Stocks turned sharply lower Thursday after Federal Reserve Chairman Ben Bernanke said bank failures are likely as the housing crisis takes its toll.
"I expect there will be some failures'' of small, regional banks invested in real estate, Bernanke told the Senate Banking Committee in his second day of congressional testimony. "Among the largest banks, the capital ratios remain good and I don't anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.'' The comments came during the question-and-answer session with the Senate.
"Investors are so nervous, they want to believe that all of the credit issues are behind them but every time Bernanke or someone comes out with a comment like this, you get these violent moves in the market," said Charles Massimo, president and founder of CJM Fiscal Management.
Massimo, who says Bernanke's pledge for transparency is what's causing a lot of the volatility in the marketplace right now, says he expects policy makers to cut interest rates by half a percentage point at the next meeting, which is March 18.
"I don't think he'll do any surprises," Massimo said, referring to speculation that Bernanke and the Fed may cut rates again between meetings. "It's part of the transparency. If he cuts inbetween, he'll have no control of this market," Massimo said.
Financial-services stocks were already under pressure after two brokerages cut their profit forecasts for J.P. Morgan Chase and residential mortgage lender Thornburg Mortgage spacer said it faced margin calls on $2.9 billion of securities backed by below-prime loans. Insurer AIG , which is expected to report earnings after the closing bell, was the lead decliner on the Dow.
And, another rogue trader is wreaking havoc in the sector. MF Global spacer said one of its traders dealing in wheat futures conducted unauthorized trades, resulting in a bad-debt provision of $141.5 million. Unlike Societe Generale, which is still probing Jerome Kerviel, who rang up more than $7 billion in losses, MF Global says this trader has been terminated, effective immediately.
The market started the day lower after a pair of economic reports came in weaker than expected.
The Commerce Department left its estimate for fourth-quarter economic growth at a 0.6 percent annual rate amid weakness in spending and housing and a slump in inventories. Economists had expected an uptick to a 0.8 percent pace.
Shares of homebuilders fell after the GDP report showed builders slashed spending on housing projects by 25 percent, the biggest cut in 26 years. The Dow Jones home construction index slipped 3.4 percent. Shares of both D.R. Horton , the largest U.S. homebuilder, and Toll Brothers declined.
Jobless claims rose by 19,000, much more than expected, to 373,000 last week. The four-week moving average, however, fell to 360,500 from 361,750.
Data in the jobless-claims report are "consistent with weakening labor market conditions, and it appears that the weakening trend is steepening," wrote Joshua Shapiro, chief U.S. economist at MFR Inc., in a morning note.
As for the market, David Sowerby, chief market analyst at Loomis Sayles, says he thinks we marked the lows of this cycle in late January. "We're slowly crawling back," Sowerby told CNBC. "Nevertheless, we'll get another gut check, but we're crawling back in 2008." Sowerby is keen to get in on early cyclicals. He likes techs and consumer stocks, notably Corning with its LCD-screen technology, which may be a beneficiary of consumer tax rebates, and DirecTV .
Apple shares jumped after the company affirmed its goal to sell 10 million iPhones in fiscal 2008. Apple also said it will detail next week how outside programmers can create software for the iPhone, a move expected to boost sales by making the device more accessible. Apple shares have fallen nearly 38 percent since the beginning of 2008.
After the closing bell, earnings are due out from fellow tech giant Dell Computer . Analysts expect earnings of 36 cents a share.
Sprint Nextelposted a loss of $29.4 million, or nine cents a share, amid a steep impairment charge and gave a dour forecast on subscriber losses. Analysts had expected a profit of 18 cents a share.
Sears Holding reported its earnings tumbled 48 percent amid increased markdowns and lower sales at its Kmart and Sears stores. The retailer, controlled by hedge-fund manager Eddie Lampert, said earnings fell to $426 million, or $3.17 a share, in the fourth quarter ended Feb. 2, from $811 million, or $5.27 a share, a year earlier. Same-store sales dropped 4.5 percent. Lampert has come under fire for failing to turn around the struggling chains and merge them into a cohesive brand.
Freddie Mac, the second-biggest provider of residential mortgage funding, on Thursday said its loss widened to $2.5 billion in the fourth quarter as the housing and credit crises worsened. The figure represented a loss of $3.97 a share, worse than the $3.05 a share loss analysts had been expecting.
A day earlier,Fannie Mae, the largest mortgage lender, reported a loss of $3.6 billion, or $3.80 a share, also worse than analysts had expected. And, regulators raised the caps on the portfolios of Fannie and Freddie, which will free up billions for the companies to reinvest in the struggling housing market.
Shares of Limited Brands skidded after the company, which operates the Victoria's Secret and Bath & Body Works chains, reported lower fourth-quarter earnings, cut its February sales projections and said margins would continue to be under pressure in the first quarter.
Due out later are earnings from fellow retail chain Gap and department-store operator Kohl's.