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Fed Minutes Send Dow, Nasdaq Freefalling

Tuesday, 28 Aug 2007 09:59 PM

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NEW YORK -- Volatility returned to Wall Street Tuesday, sending stocks plunging as investors grew more uneasy about the economy and whether the Federal Reserve will take the steps needed to prevent credit market problems from spreading further. The Dow Jones industrials fell 280 points.

The stock market found little to assuage concerns in minutes from the Fed's last meeting, released during afternoon trading. The major indexes' losses steepened after investors parsed the minutes for signs of a possible cut in interest rates.

There had been some hope on the Street that Fed policymakers might have sent a stronger signal they were more willing to cut interest rates to help calm turbulent market conditions. But in the minutes from the Federal Open Market Committee's Aug. 7 meeting, while the central bank noted the turmoil in the markets and said, "to the extent such a development could have an adverse effect on growth prospects, might require a policy response," it didn't discuss a cut in the benchmark federal funds rate that Wall Street has wanted.

The meeting predated a number of actions taken by the central bank to try to alleviate market volatility, including the Aug. 17 lowering of the discount rate, the interest the Fed charges banks to borrow money. Wall Street, despite a calmer week after that step, seems to be growing more dissatisfied because the Fed has not yet lowered the funds rate — and with a return to the intense volatility seen earlier this month may be trying to force the Fed to act.

"Investors are getting whipped side-to-side because their expectations, which are changing almost on a daily basis, aren't being met," said Chris Johnson, chief investment strategist at Johnson Research Group. "We've gone from the roof is on fire to the Fed is riding in on a white horse, and what we're seeing now is a reality check."

Stocks were down the entire session on further worries about the economy. The Conference Board's report that consumer confidence sagged in August amid volatile financial markets and ongoing housing problems added to the downbeat mood on the Street. Keeping alive credit worries, a Standard & Poor's housing index showed that U.S. home prices in the second quarter posted the sharpest decline since 1987.

The Dow fell 280.28, or 2.10 percent, to 13,041.85, its biggest drop since Aug. 9. Stocks rose in fairly subdued trading last week, but began to pullback on Monday on sluggish economic data.

Broader stock indicators were also lower. The Standard & Poor's 500 index was down 34.43, or 2.35 percent, at 1,432.36, and the Nasdaq composite index shed 60.61, or 2.37 percent, to 2,500.64.

Fixed-income investors were encouraged by the consumer confidence report, which could indicate the Fed will be more likely to lower rates at its September meeting. Bond prices rose, with the yield on the benchmark 10-year Treasury note falling to 4.52 percent from 4.57 percent on Monday.

Light, sweet crude fell 24 cents to $71.73 a barrel on the New York Mercantile Exchange. Oil prices fell last week on credit worries and as Hurricane Dean missed oil facilities in the Gulf of Mexico. They have rebounded in recent days, though, due to refinery problems and strong gasoline demand.

The dollar was lower against other major currencies, while gold prices were slightly lower.

Analysts said there just wasn't much to encourage stock investors in a day with many traders on vacation and little in the way of corporate news. And, the lack of rate-cut support from the Fed minutes didn't change matters.

"This is backward looking right now, the main thing you have to take out of this is the Fed continues to be worried about inflation and economic growth," said Ryan Larson, senior trader with Voyageur Asset Management. "They have already assured they stand ready to do something. But, the market was looking for more of a nod or a mention toward the credit problems — and I don't think they got it."

Further, investors might also be positioning themselves ahead of a speech by Federal Reserve Chairman Ben Bernanke on Friday in Jackson Hole, Wyo. Investors are not only looking for further details about a possible rate cut, but any impression Bernanke has about his recent campaign of injecting liquidity into the markets.

The New York Fed — which carries out the central bank's market operation — on Monday announced a 10-day repurchase agreement worth $9.5 billion to extend through the Labor Day holiday. Then, on Tuesday, the Fed announced another "repo" worth $2 billion.

"It's kind of a good sign," said Stephen Stanley, chief economist at RBS Greenwich Capital, referring to the smaller amount introduced Tuesday. "Before, the Fed was providing a lot of liquidity and it wasn't getting disseminated out to the places it was needed."

Financial services stocks were among the hardest hit during the session as investors reacted to not only economic reports that could affect the group, but a downgrade of several major players. Merrill Lynch analyst Guy Moszkowski cut ratings on Citigroup Inc., Lehman Brothers Holdings Inc., and Bear Stearns Cos. due to concerns about earnings.

Lehman Brothers Holdings Inc., the fourth-largest investment house, fell $3.47, or 6 percent, to $54.28. Bear Stearns, the fifth-largest investment bank, fell $3.78, or 3.4 percent, to $108.42. Citigroup Inc. fell $1.65, or 3.5 percent, to $46.14.

Meanwhile, the S&P housing report pushed shares of homebuilders lower. When home prices fall, owners have a hard time refinancing, which can lead to more defaults and delinquencies.

Hovnanian Enterprises Inc. fell 80 cents, or 7.1 percent, to $10.46. Luxury homebuilder Toll Brothers Inc. dropped 94 cents, or 4.3 percent, to $21.06. D.R. Horton Inc. declined 46 cents, or 3 percent, to $14.75.

Pharmacy benefits management company Medco Health Solutions Inc. said it will pay $1.5 billion in cash for diabetes treatment supplier PolyMedica Corp. Shares of Medco fell $1 to $85.11, while PolyMedica surged $6.40, or 14 percent, to $51.69.

The Russell 2000 index of smaller companies was down 21.6, or 2.74 percent, at 767.83.

Declining issues beat out advancers by a 3 to 1 basis on the New York Stock Exchange, where volume came to 2.96 billion shares compared to 2.35 billion on Monday.

Overseas, Japan's Nikkei stock average fell 0.09 percent, while China's Shanghai Composite Index gained 0.91 percent to another record. In afternoon European trading, Britain's FTSE 100 fell 1.90 percent, Germany's DAX index fell 0.74 percent, and France's CAC-40 fell 2.08 percent.

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