Dow, Nasdaq take a drubbing

Lowest close of the year for Nasdaq

Dow at 7-month lows; Oil spikes on Mideast crisis

NEW YORK (CBS.MW) – The major averages were pummeled Thursday as the escalating crisis in the Middle East sent oil prices flying. Investors, already distressed by the recent parade of profit warnings, fear that another spike in crude will take an even bigger bite out of corporate profits.

The Nasdaq closed at its lowest levels since November 1999 while the Dow Industrials fell to levels not witnessed since March and suffered its fifth largest point loss ever. A profit warning from Home Depot dealt a huge blow to the Dow Thursday as the retailer’s shares plunged 29 percent.

Uncertainty over the ramifications of the Middle East crisis sent shockwaves throughout the marketplace, causing already jittery investors to dump stocks with a vengeance.

“Investors are worried about an oil supply shock should the conflict in the Middle East expand beyond the Israelis and Palestinians,” said William Rhodes, chief investment strategist at Williams Capital Group.

“The market has already weathered [an oil] price shock, but a supply shock is another matter. It could result in an economic downturn and government intervention to manage shortages,” Rhodes continued.

“If oil continues to go up, risks that the U.S. economy will get a hard landing grow,” remarked Peter Cardillo, chief strategist and director of research at Westfalia Investments.

“The Dow’s carrying [a lot of] the weight of these developments,” he added, noting that the blue-chip barometer is always more susceptible to pressure from international turmoil than the tech-packed Nasdaq.

November crude zoomed $2.81 to $36.06 after peaking at $37.00 — levels not seen in about three weeks – following news that a U.S. Navy ship was struck in Yemen and that Israel had launched helicopter attacks on Palestinian leader Yasser Arafat’s headquarters.

Safe haven flows also poured into December gold, which soared $5.80 to $278.80. Treasurys were also the beneficiaries of flight-to-quality flows, led by short-dated issues.

Inside the equity market, oil and oil service shares climbed heartily as crude prices flew. Gold stocks also rallied following the surge in gold futures. The defensive utility and drug sectors were the only other areas of the market trading in the black while the heaviest losses were seen in the retail and financial sectors. And the most vigorous selling in the tech sector was seen in the Internet segment as bellwether Yahoo extended its slide.

The Dow Jones Industrials Average ($DJ) tumbled 379.21 points, or 3.6 percent, to 10,034.58.

“The market is very skittish. People are reacting to bad news in a big way. It’s a sign that valuations were too high and that too perfect a picture was being priced in [on the earnings front],” said John Waterman, managing director of investments at Rittenhouse Financial.

Chris Wolfe, equity strategist at J.P. Morgan, defined the market’s reaction to the Middle East turmoil Thursday as an extreme move that would likely be short-lived in nature.

In the meantime however, the market continues to downwardly adjust its growth expectations, Wolfe said, referring to Home Depot’s woes and its significant weight on the Dow’s performance.

The message the market is getting from companies, Wolfe said, is clear: The economy is slowing and earnings growth will also moderate.

Aside from Home Depot, the Dow’s biggest losers included Citigroup, J.P. Morgan, McDonald’s and Boeing. Among the few gainers were shares of Intel, SBC Communications, Merck, Johnson & Johnson and Philip Morris.

Home Depot shares plunged 28.7 percent, or $14.06 to $34.88. The retailer expects to report earnings-per-share of 28 cents in the third quarter versus First Call estimates of 31 cents a share. Home Depot pinned the shortfall on deflation in lumber ad building materials pricing and added that many of the factors affecting third quarter sales will adversely impact sales in the fourth quarter. The company now estimates 2000 earnings-per-share to be in the range of $1.16 to $1.17 versus the First Call estimate of $1.25.

General Motors shaved $1.25 to $57.38. The company (GM) reported a third-quarter profit of $1.55 a share versus $1.54 in the year-ago period.

The Nasdaq Composite ($COMPQ) erased 93.81 points, or 3.0 percent, to 3,074.68 — falling for the sixth straight session — while the Nasdaq 100 Index ($NDX) declined 96.08 points, or 3.1 percent, to 3,004.45.

The Nasdaq attempted to claw its way back into the plus column several times Thursday but failed each time as sellers exerted their power. Losses, initially mild, piled on as the session progressed.

Waterman said the tech sector needs to see the big names — such as Cisco Systems — deliver better-than-expected results for investors’ confidence to resurface.

“The market is in a panic phase right now. It’s a combination of the [oil spike] and earnings jitters,” remarked Peter Boockvar, equity strategist at Miller Tabak & Co.

When the market is in the shaky state it’s been over the past weeks, Boockvar said, it becomes less tolerant to news like the kind emerging from the Middle East.

“We’re just seeing more fear,” he said.

The Standard & Poor’s 500 Index ($SPX) lost 2.6 percent – closing at it lowest level since October 1999 — while the Russell 2000 Index ($RUT) of small-capitalization stocks erased 2.5 percent.

Volume was very heavy at 1.38 billion on the NYSE and at 2.11 billion on the Nasdaq Stock Market. Market breadth was indeed shabby, with decliners squashing advancers by 22 to 7 on the NYSE and by 30 to 11 on the Nasdaq.

Sector movers

Retail stocks took a veritable drubbing in the wake of the Home Depot warning as the S&P Retail Index ($RLX) tumbled a whopping 7.6 percent. The index has fallen about 31 percent this year. Dow-component Wal-Mart (WMT) saw its shares fall 2.6 percent to $44.13 and Nordstrom (JWN), which alerted investors of a shortfall on Wednesday, gave up 31 cents to $14.31.

Internet stocks saw the ugliest decline within the tech sector and the Goldman Sachs Internet Index ($GIN), already hovering at lows not seen since December 1998, fell another 7.3 percent, its third consecutive session of losses. Yahoo (YHOO), down 13.4 percent, or $8.75 to $56.63, was again one of the biggest losers in the group in the wake of its less-than-impressive profit report released after the close Tuesday. Other movers included Amazon (AMZN), which shaved $2.69, or 9.7 percent, to $25.13, and Lycos (LCOS), off 14.4 percent, or $5.75 to $34.13.

Semiconductor stocks, which initially benefited from a respectable performance in chip equipment stocks on the heels of better-than-expected results from KLA-Tencor, lost ground for the sixth straight session. The Philly Semiconductor Index ($SOX) fell 2.5 percent, mirroring the dismal price action in the rest of the market.

KLA-Tencor (KLAC) said first-quarter earnings came in at 54 cents a share, three cents ahead of the First Call estimate. The company said that geographically, the strongest performance came from Japan and Singapore. The stock fell 9.8 percent, or $3.50 to $32.18. Among the other equipment makers, Applied Materials (AMAT) lost $1 to $50.56 and Teradyne (TER) erased 44 cents to $32.25.

Meanwhile, Advanced Micro Devices registered earnings-per-share of 64 in the third quarter, beating the First Call estimate by two pennies. Sales came in at $1.21 billion, which met analysts’ expectations. The company also said that their European business – which had been cited by Intel and Dell Computer as reason for their shortfalls – “looked just fine.” Shares (AMD) declined 38 cents to $23.13, giving up the modest gains posted out of the gate.

Among the other semis, bellwether Intel (INTC) was the standout, adding $2.50, or 7 percent, to $37.88. But Motorola (MOT) fell another 5.8 percent to $20.13 after seeing 17.6 percent of its value lopped off on Wednesday.

Financials stocks withered away, with banks and brokerages equally hit. Cornering the indexes, the Phlx/KBW Bank Index ($BKX) fell 5.2 percent while the Amex Securities Broker/Dealer Index ($XBD) slid 4.9 percent. The brokerage sector has been strained in recent sessions on mounting concerns that the downdraft in the market will adversely affect trading and investment banking revenue.

Among the struggling shares, Merrill Lynch (MER) fumbled by 7.6 percent to $55.00, Lehman Brothers (LEH) dropped 9.6 percent to $112.06 and Goldman Sachs (GS) slipped 9.3 percent to $94.31.

Bond action

Government prices flexed their muscles as safe haven flows poured in. Short issues, led by bills, reaped the lion’s share of the buying interest.

The 10-year Treasury note climbed 14/32 to yield ($TNX) 5.72 percent while the 30-year bond rose 9/32 to yield ($TYX) 5.81 percent.

Thursday’s economic agenda included the release of weekly initial claims, which added 5,000 to 306,000.

In other news, import prices rose 1.5 percent in September while non-fuel prices declined by 0.3 percent.

“Import prices surged in September, but the headline number really does not mean much. The gain was entirely due to a huge 14.1 percent jump in petroleum costs,” commented Joel Naroff, chief economist at Naroff Economic Advisors.

“Excluding oil, the costs of foreign products actually declined. This was only the second time since July 1999 that we saw imported goods costs fall,” Naroff continued.

The market will have lots of economic news to process on Friday. The September retail sales report will be out and is seen rising by 0.6 percent, with a 0.5 percent rise excluding the volatile auto component. The producer price index will also be out, seen rising by 0.5 percent overall but just 0.1 percent at the core. View Economic Preview, economic calendar and forecasts and historical economic data.

The currency market saw limited movement amid the turmoil in the stock market and gains in the fixed-income arena. Dollar/yen eased 0.1 percent to 107.67 while euro/dollar lost 0.3 percent to 0.8620.