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Shock Waves Felt From Home, Abroad

Stocks: Attack on U.S. warship, negative earnings news trigger 379-point drop in the Dow, its 5th-largest in history.


U.S. stocks Thursday suffered their biggest decline in six months as an attack on a U.S. warship in the Middle East and an earnings warning from Home Depot triggered another wave of selling.

As the market opens trading on a day many consider unlucky anyway--Friday the 13th--analysts fear that many short-term traders will be inclined to continue to bail out ahead of a weekend that could bring more trouble in the Middle East.

"There's no compelling reason to buy stocks and a lot more reasons to sell," Robert Leshman, who runs New York hedge fund Briar Partners, noted on Bloomberg News. "The lower stocks go, the more fear sets in and people say, 'Get me out at any price.' "

The selling in recent weeks that was focused on the technology sector spread to blue chips Thursday, sending the Dow Jones industrial average down 379.21 points, or 3.6%, to 10,034.58.

Home Depot--one of the 30 stocks in the Dow--accounted for a large chunk of the index's loss, as the shares plunged $14.06 to $34.88 following the company's warning that near-term earnings will be weaker than expected.

It was the Dow's fifth-largest point drop ever, and the biggest since April, though in percentage terms it was far from a record.

The loss left the index just above the 10,000 mark. It hasn't been below that level since early March.

The tech-dominated Nasdaq composite index slid 93.81 points, or 3%, to 3,074.68 Thursday. Though its percentage loss was less than the Dow's, the plunge pushed Nasdaq through the low of 3,164 in May that had followed the spring tech-stock crash. It now is down 24.4% this year.

In a sign of the mounting pessimism Thursday, major stock indexes closed near their lows for the day, as selling continued unabated. Volume was extremely heavy, with 2.1 billion shares changing hands on Nasdaq. Still, volume was lower than in Wednesday's sell-off.

The market has been battered recently by reports of declining sales growth for firms in many industries. Home Depot's warning Thursday was just the latest.

But the escalating violence in the Middle East helped to underline investor concerns about the other side of the income statement--the cost side, said William E. Rhodes, strategist at Williams Capital Group in New York.

If oil prices take a further leap, rising energy costs could start cutting into profits at many more companies, he said.

Moreover, Rhodes added, because of the still-high levels of margin borrowing--investors' use of credit to buy stocks--sell-offs can feed on themselves as investors are forced to sell still more stocks to meet "margin calls," or demands by their lenders to provide more cash collateral.

As investors bailed out of stocks Thursday, some fled to the relative safety of U.S. Treasury securities: Heavy buying sent the yield on the 5-year T-note down to 5.69% from 5.81% Wednesday.

Stock groups down sharply included the Internet, software, biotech, telecom and retail sectors. Energy, gold and drug stocks were among the few pockets of strength.

"The [stock] market is unsettled and probably overshooting, but that doesn't mean it will stop tomorrow," said Donald Fine, chief market analyst at Chase Fleming Asset Management.

Fine considers Dow 10,000 "a meaningless number" except for the media attention that will come if the index drops into four digits. He acknowledged that that could be a blow to market confidence.

Octobers tend to be shaky in any event, Fine said, adding: "The real crux is the latter part of November and December, when the market normally gives itself a Christmas present. If things continue lackluster, that could be a real problem."

So far, many individual investors seem to be taking the market tumult in stride.

U.S. stock funds had a moderate net outflow of $1.1 billion in the week ending Wednesday, according to AMG Data Services of Arcata, Calif., which tracks fund investments. "There seems to be no fear in the mutual fund marketplace," said Bob Adler of AMG.

Those hoping a fourth-quarter market turnaround might occur take heart in the fact that plenty of money sits on the sidelines--which could be used to help fuel a rally.

A net $19.5 billion flowed into money market funds in the week ending Tuesday, bringing fund assets to a record $1.74 trillion, said Peter Crane, managing editor of, a Web site that tracks savings and interest rates.

"In the scheme of things that $19.5 billion is not a huge number, but about half the money came from retail investors, which is pretty strong," Crane said. While that could indicate that some investors are skittish about stocks, "a big reason for the record cash level is that we're seeing the highest yields for savings in almost a decade," he added.

At Janus Funds, phone reps have seen an increase in exchanges from equity funds into money market funds, said spokeswoman Shelley Peterson. "Some people are taking a look at the cumulative effect of all these drops and are feeling a little uncomfortable," she said. "But we haven't seen a large increase in call volume."

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