Stocks declined Monday, led by insurers and financials, after AIG revealed that the impact of the credit crisis was more than three times greater than the firm had previously disclosed. Techs benefited from a slew of deal news.
The Dow Jones Industrial Average, coming off its worst week in nearly five years, retreated after the AIG news. The S&P 500 index and tech-heavy Nasdaq also fell.
AIG, the biggest drag on the Dow, fell sharply after the world's largest insurer said auditors are questioning the firm's valuation of risky debt. The company said the value of its risky debt portfolio plunged by $5.96 billion, not $1.6 billion, as previously reported. The disclosure stands in stark contrast to AIG's earlier claim that it didn't face major problems -- as some of its rivals did -- as a result of the credit crisis. AIG shares were down more than 10 percent, the stock's biggest percentage decline since the stock-market crash in October 1987, when AIG shares plunged 15.5 percent.
"We've got a lot of hand-wringing about what's going on in the financial markets," Thom Hall of the Financial Strategies Institute told CNBC Monday. "I think Main Street is plugging along, it's just Wall Street that's having some heartburn right now."
Alan Lancz, president of Alan B. Lancz Associates, told CNBC that the AIG disclosure highlights that the credit crisis isn't ending anytime soon. "I think it's a situation where there's more shoes to drop," Lancz said. "We don't know where or when. This is not a six- or eight-month phenomenon then we're off to the races with the market again."
Lowe's tumbled after the home-improvement chain reported its earnings dropped 31 percent, hurt by subprime-investment losses at its CNA Financial insurance affiliate.
Tim Smalls, head trader at Execution LLC, told CNBC that he still likes select financials such as J.P. Morgan and People's United , companies that should weather the credit storm a lot better than some of their rivals. He also likes homebuilders due to their cheap valuations, but said he's not jumping on the retail bandwagon.
Before the opening bell, Dow Jones announced a shake-up in the Dow Jones Industrial Average that will see Bank of America and Chevron added to the blue-chip index, and Altria and Honeywell removed. The changes take effect Feb. 19.
In announcing the changes, Wall Street Journal Managing Editor Marcus Brauchli, who oversees the composition of the Dow, said Altria was removed because it is in the process of restructuring, which will make a smaller, more narrowly focused company. Honeywell was dropped because it's the smallest Dow industrial and industrials are really losing clout in the market anyway.
As for the addition of Bank of America and Chevron, Brauchli said, "we saw that the financials industry was under-represented -- notwithstanding the current turbulence -- and that the oil and gas industry's growing importance to the world economy called for another representative to join Exxon Mobil Corp."
A slew of tech news coupled with low valuations gave the sector a boost today.
Semiconductors were some of the day's biggest gainers, with Intelleading advancers on the Dow. The Philadelphia Stock Exchange Semiconductor Index jumped nearly 2 percent.
Analysts said Microsoftis likely to raise its bid for Yahoo after Yahoo rejected the software giant's $44.6 billion offer, as widely expected. RBC Capital Markets downgraded its rating on Microsoft to "sector perform" from "outperform" and cut its price target on the stock to $31. from $40.
Meanwhile, Motorola and Nortel Networks are said to be considering combining their wireless-networking units, the Wall Street Journal reported.
It's an important week for the telecommunications sector as the World Mobile Congress kicked off in Barcelona and a slew of firms, eager to push their products and services out ahead of the competition, issued announcements.
Nokia , the world's largest cell-phone maker, on Monday unveiled four new multimedia-phone models, including successors to its top N95 and N73 models. The Finnish company also launched its new free media-sharing service "Share on Ovi." Nokia said it had no plans to use Microsoft's Windows Mobile operating system, making it the only one of the world's leading cell-phone makers to snub Microsoft's system.
Google launched its Android software for mobile phones, which enables users to access the Internet via the mobile telephone.
Apple shares rose in premarket trading after Citigroup added the tech giant to its top-picks list. Analyst Richard Gardner said concerns over reductions to iPod and iPhone build plans are already prices into the stock. He said he sees "significant offsets" to sluggish first-half 2008 iPod unit growth, including continued strong demand for PCs, lean inventories, further expansion of Apple's relationship with Best Buy and the introduction of MacBook Air.
Hasbro, the world's second largest toy maker, reported on Monday that its earnings rose 24 percent as sales shot up 16 percent from a year earlier.
Larger rival Mattel recently announced a 15 percent profit increase but faced negative publicity because of its recalls of millions of Chinese-made toys tainted with lead.
In merger and acquisition news, people familiar with talks between Delta and Northwest Airlines could reach a merger agreement as soon as this week, Bloomberg.com reported.
There are no major economic indicators due out Monday.
-- Reuters contributed to this report