U.S. Stocks Decline, Dow Average Has Biggest Drop Since 1987

Oct. 6 (Bloomberg) -- U.S. stocks tumbled, driving the Dow Jones Industrial Average to its biggest intraday drop since October 1987, after bank bailouts in Europe widened and commodities producers slid on concern global growth is slowing.

Equities fell worldwide, erasing about $2.5 trillion in market value. Morgan Stanley, Citigroup Inc. and Goldman Sachs Group Inc. lost more than 8.2 percent after the German government led a bailout of Hypo Real Estate Holding AG and BNP Paribas SA bought parts of Fortis, Belgium's largest financial-services company. ConocoPhillips and Chevron Corp. declined more than 7 percent as oil traded below $90 a barrel, sending the Standard & Poor's 500 Energy Index to a two-year low.

The S&P 500 lost 70.09 points, or 6.4 percent, to 1,029.14 at 3:10 p.m. in New York, the lowest since October 2003. The Dow retreated 660.28, or 6.4 percent, to 9,665.10 and earlier fell as much as 800 points. The Chicago Board Options Exchange Volatility Index, a measure of how much insurance against declines in the S&P 500 costs, surged to a record high of 58.24.

``It's a financial panic, total dislocation in the financial industry across the board,'' said Ralph Shive, chief investment officer at 1st Source Corp. Investment Advisors in South Bend, Indiana, which manages $3 billion.

About 55 stocks fell for each that rose on the New York Stock Exchange. All 30 companies in the Dow average and all but six in the S&P 500 declined. One-hundred-fifty-seven S&P 500 companies lost more than 10 percent of their value and an additional 280 fell at least 5 percent. More than half traded at 52-week lows. Treasury securities rose and gold jumped more than 4 percent as investors sought the safest assets.

9.4% Drop

The S&P 500 lost 9.4 percent last week, the steepest slump since the September 2001 terrorist attacks, as concern the U.S. is headed for a recession overshadowed passage of a $700 billion bank bailout. The index has fallen more than 500 points from its Oct. 9, 2007 record, wiping out about two-thirds of the 788.39- point bull market that began in October 2002.

The Federal Reserve doubled its emergency auctions of loans to commercial banks to as much as $900 billion in an effort to unfreeze short-term lending markets. The central bank also will begin paying interest on bank deposits under authority it gained from last week's financial-rescue legislation.

About 1.3 billion shares had changed hands on the New York Stock Exchange as of 2:55 p.m. in New York, compared with about 1.2 billion at the same time a week ago.

Hoarding Cash

Money-market interest rates remained elevated as lenders hoarded cash on speculation more financial institutions may collapse after governments in Europe and the U.S. intervened to salvage six in the past two weeks. The difference between what banks and the Treasury pay to borrow money for three months touched to 3.95 percentage points, the biggest since Bloomberg began compiling the data in 1984.

``The chief issue right now is the deterioration overseas,'' said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, which manages $30 billion. ``Exports have been one of the bright spots for the U.S., and that seems to be growing dimmer.''

David Bianco, UBS AG's New York-based chief equity strategist, cut his 12-month forecast for the S&P 500 by 9.1 percent to 1,500 and abandoned his year-end target, citing deeper-than-expected recessions in the U.S. and Europe.

Rate Cut?

U.S. gross domestic product will drop the next two quarters, with unemployment reaching 8 percent by the end of 2009, Goldman Sachs wrote in a research note Oct. 3. Financial futures are pricing in 100 percent odds the Federal Reserve will cut the target rate for overnight loans between banks by at least 0.50 percentage point by Oct. 29.

Morgan Stanley fell 10 percent to $21.53 as financial companies in the S&P 500 lost 7.2 percent, deepening their 2008 decline to nearly 40 percent. Citigroup dropped 10 percent to $16.49. Goldman Sachs lost 8.8 percent to $116.78.

National City Corp. tumbled 35 percent to $2.28 for the biggest drop in the S&P 500. Fitch lowered the Ohio bank's long- term issuer default rating to BBB+ from A on Oct. 3.

Energy companies in the S&P 500 fell 9.8 percent as a group. The industry, the third-biggest in the U.S. stock benchmark as recently as Oct. 1, shrank to the fifth-largest behind the financial, technology, health care and consumer staples groups.

ConocoPhillips, the second-biggest U.S. refiner, dropped 9.2 percent to $60.05. Chevron, the second-largest U.S. oil company, lost 7 percent to $73.84. Exxon Mobil, the biggest, slumped 4.6 percent to $74.35.

Oil Tumbles

Crude oil sank below $90 a barrel in New York for the first time since February as the deepening credit crisis added to concern that slowing global economic growth will reduce demand for fuels. Crude oil for November delivery fell $5.73, or 6.1 percent, to $88.15 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange.

Steelmakers including A.K. Steel Holding Corp., U.S. Steel Corp. and Nucor Corp. led materials producers in the S&P 500 to an 8.7 percent drop. Lakshmi Mittal, the chief executive officer of ArcelorMittal, the world's biggest steelmaker, said the market faced an ``unprecedented'' disruption in demand. Mittal spoke at a conference of the World Steel Association in Washington, D.C.

The euro had its biggest one-day drop against the yen since its 1999 debut and the dollar plunged as the deepening credit crisis prompted European governments to pledge bailouts for troubled banks while stopping short of coordinated action.

Denmark and Germany said they will guarantee all their countries' bank deposits. French President Nicolas Sarkozy and Italian Prime Minister Silvio Berlusconi have made verbal pledges to do the same.

European Banks

Germany's Hypo Real Estate was forced to seek the lifeline after its Dublin-based Depfa Bank Plc unit, which lends to governments, lost access to short-term funding. Fortis was driven to the brink of collapse after pouring 24.2 billion euros ($32.9 billion) into the acquisition of ABN Amro Holding NV assets last year just as the U.S. subprime-mortgage market collapsed and credit markets froze.

Hartford Financial Services Group Inc. added 9.3 percent to $29.94 after Allianz SE said it will invest $2.5 billion in the insurer. Hartford also reported a third-quarter loss of $8.50 to $8.80 a share.

ImClone Systems Inc. climbed 1.6 percent to $66. Eli Lilly & Co. agreed to buy ImClone, the biotechnology company controlled by billionaire Carl Icahn, for $6.5 billion in cash, topping Bristol-Myers Squibb Co.'s hostile bid of $62 a share.

About $25 trillion in value has been erased from stocks worldwide in the past year. The MSCI World Index of 23 developed countries lost 28 percent through Oct. 3, the worst annual performance on record dating back to 1970. Investors in the U.S. face their first annual loss in six years after the S&P 500 dropped 34 percent from its October 2007 record.

The S&P 500 is still valued at 19.5 times profit from the past four quarters, according to data compiled by Bloomberg.