Stock losses deepened Thursday as news out of the financial sector rekindled worries about fallout from the credit crunch.
The Dow Jones Industrial Average and S&P 500 index both hit their lowest levels since January 22, when closely-watched lows were set. The key breakthrough levels are at 12000 and 1310, respectively. The tech-heavy Nasdaq dropped to a 17-month low.
The Mortgage Bankers Association said the proportion of mortgages that fell into foreclosure shot up to a record 0.83 percent, topping the prior record of 0.78 percent, set in the third quarter.
The mortgage-delinquency rate rose to 5.83 percent from 5.59 percent in the third quarter. The delinquency rate on subprime mortgages jumped to 5.29 percent from 4.72 percent.
In other economic news, the National Association of Realtors reported that existing-home sales were unchanged in January from December, better than the 1 percent drop economists had expected.
Pending-home sales were off 20 percent from January 2007, but "with mortgage rates coming down the way they are, people are looking" to buy homes, Victor Pugliese, director of listed-equity trading at Broadpoint Securities told Reuters. "There is pent up demand."
Jobless claims fell by 24,000 last week to a lower-than-expected 351,000, the Labor Department reported. The four-week moving average, which smooths out weekly fluctuations, fell by 1,500 to 359,500.
The jobless-claims report and better-than-expected same-store-sales reports gave investors cause for optimism, but the bulls weren't biting.
"We're not in a situation anymore that, because a number is not quite as bad as we thought it was, we're going to turn that into a positive," Jim Iuorio, director of TJM Institutional Services, told CNBC. "Sentiment is overwhelmingly negative right now." Iuorio said the only thing that might budge the bears is a solid jobs report, which is due out Friday.
More Shoes Drop in Financial Sector
Financials came under fire again Thursday, with the S&P financial index down more than 2 percent in early afternoon trading.
Thornburg Mortgage , which provides "jumbo" mortgages for high-end homes, said it had received a notice of defaultfrom J.P. Morgan Chase for failing to meet a margin call of about $28 million.
Carlyle Capital Corp., a European affiliate of Carlyle Group that invests in mortgage-backed securities issued by Fannie Mae and Freddie Mac, also said that it had received a notice of default as it couldn't meet some margin calls.
As a result, several mortgage REITs, including Anworth Mortgage Asset Corp., dropped more than 20 percent and were among the biggest percentage decliners on the New York Stock Exchange.
"The real story in financials today is we're all focused on the car crash on the side of the road -- the banks that are writing off big numbers," Doug Sandler, chief equity strategist at Wachovia Securities, told CNBC. "What we're not looking at is the companies that are reliant on healthy lending environments." It's not banks the market should be worried about, it's REITs, Sandler said.
Shares of Fannie and Fredddie fell to their lowest levels in more than a decade.
Merrill Lynch said on Wednesday it was quitting the subprime-lending businessbecause of the deteriorating market for home loans, firing 650 employees in that business, which it bought in December 2006 for $1.3 billion.
Standard & Poor's cut its credit rating on Washington Mutual to "BBB" from "BBB+," saying the regional bank chain, based in Seattle, faces steeper losses on bad loans that previously expected. Bear Stearns said it now expects Washington Mutual to report a loss of 90 cents a share for 2008, down from its earlier estimate of 15 cents a share.
Investors were also disappointed that the plan for bond insurer Ambac, announced Wednesday, called for raising $1.5 billion in capital, not a bigger bank-led bailout.
Goldman Sachs cut its price target on Ambac, as well as competitor MBIA, saying that Ambac's capital plan falls $1 billion short of what the bond insurer needs.
Elsewhere in the market, the dollar hit another record low against the euro, which traded above $1.53, and oil topped $105 a barrel in Thursday trading.
Offering the dollar no relief, both the European Central Bank and the Bank of England left their respective interest rates unchanged.
Financials were the day's biggest decliners in the S&P's top 10 sector indexes, followed by energy and consumer-discretionary stocks.
Airline stocks skidded again as deal speculation quiets down and oil prices soar. American parent AMR and Continental were among the sector's biggest decliners.
Discounters Ring Up Sales
Early retail-sales results were decent, defying analysts' expectations that this would be the the worst February in about five years. According to Thomson Financial, 60 percent of retailers have topped estimates, while 40 percent have fallen short.
However, if you look closer at how consumers were spending, it's a little more worrisome: They were using gift cards to pay for groceries and spending around the time they received their paychecks, CNBC's Margaret Brennan pointed out.
Discounters turned in solid numbers as consumers tend to focus on bargains and staples in times of downturns.
Wal-Mart Stores said its February same-store sales rose 2.6 percent, far above analyst estimates of 1.1 percent, as consumers bought groceries and other staples but also discretionary items. Wal-Mart said sales of food, flat-panel TVs, digital-audio products, video games, pharmacy items and Valentine's Day seasonal merchandise were all solid.
Warehouse clubs Costco and BJ's also reported stronger-than-expected sales.
Wal-Mart rival Target , which is a discounter but with a more trendy, upscale edge, said it expects same-store sales to fall slightly in March, then start to climb in April.
Clothing retailers are already in a recession, according to Piper Jaffray retail analyst Jeffrey Klinefelter.
J.C. Penney said same-store sales fell 6.7 percent, while Kohl's sales fell 3.8 percent. Gap , which runs Gap, Banana Republic and Old Navy stores, reported such sales dropped 6 percent, more sharply than analysts had expected.
Even teen retailers and high-end department stores started to show some cracks.
Abercrombie & Fitch , American Eagle and Nordstrom all posted declines. Though, teen retailer Aeropostale and upscale department store Saks continued to post gains in same-store sales.
Investors continued to sell off shares of Macy's , which recently decided to stop issuing monthly same-store sales reports. The stock is already down more than 40 percent in the past year.
Oracle was one of the biggest gainers on both the Nasdaq and in the S&P 500 index after Merrill Lynch raised its rating on the stock to "buy" from "neutral."
Blockbuster shares rose after the video-rental chain reported a better-than-expected earnings and said its restructuring efforts -- including cost reductions and job cuts -- will propel it to a fulll-year profit. Excluding severance costs and other one-time items, Blockbuster earned 26 cents a share, better than the 19 cents a share predicted by analysts surveyed by Reuters.
H&R Block also advanced as the largest U.S. tax preparer reported its quarterly loss narrowed as tax-return revenue offset costs related to job cuts and the closing of a subprime-mortgage unit.
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