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It was investors' last straw

News of a 6.6% drop in new-home sales triggers a sell-off that echoes around the globe. The Dow plunges 311 points.

July 27, 2007|From the Associated Press

Wall Street finally caved Thursday.

For months, investors had looked past a series of warning signs: major U.S. banks reporting losses from portfolios of sub-prime loans amid a slowing housing market, private equity funds not being able to attract investors on junk bond deals as they had just weeks before, and hedge funds going belly up on soured investments linked to the sub-prime market.

The proverbial last straw came Thursday, with the Commerce Department's report that new-home sales fell 6.6% last month, more than triple what had been expected. Investors decided that it was time to sell.

The result was the stock market's suffering one of its worst days this year, with the Dow Jones industrials plunging 311.50 points, or 2.3%, to 13,473.57. The blue chips had managed to come back somewhat from an afternoon loss of 449.77, but the close was the Dow's worst since the industrial average tumbled 416.02 points Feb. 27 after a plunge in the Shanghai stock market.

"Worries that have been out there for the past couple of years are coming to a head right now," said investment strategist Edward Yardeni of Yardeni Research Inc. "It's showtime."

The Standard & Poor's 500 index skidded 35.43 points, or 2.3%, to 1,482.66. The Nasdaq composite index tumbled 48.83 points, or 1.8%, to 2,599.34.

The Russell 2,000 index of smaller-company stocks fell 21.02 points, or 2.6%, to 791.48.

Declining issues outnumbered advancers 14 to 1 on the New York Stock Exchange, where volume came to a record 5.84 billion shares.

The declines triggered a global sell-off in stocks. What started out as minor losses in Europe grew rapidly along with the Dow's drop. Major indexes ended down 3.1% in Britain, 2.4% in Germany and 2.8% in France.

Asian markets followed, with Japan down 2.3% at the end of morning trading today in Tokyo. Chinese stocks, which hit a record Thursday, also fell. The benchmark Shanghai index was down 1.2% this morning.

In the U.S., the Nasdaq's losses weren't as steep as those of the Dow and the S&P in large part because of Apple, which surged $8.74, or 6.4%, to $146. The iPod and iPhone maker's earnings easily surpassed expectations late Wednesday.

Ford Motor also managed to rally, rising 12 cents, or 1.5%, to $8.09, after it reported that cost cutting and a turnaround in its core automotive operations produced a second-quarter profit. The company had posted seven quarters of losses as it grappled with sluggish sales and a major overhaul of its operations.

Before Thursday's big drop, the Dow had been up 10.6% for the year -- a figure that by the end of the day was 8.1%. The S&P 500, which before Thursday was up 7% for the year, is now up only 4.5%, and the Nasdaq's 9.6% advance has been cut to 7.6%.

Feeding the plunge were a variety of concerns about lending. Investors feared that higher corporate borrowing costs would curb the rapid pace of takeovers that had driven stocks higher this year and would take a bite out of corporate profits. They also worried that the sluggish environment for home sales and continued defaults in sub-prime loans would force hedge funds holding mortgage-backed bonds to pull money out of stocks.

While stocks plummeted, investors poured money into the safe haven of the Treasury bond market, pulling their yields lower. The yield on the 10-year Treasury note dropped to 4.79% from late Wednesday's 4.9%.

Thursday's trading was the latest and most extreme in a series of frenetic sessions over the last month -- many of which have seen triple-digit swings in the Dow -- as investors sold on worries about the sub-prime fallout or bought on optimism that there wouldn't be any widespread problems caused by mortgage failures.

Many analysts described the back-and-forth trading as overwrought and based more on emotion than careful consideration of market and economic fundamentals.

That sentiment was present again Thursday.

"The rally in bonds at this point looks a little bit overdone," said Tom Higgins, an economist at Payden & Rygel Investment Management in Los Angeles. "If you're going to park money temporarily, then cash I think is the way to be. But I think that we're going to form a bottom. I think people are going to be legging it back into the market."

The Commerce Department's report raised the market's anxiety levels after home builders including Pulte Homes and D.R. Horton said their earnings were squeezed by weak sales.

D.R. Horton fell 32 cents, or 1.8%, to $17.16 after it posted a fiscal third-quarter loss, in part because it wrote down the value of unsold inventory.

Pulte dropped 63 cents, or 3.1%, to $20.04 after it reported a second-quarter loss.

Investors also reacted negatively as oil prices climbed to nearly $77 a barrel during the session, stoking the market's worries about inflation. However, after a late slide, crude futures closed at $74.95, down 93 cents, in New York.

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