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Stocks Fall After Bernanke Comments
Thursday January 17, 1:55 pm ET
By Leslie Wines, AP Business Writer
Stocks Fall As Bernanke Reiterates Assesement of Weak Economy; Manufacturing Index Falls

NEW YORK (AP) -- Stocks fell Thursday after Federal Reserve Chairman Ben Bernanke warned that the risks of an economic downturn have grown more pronounced and after a Philadelphia Federal Reserve survey showed regional manufacturing activity has declined sharply this month. The major indexes each lost more than 1 percent, including the Dow Jones industrial average, which lost more than 130 points.

Bernanke, testifying before the House Budget Committee, confirmed fears that have taken Wall Street sharply lower in the short time since the year began. Bernanke forecast slower growth in 2008 but not a recession. Bernanke as well as the White House lent support to the notion of an economic stimulus package aimed at letting the economy sidestep recession.

The Philadelphia Fed also weighed in, announcing its measure of manufacturing activity fell sharply to a negative 20.9 from a revised reading of negative 1.6 in December. The report underscored the seriousness of the economic concerns that have in recent weeks drawn the focus of both Wall Street and Washington.

"The Philadelphia Fed just announced dreadful numbers," said John O'Donoghue, co-head of equities at Cowen & Co. He said if you look back at Philadelphia Fed data for similar numbers, it takes you back to the 2001 to 2002 recession.

"It's not rocket science -- the economy is slowing dramatically, and it's being reflected in economic reports."

The unease about the economy hit stocks. In early afternoon trading, the Dow, which had been up more than 50 points early in the session, fell 139.98, or 1.12 percent, to 12,326.18.

Broader stock indicators also declined. The Standard & Poor's 500 index fell 22.61, or 1.65 percent, to 1,350.59, and the Nasdaq composite index fell 22.78, or 0.95 percent, to 2,371.81.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 1.03 billion shares.

Bond prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.66 percent from 3.68 percent late Wednesday. The dollar was mixed against other major currencies.

Light, sweet crude fell 62 cents to $90.22 per barrel on the New York Mercantile Exchange.

The Philadelphia manufacturing reading caught Wall Street by surprise -- igniting fears that the economy is slowing precipitously and that policymakers could be bringing too little water to douse an economic flameout.

Economists had expected the Philadelphia index would come in at a negative 1.5, according to Dow Jones Newswires. Instead, the negative 20.9 figure was the weakest since October 2001 when the economy was reeling from the shock of the Sept. 11 terror attacks.

Other economic reports added to investors' glum mood. The Commerce Department said housing starts plunged 14 percent to 1.01 million in December, marking the weakest pace of home building in more than 16 years. In addition, permits to build new homes dropped 8 percent last month to 1.07 million, the lowest level since 1993.

Thomson/IFR had forecast smaller declines for both housing starts and building permits. Still, some economists pointed out that the weakness may prove helpful in the long run, as smaller inventories of homes will take some pressure off the housing sector.

In one bright spot, the Labor Department reported jobless claims dropped by 21,000 to 301,000 in the latest week. Claims had been expected to rise by 8,000 to 330,000, according to Thomson/IFR. However, the weekly readings can be volatile.

The week's steady flow of news, much of which has dented investor sentiment, has made for a growing chorus of calls for the Fed to cut rates. The central bank is expected to lower its Fed funds target from the current 4.25 percent level this month. The Fed's monetary policy committee will meet Jan. 29-30 and Bernanke on Thursday reiterated recent strong signals that the central bank could reduce rates for a fourth straight time.

Some on Wall Street have called for the Fed to intervene sooner with steep rate cuts.

The economic concerns come in a week in which some of Wall Street's biggest names have posted huge losses following bad bets on mortgage investments. The reports have made clear that there is also increasing weakness in home equity and other consumer-oriented banking operations. The problems with subprime and home equity, along with a badly stalled housing market, are among the chief reasons investors are pinning their hopes on stimulus efforts and cheaper lending rates.

Merrill Lynch & Co. on Thursday posted a massive loss that underscored the depth of the economy's credit problems. The world's largest brokerage said it lost $9.91 billion in the fourth quarter, hurt by massive write-downs from investment and trades battered by the ongoing credit crisis.

John Thain, the new chief executive at Merrill, said he believes this will be the bulk of the company's write-downs from its subprime mortgage exposure. But he would not speculate about what 2008 might hold in store in other areas. Earlier this week, Merrill secured a new round of capital infusions from foreign funds.

Merrill fell $4.37, or 7.9 percent, to $50.73.

Adding to Wall Street's unease, credit rating agency Moody's Investors Service placed bond insurer Ambac Assurance Corp. on review for a possible downgrade.

Moody's said it will review Ambac for a possible downgrade of its "Aaa" financial strength rating -- a rating that is essential for Ambac to continue getting new business. Ambac on Wednesday said it booked a $5.4 billion write-down on its credit derivative portfolio during the fourth quarter.

Ambac fell $6.99, or 54 percent, to $5.98.

Jim Herrick, manager of equity trading at Baird & Co. contends that the Philadelphia Fed reading and other negative economic reports out recently indicate the economy is likely in a downturn.

Herrick contends Bernanke's focus was long about fighting inflation in 2007 that his speech Thursday "seems kind of like a mea culpa" about the weakness of the economy.

The Russell 2000 index of smaller companies fell 13.73, or 1.96 percent, to 686.18.

Overseas, Japan's Nikkei stock average closed up 2.07 percent. In afternoon trading, Britain's FTSE 100 rose 0.68 percent, Germany's DAX index rose 0.78 percent, and France's CAC-40 fell 1.31 percent.

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

Link to this article: http://biz.yahoo.com/ap/080117/wall_street.html