February 1, 2008

Jobless claims spark sell-offs on Wall Street

Wall Street stocks fell sharply on Thursday after a sharp spike in jobless claims added to worries about the labour market and as wary traders reflected on a 50 basis point rate cut and the possibility of downgrades of key bond insurers.

Less than an hour after the opening bell, the S&P 500 fell 1 per cent to 1,342.10, the Nasdaq Composite shed 0.8 per cent to 2,330.19 and the Dow Jones Industrial Average declined 0.9 per cent to 12,335.77.

Traders were unsettled by a sharp spike in weekly claims for unemployment benefit, which jumped 69,000 to 375,000 - the biggest increase in more than two years - versus expectations of a 320,000 reading.

Although these numbers may have been affected by the timing of a public holiday the uptick will renew concerns that Friday's employment report may not be as strong as hoped. ADP on Wednesday painted a contrasting picture after showing the private sector added 130,000 jobs in January.

"Claims have been depressed by two separate seasonal issues in recent weeks. There is nothing in the argument that the dip in claims in late December and early January is a sign that the labor market is OK really. It's not," Ian Shepherdson, chief U.S. economist at High Frequency Economics, said.

Treasury prices rallied sharply amid a flight to safety. The yield on the 2-year Treasury note fell 11 basis points to 2.06 per cent while the 10-year yield shed 8.5bp to 3.58 per cent. Crude oil dropped 1.6 per cent to $91.08 amid fears of a US recession but the dollar rose against the euro.

European markets tracked Wall Street lower where the FTSE Eurofirst 300 fell 2.2 per cent and the FTSE 100 dropped 2.3 per cent.

A brief rate-cut rebound fizzled out almost immediately on Wednesday as rumours about possible downgrades of bond insurers unsettled investors.

"People don't know what to think, they're mostly reactive, not proactive," Ryan Larson, senior equity trader at Voyageur asset management, said. "It's a sell first, ask questions later, mentality."

One of these bond insurers, MBIA (NYSE:MBI), said on Thursday it made a $2.3bn fourth-quarter loss after writing down $3.5bn of credit derivatives and is considering new ways to raise capital in order to maintain its triple-A rating.

The shares fell 7 per cent to $12.99 while rival Ambac Financial lost 4.9 per cent to $10.32. FGIC, a smaller bond insurer, was downgraded by Fitch Ratings on Wednesday.

Investors fear downgrades could trigger losses for financial companies many of which are forced to hold only securities guaranteed by triple-A ratings.

Oppenheimer said on Wednesday that monoline-related writedowns could reach $70bn but that losses would be concentrated at three banks - UBS, Merrill Lynch and Citigroup.

However, if bond insurance losses can be contained and earnings visibility increases many analysts think beaten-down financial stocks could soon become an attractive investment.

"From a longer term perspective the actions that the Fed is taking allows you to become a bargain hunter in the financial stocks - you can start to take positions in them," equity manager Hugh Whelan at Hartford Investment Management, said.

Some investors have also tried to call a bottom in the consumer sector but a slew of mixed earnings and economic data revealed the danger of this strategy.

Procter & Gamble, 0.5 per cent weaker at $64.74, increased fiscal second quarter earnings 14 per cent while sales leapt 9 per cent to $21.58bn and the company raised its full-year outlook.

Burger King also beat estimates as second quarter profit jumped 29 per cent but the shares fell 1.3 per cent to $44.63.

In contrast, although Amazon.co (NASDAQ:AMZN)m reported quarterly results in line with expectations after the closing bell on Wednesday, a decline in profit margins caused the stock to slide 4.8 per cent to $70.62.

Also in technology sector Adobe Systems (NASDAQ:ADBE) fell 5.4 per cent to $34 on Thursday after Jefferies & Co. downgraded the software company from "buy" to "underperform" because of slowing sales in January.

Starbucks (NASDAQ:SBUX)' cautious outlook for 2008 also unnerved investors as it said it plans to open 425 fewer US stores and close 100 existing outlets. Earnings increased less-than 2 per cent to $208.1m. The shares fell 4.8 per cent to $18.29.

Personal spending rose a modest 0.2 per cent in December and although this was more than expected for all of 2007 spending was the weakest since 2003.

Personal income rose 0.5 per cent last month against expectations of a 0.4 per cent increase. The personal consumption expenditure price index, a closely watched measure of inflation rose 0.2 per cent.

Energy stocks led the sell-off on Thursday amid concerns about corporate earnings. Peabody Energy (NYSE:BTU), the coal producer, said fourth quarter dropped from $175m to $35.8m and the shares plummetted 8 per cent to $50.94. Cameron International dropped 10.6 per cent to $38.51 after the oil services company gave weaker-than-expected earnings guidance.

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