Stocks fell for a third straight session Monday, with the S&P 500 index testing a key level, as a fresh wave of credit worries rattled the market.
The S&P 500 index shed 1.6 percent and finished just about its January intraday low of 1270. The Dow Jones Industrial Average lost 1.3 percent, while the Nasdaq declined 2 percent.
Ten of 30 Dow components hit new 52-week intraday lows, including AIG , Boeing , Citigroup , General Electric and J.P. Morgan.
Crude oil settled at $107.90 a barrel -- after topping $108 in intraday trading -- due to the weak dollar and signs that the economy is still struggling. The dollar fell to an eight-year low against the yen, but gained slightly against the euro after Europe's top monetary official said he's concerned about excessive exchange-rate moves.
In the financial sector, Bear Stearns tumbled 11 percent amid rumors that the brokerage is facing liquidity problems and after Moody's downgraded a bunch of Bear securities backed by Alt-A mortgages, which are given to people who have no proof of income or have some credit problems.
Alan "Ace" Greenberg, Bear's former CEO and its current executive committee chairman, told CNBC that speculation that the brokerage is facing liquidity problems are "totally ridiculous."
J.P. Morgan said Wall Street banks are facing a "systemic margin call" that may deplete them of $325 billion of capital due to deteriorating subprime U.S. mortgages.
Bernstein chimed in, saying it wouldn't recommend buying shares of brokerage firms as there are more write-downs to come. Citigroup estimated that U.S. investment banks will log write-downs totaling $9 billion during the first quarter.
"You can throw all your rational market theory out the window right now," Rich Berg, chief executive of Performance Trust Capital, told CNBC. "The credit markets are like a massive sea anchor right now on the stock market and it's going to be hard to get much speed going when you've got an anchor sitting in the water dragging bottom."
Billionaire investor Wilbur Ross said he thinks the next phase of this downturn will be bank failures, though probably not the big banks. Those most at risk are medium-sized banks that got tangled up in mortgage debt.
"I think that's going to be the next wave, and coupled with problems in the commercial real-estate market; I think they'll be the next bubbles that burst," the chairman and CEO of W. L. Ross and Company told CNBC.
Lehman Brothers lost more than 7 percent amid speculation that the brokerage is going to lay off 5 percent of its global work force and that there are more cuts to come.
Shares of Ambac Financial Group plunged 23 percent after the bond insurer reported its net income fell 27 percent to $173 million in the second quarter from $238.6 million a year earlier, citing unrealized mark-to-market losses related to credit-derivative exposures.
Larger rival MBIA saw its shares slide 10 percent after the company on Friday asked Fitch Ratings to take several of its units off the Fitch Ratings system, saying it only adds extra volatility to the stock.
Fannie Mae and Freddie Mac continued to decline -- with both trading at a more than 12-year low -- following a weekend report in Barron's that Fannie may require a government bailout.
U.S. federal authorities opened an investigation into the largest mortgage lender, Countrywide Financial, to see whether it misrepresented the soundness of its loans and its financial conditions in security filings.
And Carlyle Capital Corp, the Dutch-listed affiliate of private equity firm Carlyle Group, said it was still in talks with its lenderstrying to persuade them not to liquidate their securities. Margin calls and default notices from lenders ballooned to more than $400 million last week, the company said.
Merrill Lynch offered a bit of hope, as CEO John Thain told French newspaper Le Figaro that the bank wouldn't need to raise more capitalto strengthen its balance sheet.
"These problems are behind us. We will not return to the market," Thain was quoted as saying.
And Annaly Capital Management boosted its dividend to 48 cents for the first quarter, a 40 percent increase from the fourth quarter.
Asset manager Blackstone reported its earnings plunged 86 percent to $128.2 million from $894.9 million a year earlier due to the credit crunch and a write-down of bond insurer FGIC.
Boeing was among the drags on the Dow as industrials were hit by recession worries.
General Motors declined after Lehman Brothers said U.S. auto makers will be hit with a double whammy: declining sales and rising commodity prices.
Commodities stocks also pulled back as gold and other metals receded. Freeport-McMoRan Copper & Gold dropped 6 percent. The materials sector was the biggest decliner of 10 key S&P indexes.
McDonald's, the biggest gainer on the Dow, rose 1.5 percent after the fast-food giant said U.S. same-store sales rose 8.3 percentin January, well above the 1 to 2 percent analysts had expected, helped by coffee sales. Such sales rose a more robust 15 percent in Europe.
Starting off the day was market buzz about an emergency rate cut after Goldman Sachs analysts said in a research note that they expect the Federal Reserve to drop its target for the federal-funds rate to 2 percent by late April. That will most likely happen through cut of half a percentage point at the next two regularly scheduled meetings, the analysts said, but added: "We cannot rule out an intermeeting rate cut today."
The Fed's next regularly scheduled meeting is next Tuesday, March 18.
In economic news, wholesale inventories rose 0.8 percent, more than expected, in January, though wholesale sales shot up 2.7 percent, the largest increase in four years, according to a report from the Commerce Department. Sales of durable goods were particularly robust, increasing 2.4 percent from December.
Consumers got another hit as gas prices reached a new high of almost $3.20 per gallon. They will likely jump another 20 to 30 cents in the next month as refiners become more willing to pass on their higher costs of crude oil, Lundberg price survey editor Trilby Lundberg said.
TUESDAY: Trade balance; Mississippi primary
WEDNESDAY: Weekly crude inventories; Treasury budget; Bill Gates on Capitol Hill
THURSDAY: Import prices; retail sales; weekly jobless claims; business inventories
FRIDAY: CPI, consumer sentiment
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