Stocks Plunge in Late-Day Collapse

Oct. 22, 2008— -- Investors worried about disappointing corporate earnings and the failing health of the U.S. economy sent stocks tumbling for the second consecutive day on Wall Street, mirroring selloffs in markets throughout Europe and Asia.

"It was another one of these days where global recession fears were gripping the market," said Jeff Kleintop, chief investment strategist with LPL Financial.

The Dow Jones dropped more than 200 points soon after the opening bell, and in the final hour it plunged nearly 700 points. On the day it lost 514.45 points to close at 8,519.21, down 5.7 percent.

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With technology companies such as Yahoo! and Texas Instruments reporting poor earnings and layoffs, the tech-heavy Nasdaq dropped 80.93 points to close at 1,615.75, down 4.8 percent. The S&P500 closed at 896.78, losing 58.27 points for the day. All the major indices are down more than 30 percent this year.

Thomson Reuters said that of the 128 S&P 500 companies that have reported earnings, profits are down 26 percent on average.

The analysts surveyed by Thomson Reuters believe that number will improve as 372 companies report over the next few weeks. Their estimate is that profits for firms in the S&P 500 will be down by 10 percent.

Their estimates (a combination of both actual results and estimates of the companies that have not yet reported) show financial services as the worst-performing sector, with an 87 percent drop in earnings, and the energy sector as the best performing, with a 52 percent net income rise.

As credit markets slowly improve with the promise of trillions from governments around the globe, investors have now turned their attention to corporate earnings.

And what they see worries them.

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From Internet companies like Yahoo to manufacturers such as Boeing, from pharmaceutical giants such as Merck to banks like Wachovia, corporate earnings slumped.

Drugmaker Merck & Co. said Wednesday it will slash 7,200 jobs as part of a new restructuring program that comes as third-quarter profit plunged 28 percent, due to a hefty restructuring charge and flat sales.

Wednesday morning, Boeing Co.'s third-quarter profit dropped 38 percent as a strike and supplier production problems hurt the world's No. 2 commercial airplane maker. Boeing said it may need to finance some airplane deliveries beginning in 2009 because of the tightening credit markets, something the company hasn't done since 2006.

AT&T missed analysts' profit estimates and lowered its guidance for the full year despite stellar sales of the iPhone in the United States. The company offers subsidies to make the iPhone more affordable in exchange for a commitment to monthly payments. That weighed on the company's third-quarter results and drove its shares down 7.6 percent Wednesday.

Yahoo announced after trading on Tuesday that its third-quarter profit plunged 64 percent. The Internet company is bracing for a deep slump likely to extend well into 2009 by trimming $400 million from its annual expenses of $3.9 billion. The company's leaders still have jobs, despite investor misgivings about their decision-making, but at least 1,500 workers will be laid off by the end of year.

Apple also reported earnings after the bell on Tuesday and said its profit jumped 26 percent as the iPhone 3G outsold the market-leading BlackBerry. Despite the blockbuster performance, the company issued what it called "prudent" predictions for the current quarter, because of broader economic uncertainty.

In a bit of good news, McDonald's Corp. said third-quarter profits jumped 11 percent, propelled by strong same-store sales both overseas and in the U.S. The nation's biggest hamburger chain is doing better than many restaurant companies as consumers economize on dinners out.

And record crude prices this summer helped ConocoPhillips' third-quarter profit soar 41 percent from a year ago, as the company overcame lower oil and natural gas output caused by two hurricanes. But the company's chairman and chief executive, Jim Mulva, acknowledged a difficult period ahead thanks to falling crude prices.

Oil prices dropped $5.43 today to $66.75 on the New York Mercantile Exchange. That's down 54 percent from oil's record-high price of $145.29 a barrel July 3. Oil has fallen as traders worry about a global economic slowdown and lagging demand as well as the recent surge in the dollar, which has made oil less expensive as it is traded in dollars.

On Wednesday, the dollar surged to multi-year highs against the Canadian dollar, British pound and 15-nation Euro, as expectations grew that the central banks of Europe and England will cut interest rates, which in turn will make those currencies weaker compared with the dollar.

As for oil, many analysts believe that oil prices have not hit bottom yet, with some mentioning a potential low of $40 a barrel while others expect prices to bottom out at between $50 and $60.

The leaders of the oil cartel OPEC are set to meet on Friday in Vienna, and most analysts expect they will cut production by a million barrels a day. Analyst Charlie Maxwell of Weeden and Associates expects OPEC will cut oil production by another 3 million barrels in coming months, but no more than that. He also believes that OPEC will try to defend a price of $75 a barrel, quite a departure from the $100 a barrel price they seemed to be defending earlier this year.

Similarly, gas prices are expected to continue dropping until the OPEC cuts are in place. But as demand continues to fall and the economies around the world slow, it is likely that gas prices will not climb to the highs seen this past summer. Already, demand for gasoline dropped 4.3 percent for the last four weeks compared to a year ago.

Maxwell pointed out that there are concerns about natural gas and heating oil prices. Natural gas prices are up 19 percent and heating oil prices are up about 25 percent to 26 percent from a year ago. With more people losing jobs around the country, these higher prices will be harder to handle for the average consumer.

As for the overall economy, layoffs continue to rise. The Labor Department reported that "mass layoffs" (firms laying off more than 50 workers at a time) hit a point not seen since the September 11 terror attacks. This past September, more than 2,000 firms made cuts effecting more than 236,000 workers, according to the Bureau of Labor Statistics.

At least credit markets appear to be back on track and gaining steam. By way of example, the much-watched LIBOR (London Interbank Offered Rate) on three-month loans in dollars fell sharply, losing 0.29 percentage points to settle at 3.54 percent.

So it's not the credit markets now grabbing investors' attention. As the saying goes, it's the economy.