more than one-third of its market value after the life insurer voluntarily withdrew its bid to receive U.S. aid. Lincoln also reached a reinsurance deal with a Goldman Sachs (GS) unit in an effort to boost its capital.
Fifth Third Bancorp (FITB) avoided the financial selloff as the bank reached a deal to sell 51% of its payment processing unit to private equity firm Advent International for $561 million. Fifth Third will spin off the business into a joint venture worth $2.35 billion and give the unit $1.25 billion in loans.
General Growth Properties (GGP), the second-largest U.S. mall owner, failed to reach support for a nine-month reprieve from bondholders, raising fears of a bankruptcy filing. The company said it remains in talks with some bondholders.
Eli Lilly (LLY) CEO John Lechleiter told The Wall Street Journal he is still “hungry” following the drug maker’s buyout of ImClone and is eyeing a takeover worth $5 billion to $15 billion. However, Lechleiter ruled out a megadeal like Pfizer’s (PFE) $68 billion takeover of Wyeth (WYE).
Abbott Laboratories (ABT) held preliminary talks with Wyeth(WYE) in mid-December about a possible deal but decided not to pursue a buyout due to pricing and other concerns, the Journal reported.
Sara Lee (SLE) said it may sell its international household and personal care business after receiving some interest from potential bidders. The company didn’t say who might be interested.
Global Markets
European stocks tanked, suffering their worst one-day losses in several weeks. London's FTSE 100 dropped 3.49% to 3762.91, Germany's DAXslid 5.1% to 3989.23 and Paris' CAC40 fell 4.27% to 2719.34.
In Asia, Tokyo's Nikkei 225 plunged 4.53% to 8236.08, Hong Kong's Hang Seng tumbled 4.7% to 13456.33 and China's Shanghai Composite fell 0.7% to 2358.04.
World Markets Slide Again Amid Financial Fears
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