Bank Turmoil Sinks Stocks (WSJ)

by Chris Sturr | January 14, 2009

Just posted to the WSJ website. Citigroup’s troubles register in the Dow; plus it sounds like Deutsche Bank is having problems too.

By GEOFFREY ROGOW, ROB CURRAN and PETER A. MCKAY

Stocks tumbled as more losses and upheaval in the banking sector and poor trade and retail data hinted at an economy at risk of a deflationary spiral.

The Dow Jones Industrial Average dropped 248.42 points, declining 3% to 8200.14, its sixth straight slide. The Standard & Poor’s 500 fell 29.16, or 3.3%, to 842.63. All its sectors traded lower, led by a 5.8% drop in financials.

As stocks declined Wednesday afternoon, volatility surged; the Chicago Board Options Exchange Volatility Index jumped 14%. Traders said that the sell-off confirmed many of their fears that the market would retest long-held support.

Setting the tone for banks was a series of developments that underscored the feeling that the industry’s woes aren’t in the rearview mirror. Citigroup plunged 23% after moving toward a dismantling of the “financial supermarket” model that has long defined its business strategy.

The Citi move is “a wake-up call for the financial industry. I think we’re going to see more merging and merging and merging until a few very strong firms survive,” said Joe Kinahan, chief derivatives strategist at thinkorswim.

The Financial Select Sector SPDR Fund, a basket of brokers and lenders, fell 5.8%, with the sector also hit by a warning from Deutsche Bank that it would post a fourth-quarter loss of about $6.33 billion. Deutsche Bank’s U.S. shares fell 9.2%.

Traders also continued to fret over when the government will release the second phase of its promised $750 billion in aid to troubled banks and what conditions might be attached.

“There’s still a lot we don’t know for sure at this point, but we know a few things that are likely: reduced dividends, lack of [mergers and acquisitions] and continued declines in earnings,” said Peter McCorry of Keefe, Bruyette & Woods. “None of that is supportive of share prices.”

Economic signals were grim. The Federal Reserve’s regional beige book survey found the economy continued to weaken as discounts failed to revive consumer spending. “Most districts reported that layoffs continued,” the Fed said, adding that in New York “a substantial number of job reductions in the financial sector have yet to show up in payroll statistics.”

The Commerce Department said retail sales fell 2.7% in December and evidence of a slowdown in commercial activity showed up in trade numbers that revealed exports and imports in the U.S. slowing sharply from July to November. Among commodities and industrial stocks, aluminum maker Alcoa and General Electric fell more than 5% each.

Commodity prices also fell, with energy and materials stocks declining broadly as a result. Crude oil settled 50 cents, or 1.3%, lower at $37.28.

Treasury security prices climbed as investors sought safe havens. The two-year note was up 2/32 to yield 0.72%. The 10-year note climbed 28/32 to yield 2.20%.

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