Supporters of the Moratorium Now! Coalition protest outside Detroit city headquarters on Friday, October 10, 2008. They called for a delcaration of a state of economic emergency. (Photo: Alan Pollock).
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By PETER A. MCKAY
Wall Street Journal
Stocks reversed course on Tuesday as earnings took over from interest rates as the market's main driver.
The Dow Jones Industrial Average, which enjoyed a 413-point leap in the previous session, gave back 231.77 points, ending down 2.5%, at 9033.66, just off its intraday low.
Five blue chips reported quarterly earnings, and the overall tone of those companies' comments suggested a dim corporate outlook amid the fallout from the global financial crisis.
Markets on the Move
For the month, the Dow has plummeted more than 1,800 points, or 16.7%, amid worries about the global financial system and slowing growth in major industrial powers. On Tuesday, corporate profits came to the fore, and the picture that is emerging isn't doing much to improve investors' jittery mood.
DuPont posted a 30% drop in net and slashed its full-year forecast. Its shares dropped 8%. Caterpillar dropped 5.1% after the heavy-equipment maker said 2009's sales and earnings are likely to be flat compared to this year's results.
"The numbers we're seeing are pretty scary," said Ashwani Kaul, research director at Thomson Reuters, which tracks earnings trends. "If there's any silver lining it may be that things won't get much worse than this," with a profit rise possible in the fourth quarter largely because of dismal year-ago performance. Profits shrank more than 25% in the final three months of last year.
As it stands, the market is likely to register its fifth straight period of declining earnings. The consensus expectation is that aggregate third-quarter earnings at S&P 500 companies will fall about 10%, according to Thomson Reuters data.
Investors' profit jitters were most evident Tuesday in the energy and technology sectors, categories which attracted buyers earlier this year as oil prices were enjoying a multi-year boom and tech was boasting the biggest share of revenue from fast-growing overseas economies. But Tuesday, crude prices fell and a flurry of tech bellwethers reported weak quarterly profits.
Those reports weighed on the the tech-focused Nasdaq Composite Index, which slipped 4.1% to 1696.68. The small-stock Russell 2000 dropped 3% to 530.65. The S&P 500 declined 3.1%, ending at 955.05. All its sectors posted losses, led by energy, which fell 4.1%, and technology, which shed 3.9%.
"Once you get these sectors acting as negative contributors to the overall picture in the next few quarters, I think we could get earnings much lower than everyone now expects," said David P. Prokupek, chief executive of the Denver money-management firm Geronimo Partners.
Mr. Prokupek is steering his clients away from stocks for now, based on the assumption that S&P profits typically fall by about a third from their peak when a recession hits. Since he believes the current downturn will be worse than most previous ones, Mr. Prokupek anticipates profits could instead be cut in half from the 2007 peak.
Gloomy outlooks pressured chip maker Texas Instruments, which dropped 6.3%, and Sun Microsystems, which lost 17.5%. Apple and Yahoo declined 7.1% and 6.1%, respectively, before their post-market hours reports.
Art Hogan, chief market strategist at Jefferies & Co., was surprised to see the giants moving in such lockstep. "There's really not much reason to be worried about Apple, since they always seem to reinvent themselves," said Mr. Hogan. "But Yahoo relies pretty heavily on advertising revenue," which seems likely to suffer due to the weakness that has reared its head in the global economy.
Mr. Hogan pointed to a series of recent economic reports that have not only shown the U.S. slowing but also major overseas rivals as well. Particularly worrisome to Mr. Hogan: China's statistics bureau reported Monday that economic growth slowed to a year-to-year expansion of 9% in the third quarter, still healthy but sharply down from 10.1% in the second quarter and 10.6% in the first. For the year, China's growth is likely to be below 10% for the first time since 2002.
Despite all the earnings and economic jitters that dominated trading on Tuesday, a further decline in interbank lending rates gave the market some support. The lending rates between banks in the U.S. and Europe dropped to the lowest levels in over a month, as the rate on three-month loans in dollars slumped 0.23 percentage point to 3.83%.
Crude-oil futures tumbled $3.36, or 4.5%, to $70.89 a barrel in New York. There are widespread expectations among traders that the Organization of Petroleum Exporting Countries will reduce production at an emergency meeting Friday. But market participants disagree over how deep the cut will be and to what extent it will work to buoy prices.
In a worst case for the cartel, its cut could have little effect if its own members decide to fudge their output and continue selling oil to book as much revenue as possible, as has been the case during past cutting cycles. Non-members of OPEC may also seize the opportunity to increase their production. And the cartel must be careful not to harm increasingly fragile economies in major oil-consuming nations.
"Japan, Europe, and U.S. are in a bad place, China is slowing faster than expected," and OPEC producers could be blamed for exacerbating an economic slowdown, one trader said. "Its going to be very interesting."
Other commodities headed lower. The broad Dow Jones-AIG Commodity Index was off 1.4%. Gold futures fell $21.50, or 2.7%, to $766.10 per ounce in New York, its lowest settle in over a month. Copper contracts slid 11.2 cents, or 5.3%, to $2.007 a pound, the lowest close in nearly three years.
Falling metals prices hammered the shares of mining concern Freeport-McMoRan Copper & Gold, which ended 10.8% lower.
Treasurys rose. The two-year note gained 6/32 to yield 1.618%. The benchmark 10-year note rose 1-2/32 to yield 3.735%.
The dollar was mixed. One euro recently cost $1.3052, down from $1.3229 late Monday. The dollar fetched 100.13 Japanese yen, down from 101.78 yen.
—Lananh Nguyen contributed to this article.Write to Peter A. McKay at peter.mckay@wsj.com.
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