AIG, Dismal Economic Data Smack Stocks

Friday may be February 29, a day that only comes around once every four years, but the news that moved the market followed familiar themes.

Stocks fell sharply Friday after a trio of economic reports stirred recession fears and AIG reminded the market that there are more shoes to drop, posting a huge quarterly loss.

In the last few hours of trading, selling accelerated, pushing all three major indexes to sessions lows.

At this rate, the Dow Jones Industrial Average is on track to lose 300 points for the month, making February the fourth straight down month. Only three sectors are up for the month -- energy, materials and consumer staples.

For sure, 2008 has been a wild year -- a couple of months, really -- for stocks. The Dow is down nearly 1,000 points since the end of 2007.

In economic news Friday, the National Association of Purchasing Managers-Chicago reported its index of regional business conditions, fell to 44.5, the lowest since December 2001, from 51.5. Economists had expected a less sever slide to 49.7.

The report's subindexes were mixed, but "employment plunged catastrophically" to 33.5 from 47, notes Ian Shepherdson, chief U.S. economist at High Frequency Economics. Combined with other weak regional reports, including Philadelphia New York and Cincinnati, Shepherdson said, "We now expect the economy to shrink in the second quarter ... the only factor preventing another drop in the third quarter is the tax rebates."

The regional reports are seen as a precursor to a national reading on manufacturing, due out on Monday.

Meanwhile, the University of Michigan said its gauge of consumer confidence came in at 70.8 in a final February reading, up from a midmonth reading of 69.6, but down from 78.4 in January. It was the lowest reading since February 1992.

A report from the Commerce Department showed consumer spending has idled.

Personal spending increased 0.4 percent as income rose 0.3 percent, the Commerce Department said. Economists had expected both gauges to rise a more modest 0.2 percent. Some of the gain was due to inflation, as the personal consumption expenditure price index climbed 2.2 percent in annual terms. Real spending, which is factored into GDP, was actually unchanged in January; it's been unchanged in three of the past four months.

Dell also talked about the pinch of the consumer pullback in its earnings report. The computer maker posted a lower-than-expected quarterly profit and warned that consumers may reduce spending. The company said it was making efforts to improve profitability by shedding jobs and shaking up its business.

Friedman, Billings, Ramsey & Co. upgraded its rating on Dell to "outperform" from "market perform," saying it expects margins to improve and that emerging-markets growth should remain strong.

American Insurance Group, the Dow's biggest decliner, joined the ranks of the biggest losers of the credit crunch, posting a $5.29 billion loss amid writedowns and losses of nearly $15 billion. AIG's CEO said the company expected the housing market to stay weak and credit uncertainties to persist.

UBS said Friday that losses from the credit crisis will likely top $600 billion -- more than triple what's been reported so far -- with more than half of that being absorbed by banks and brokers.

Punk Ziegel lowered its earnings forecast for several financial institutions, including Goldman Sachs , Merrill Lynch and Citigroup , citing more provisions for bad loans to come.

Meanwhile, the bailout plan for Ambac ran into trouble when regulators demanded that banks involved move put up more capital, CNBC has learned. Confidence remains that the deal will still happen and talks are expected to continue over the weekend.

Moody's said Friday that Ambac remains on review for a possible credit downgrade, though if the bond insurer can meet target capital levels, it will hold on to its "AAA" rating.

Among bond insurers, there's been a lot of talk about Ambac and MBIA, not so much about Assured Guaranty. Well, Friday, Assured got its day, after billionaire investor Wilbur Ross told CNBC he plans to buy up to a $1 billion stake in the company. The purchase, done through WL Ross & Co, gives Assured a much-needed capital boost to preserve its triple-A credit rating.

Some good news on the earnings front came from media company Viacom , the owner of MTV, which reported a 16 percent gain in fourth-quarter earnings and said its advertising business had not been hurt by the economic slowdown.

But in the housing sector the outlook was still bleak, as mortgage rates continued to rise. A survey by Freddie Mac showed that 30-year mortgage rates averaged 6.24 percent compared to 6.04 percent a week earlier, while 15-year mortgages increased to an average of 5.72 percent from 5.64 percent.

Slamming a plan to bring relief to mortgage borrowers, U.S. Treasury Secretary Henry Paulson said homeowners who could afford their mortgage should honor their obligations and that the Bush administration had no interest in bailing out housing speculators.

MF Global shares tumbled after at least four firms downgraded their ratings on the stock. UBS and Credit Suisse cut their ratings to "neutral," citing the company's ineffective risk management. A day earlier, MF Global disclosed that it had a rogue trader, who cost the company $141.5 million due to unauthorized wheat trades.