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Market Insider: Credit Crunches Wall Street

There is no joy on Wall Street, and frankly, the mood is getting worse.

On Wednesday, stocks hit a 5-1/2 year low on waves of selling stemming from a meltdown in financials. The group was down nearly 12 percent, with some big names like Citigroup at shocking lows.

At the same time, credit markets are getting dicey again, worrying traders who see no solutions to mend the ailing mortgage market.

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On Thursday, investors will be watching weekly jobless claims data, released at 8:30 a.m., and expected to come in at 505,000. The Philadelphia Fed survey is released at 10 a.m. as are leading indicators. At 2 p.m. Treasury Secretary Hank Paulson speaks on the economy at 2 p.m. at a lecture series at the Ronald Reagan Presidential Library.

Gamestop and Suntech Power report earnings ahead of the open, and Dell reports after the closing bell.

Markets Mayhem

The Dow Wednesday, skidded 427 points, or 5 percent, to 7997. The S&P 500 was down 53 points, or 6.1 percent to 806, a new intraday low. Credit markets, meanwhile, showed more signs of stress and have increasingly deteriorated since last week when Paulson said the financial bailout plan no longer intends to buy distressed mortgage securities.

That comment, and other comments from Paulson that he would not seek to use new money from the bailout fund has spooked investors who see the healing process in credit markets reversing. It also put in doubt the outlook for those bundles of toxic mortgage securities, held on the books of banks and insurers. At the same time, investors had been looking for a sign from the incoming Obama Administration on how it will handle the crisis.

As Washington focuses on a bailout of the auto industry, markets are fretting more about the financial bailout.

The Fed didn't help the mood either Wednesday when it released its forecast and minutes from its last meeting. The Fed now expects the U.S. economy to contract for as much as a year with the risk the slowdown could go on even longer. Fed officials now expect the economy to contract moderately in the second half of this year and the first half of 2009. That means the Fed now sees a recession lasting a year.

TARP-pedoed

"It feels really bad again," said Greg Peters, Morgan Stanley global head of fixed income research. "My positive leanings have really come under question in the last week, and the past couple of days."

He pegged the credit markets' decline to Paulson's reversal on what the $700 billion TARP (bailout fund) would be used for.

"Everything is so fragile ... Any level of disappointment just crushes it," he said of the markets.

"There's not going to be any real tangible solution around housing or mortgages for quite some time to come. That realization is affecting CMBX, ABX in addition to the other stuff as well. There's just a confluence in the last couple of days ... It's staggering the kind of declines we're seeing - even investment grade corporate ... high yield is trading down. Everything is trading off on it," he said.

Traders in the stock market had been particularly watching spreads widen on commercial mortgage-backed securities, where they fear a cascade of defaults.

It's no surprise that Treasury debt prices rallied, as investors moved into the safe haven securities. That pushed the two-year's yield to 1.11 percent, while the 10-year yield fell to 3.39 percent. The 30-year, meanwhile, rose three points with its yield dropping to 3.92 percent, the lowest level since 1961, according to Reuters. On the other end of the spectrum, flight to quality buying also pushed the yields on T-bills lower, with the three-month falling to 0.07 percent.

Getting Technical

The S&P 500 broke through 818, an intraday low set last week. Technicians were watching that level very closely to see if the market would find support there.


Natixis Bleichroder technical analyst John Roque said he frankly didn't expect that level to hold. "Breaking of the support today was something we had been expecting. We think there was no support and we thought it was going to fail," he said.

Roque said his downside target on the S&P is 680. ouch. "I think that the trend is down. I think the number is reasonable. I don't know what the time frame is. We're still in a bear market," he said.

Oil Drip, Drip
Crude fell again , dropping 1.4 percent to $53.62 per barrel. The CRB index of 19 commodities fell 0.74 percent, its lowest level since September, 2003.

Questions? Comments? marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC's Senior Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.