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Fed Comments Push Stocks Even Lower

Cindy Perman|CNBC.com
Tuesday, 5 Feb 2008 | 1:05 PM ET

Stocks tumbled Tuesday after an unexpectedly sharp contraction in the U.S. services sector and a fresh downgrade in the financial sector.

Stocks got an extra push from the Federal Reserve after Richmond Fed Bank President Jeffrey Lacker said he sees "the possibility of a mild recession, similar to the last two we have experienced -- in other words, shallow and with a short recovery." Lacker said further rate cuts may be necessary, but aren't a sure thing.

Within the first five minutes of trading, the Dow Jones Industrial Average was down about 150 points and just kept going. In intraday trading, the Dow was off more than 12 percent from the closing high of 14164.53 set on Oct. 9. The S&P 500 index and the Nasdaq also declined.

The Institute for Supply Management reported Tuesday that its nonmanufacturing index, which measures the performance of the U.S. services sector, plunged to 41.9 from 54.4 in December. Economists had expected a more modest drop to 53. A reading below 50 indicates contraction. This was the lowest reading since October 2001, when the Sept. 11 attacks caused the U.S. to slip into a mild recession.

The services sector represents about 80 percent of U.S. economic activity, including businesses such as banks, airlines, hotels and restaurants. The ISM report underscored concerns that the fallout from the housing-sector slump is spreading to the broader economy.

"The recession has indeed arrived," Jane Caron, chief economic strategist at Dwight Asset Management in Burlington, Vermont, told Reuters.

European shares continued to slide for a second day after a report that service-sector growth in the euro zone fell to a four-and-a-half-year low in January, fueling concerns that the U.S. slowdown may be spilling over into Europe.

Spain in particular took a hit, recording the its slowest ever rate of growth in the service sector. "The sky is tumbling in on the Spanish services sector," Bear Stearns analysts wrote in a note.

Asian stocks also extended their losing streak amid global-recession fears.

Another Downgrade for Financials

Goldman Sachs shares slipped after Oppenheimer downgraded its rating on the stock to "perform" from "outperform," citing valuation and other factors.

Downgrades on credit-card providers such as American Express and a slew of other financials dragged down the market a day earlier. Analysts are growing increasingly concerned that consumers are falling behind on their loan payments.

Technology stocks, which are seen as particularly vulnerable to a downturn in business and consumer spending, were mostly lower Tuesday.

Apple fared better than some of its tech counterparts after the company introduced new models iPods and iPhones with double the memory of previous versions.

Google advanced amid rumors that Yahoo might outsource its search function to Google and an announcement that Google is adding more business email security and storage products. The products build on technology acquired when Google bought email specialist Postini last year for $625 million, AP reported. The products are designed to weed out junk mail and viruses and prevent security breaches.

Some of the Google gain could be bargain hunting; the Internet giant is down 33 percent from its closing high of $741.79 on Nov. 6. For those of you keeping score, the stock is still up nearly 500% from its IPO price of $85.

Bespoke Investment Group noted on its blog (http://bespokeinvest.typepad.com/) that Google stock looks similar to Microsoft did when it was at the same stage in its corporate lifespan. After 871 trading days, Microsoft was up 458 percent; Internet giants Amazon and eBay were up nearly 1800 percent and Yahoo was up nearly 8,000 percent, the analysts noted.

"Twenty years from now, Google can only hope that it is up 43,000 percent from its IPO price like Microsoft currently is," Bespoke said.

Not to be outdone, Microsoft said it sent a major package of upgrades and fixes for Windows Vista to manufacturers for mass production on Monday.

Analysts Raise Price Target on Yahoo

Yahoo shares were flat after Banc of America cut its rating on the stock to "neutral" from "buy" and raised its price target to $31 from $26. UBS and Citigroup also raised their targets on the stock, to $34 and $31, respectively.

Shares of business-software maker Oracledeclined as did blue chips Microsoft and Intel. Telecom-service providers AT&T and Verizon were among the biggest drags on the Dow.

In earnings news, oil giant BP reported that fourth-quarter replacement cost (RC), which strips out unrealized gains on fuel inventories, fell 24 percent to $2.97 billion. But BP's shares gained 1.8 percent in premarket trading after the company said it favored returning money to shareholders via dividends, rather than share buybacks.

The parent of the New York Stock Exchange, trans-Atlantic NYSE-Euronext , said its profit rose to $156 million, or 59 cents a share, compared with net income of $45 million, or 29 cents per share in the year-ago period -- before the merger with Euronext.

Whirlpool shares jumped after the appliance maker reported a 72 percent surge in its fourth-quarter profit, helped by its Maytag acquisition and the weak dollar. The company said that all of its branded products gained market share during the quarter.

Avon also advanced after the cosmetics company reported its profit dropped 30% in the quarter but beat analysts' estimates.

News Corp. , which closed a $5.6 billion deal to buy Wall Street Journal publisher Dow Jones in December, said quarterly profit rose just 1.2 percent to $832 million from $822 million a year earlier, in line with expectations. The company said the economic slowdown is not hurting its business. And, this quarter is on track for the media giant, which said it received $250 million in ad revenue for the Super Bowl, its best ever.

On Tuesday, News Corp. owner Rupert Murdoch said he won't make a bid for Yahoo.

Politics will take center stage on this Super Tuesday, as more than 20 states hold primaries for the presidential election.

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AVP
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ALXN
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BP.
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GS
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INTC
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MSFT
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FOXA
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ORCL
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T
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VZ
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WHR
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YHOO
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BSX
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NYX
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AAPL
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GOOGL
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