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Date Posted: 14:46:05 10/11/08 Sat
Author: No name
Subject: U.S. Stocks Tumble, Sending S&P 500 to Worst Drop Since 1933

U.S. Stocks Tumble, Sending S&P 500 to Worst Drop Since 1933

By Eric Martin

Oct. 11 (Bloomberg) -- U.S. stocks plunged, sending the Standard & Poor's 500 Index to its worst week in 75 years, on concern the credit crisis will spread from banks to consumer companies and energy producers, triggering a global recession.

Financial firms in the S&P 500 fell to an almost 12-year low, led by Morgan Stanley, on speculation they're running short of money as lending markets freeze. General Motors Corp. and Ford Motor Co. slid more than 45 percent as S&P said the carmakers may be forced into bankruptcy. Exxon Mobil Corp., the largest energy company, lost a fifth of its value as oil prices dropped below $78 for the first time in a year.

The S&P 500 dropped 200.01, or 18 percent, to 899.22, the lowest since April 2003. The Dow Jones Industrial Average lost 1,874.19 points, or 18 percent, to 8,451.19 for the biggest weekly slide in the history of the 30-stock index. The Russell 2000 Index of small-company stocks fell 96.92, or 16 percent, to 522.48. The MSCI World Index of 23 developed countries lost 20 percent, the most since records began in 1970.

``What we have is a slow-motion crash,'' said Robert Arnott, founder of Pasadena, California-based Research Affiliates LLC, which manages $39 billion. ``In the space of 10 days we've had a 25 percent drop -- that's a crash. It's slow- motion compared with 1987 or 1929.''

The S&P 500 has fallen 39 percent this year, led by financial companies, as losses tied to the collapse of the subprime mortgage market topped $630 billion. The benchmark is poised for its worst annual performance since 1937.

Financial Shares Plunge

A gauge of banks and insurers in the S&P 500 fell 22 percent this week to the lowest since December 1996. Credit markets stayed frozen as the cost of borrowing in dollars in London rose to the highest this year, according to the British Bankers' Association.

Morgan Stanley plunged 60 percent to $9.68 as Moody's Investors Service said it may reduce the U.S. investment bank's credit rating on concern the financial crisis threatens earnings and investor confidence. Goldman Sachs Group Inc. dropped 31 percent to $88.80.

The banks retreated as a restriction on short selling for most financial shares expired on Oct. 8. John Mack, Morgan Stanley's chief executive officer, last month lobbied the Securities and Exchange Commission to ban the practice, arguing that it was driving down the company's stock. Short sellers borrow stock and sell it, hoping to buy it back at a lower price.

Ford, GM Slump

Bank of America Corp. slid 39 percent $20.87. The lender cut its dividend in half and sold $10 billion in common stock at a discount. Citigroup Inc. fell 23 percent to $14.11 after Wells Fargo & Co. trumped its bid to buy Wachovia Corp.

Ford dropped 51 percent to $1.99 and GM lost 46 percent to $4.89. S&P said it may cut the companies debt deeper into junk. ``Macro factors could overwhelm them at some point,'' Robert Schulz, S&P's lead automotive credit analyst, said in a Bloomberg Television interview. The companies said they have no plans for a bankruptcy filing.

Exxon tumbled 20 percent to $62.36 and led energy producers to a 25 percent drop, the steepest decline among 10 industries in the S&P 500. Oil fell 17 percent for the week to $77.70 a barrel on speculation the financial crisis will reduce demand.

``The markets have melted down in front of us,'' said Robert Weissenstein, who oversees $125 billion as chief investment officer at Credit Suisse Holdings in New York. ``People aren't going to pay anything for risk and they're running in every direction from any asset that could be volatile. It's as disruptive an environment as I've ever seen.''

Metals Producers

Alcoa Inc., the largest U.S. aluminum producer, suffered its biggest one-day decline in more than 20 years after third- quarter profit trailed analysts' estimates and the company suspended a share-repurchase program because of the worsening debt markets. Alcoa lost 42 percent to $11.25 for the week.

U.S. Steel Corp. dropped 30 percent to $44.59 and AK Steel Holding Corp. lost 46 percent to $11.03. Goldman Sachs Group Inc. slashed its 2009 steel price forecast 29 percent and lowered recommendations on some steelmakers, citing the slowdown in emerging markets and difficulty in financing new projects.

Mall owner General Growth Properties Inc. plunged 50 percent to $4.82 on concern it won't be able to repay debt. XL Capital Ltd. lost 64 percent, the most in the S&P 500, to $5.43 and led a 28 percent decline in a gauge of insurers on concern investment losses will curb results.

VIX Record

Credit and recession concerns overshadowed unprecedented coordinated interest-rate cuts by the world's largest banks. The Federal Reserve reduced its benchmark interest rate by 0.5 percentage point to 1.5 percent. The European Central Bank lowered its key lending rate by half a point to 3.75 percent.

The benchmark index for U.S. stock options surged 55 percent to 69.95 and closed at a record each day. The VIX, as the Chicago Board Options Exchange Volatility Index is known, measures the cost of using options as insurance against declines in the S&P 500. It averaged 59.43 this week, almost triple the 22.39 average in its 18-year history.

The S&P 500 has declined for eight straight days, its longest losing streak since 1996. This week's drop pushed both the S&P 500 and Dow down more than 40 percent from their peaks last October. The S&P 500 ended the week trading for 17 times reported earnings of its companies, the cheapest valuation in more than a year.

Eight stocks in the S&P 500 rose for the week. Dynegy Inc., a Houston-based power producer that has lost 47 percent of its value this year, gained 25 percent to $3.75 after boosting output at a California generating unit.

Sales at U.S. retailers probably dropped in September as mounting job losses, plunging home prices and the deepening credit crisis shook consumers, economists said before reports next week.

To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net.

Last Updated: October 11, 2008 08:00 EDT

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