Dow at 7-month low

Blue chips close at lowest point since April on worries about mortgage and credit markets and the surge in oil prices. Markets closed for Thanksgiving.

Stocks slumped Wednesday, with the Dow closing at a 7-month low, as worries about the credit and mortgage market and higher oil prices hit investors hard ahead of what for many will be a long holiday weekend.

Treasury prices rallied, the dollar fell, oil prices edged lower and gold prices rose.

The Dow Jones industrial average lost 211 points or 1.6 percent. That set the Dow at its lowest point since April 17, when it ended the session at 12,773.04.

The S&P 500 index lost 1.6 percent and the Nasdaq composite lost 1.3 percent.

The stock selloff was very broad, with homebuilders, banks, mortgage lenders and technology shares leading the decline.

Financials and housing have been a wet blanket on the entire market, said Richard Sparks, senior equities analyst at Schaeffer's Investment Research. We're seeing the weight of the subprime worries and the credit crunch coming home to roost.

All financial markets are closed Thursday for Thanksgiving and Friday's abbreviated session ends at 1:00 p.m. ET. Attendance Friday is expected to be low and trading volume light.

Despite the minimal market action on that day, Friday is key for stocks and the economy in that it is Black Friday, the kickoff for the critical holiday shopping season.

Worries about consumer spending, which fuels roughly two-thirds of the economy, have played a big role in the recent stock market decline. Therefore, the results from retailers will be significant in determining whether stocks rebound in December or fall further.

Everyone is going to be keying on the retail numbers and that could come down on either side of the fence, Sparks said.

If you have a poor start to the Christmas Season, you have real evidence of the economic slowdown, he said. But if the consumer is resilient - although it may cause worries that the Fed won't have a good reason to cut rates - it might also placate investors worried about a recession.

Stocks have been whipsawed lately as investors have muddled through the ongoing housing and credit market turmoil, eyed the weak dollar and fretted over oil prices near $100 a barrel. On Tuesday the Fed issued a sluggish 2008 economic outlook, confirming other recent signs of a slowdown.

Wednesday's index of leading economic indicators and consumer sentiment readings added to the lackluster growth outlook.

Additionally, the Mortgage Banker's Association reported a 3.6 percent drop in applications last week. Separately, 47 of the 50 states saw a drop in existing home sales in the third quarter, according to a National Association of Realtors report.

Equity markets are reacting to the economic slowdown, said Michael Strauss, chief economist at Commonfund. There is some worry about the consumer, about discretionary business spending and about the financial sectors of the economy.

He said that there may also be some worry that the Federal Reserve is behind in addressing these issues, as was reflected by the steep decline in Treasury bond yields Wednesday.

Treasury prices jumped, lowering the corresponding yields, as investors sought safety in the safer haven of bonds. The rally sent the benchmark 10-year note below 4 percent, during the session, for the first time in two years.

There's a pretty strong flight-to-quality there, Strauss said. There's a clear bet that the Fed has further to go, even if the Fed doesn't realize it.

Policy makers meeting on Dec. 11 are widely expected to cut the fed funds rate, a key short-term interest rate by a quarter-percentage point.

Among stock movers, Freddie Mac shares continued to slip after plunging nearly 27 percent Tuesday. The government-sponsored mortgage backer reported a steep quarterly loss Tuesday and a $1.2 billion writedown due to credit losses.

Fellow mortgage lenders Countrywide Financial and Washington Mutual slipped too, while Fannie Mae bounced back after sliding through the morning.

Big banks slumped, including Merrill Lynch, Lehman Brothers and Morgan Stanley.

Declines were broad based, with 29 out of 30 Dow components falling, led by AIG, American Express, JP Morgan, General Electric and Intel.

Intel was one of many chips falling, including Advanced Micro Devices and Micron Technology. Micron slumped for a second session after a Morgan Stanley analyst initiated coverage of the company Tuesday with an underweight rating, AP reported.

The Dow's lone advancer was GM, which recovered from a steep morning selloff after reports said that GMAC, its struggling former finance unit, is taking steps to keep its mortgage unit alive.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by almost three to one on volume of nearly 1.61 billion shares. On the Nasdaq, decliners topped advancers by seven to three as 2.07 billion shares changed hands.
Federal Reserve battles recession fears

In economic news, the October index of Leading Economic Indicators (LEI) fell 0.5 percent, after rising 0.1 percent in the previous month, suggesting that the economic slowdown could accelerate in the months ahead. Economists surveyed by Briefing.com thought LEI would fall 0.3 percent.

The November consumer sentiment index from the University of Michigan showed a rise to 76.1 from an initial reading of 75.0, but was down from last month's 80.9. Economists thought it would hold steady, on average.

The number of Americans filing new claims for unemployment last week fell by 11,000, as expected.

U.S. light crude oil for January delivery fell 74 cents to settle at $97.29 a barrel on the New York Mercantile Exchange, after having hit a record high of $99.23 in electronic overnight trading.

Oil prices were volatile after the release of the weekly oil inventories report, which showed a surprise drop in crude supplies.

COMEX gold for December delivery rose $7.20 to settle at $798.60 an ounce.

Source - CNN Money

Merrill Ousts O'Neal, Names Cribiore Interim Chairman

Merrill Lynch & Co. ousted Stan O'Neal as chairman and chief executive officer and said it will begin a search for his successor, leaving the world's biggest brokerage without a leader.

Co-Presidents Gregory Fleming and Ahmass Fakahany will run the firm, reporting to board member Alberto Cribiore, who will be a non-executive chairman until O'Neal's successor is found, New York-based Merrill said in a statement today.

Merrill fell as much as 4.6 percent in New York trading after the firm said no successor is imminent. O'Neal lost the confidence of investors and directors after delivering a $2.24 billion third-quarter loss, six times what the firm forecast just three weeks earlier. Merrill has declined about 30 percent in New York trading this year, the second-worst performance after Bear Stearns Cos. among the five largest U.S. securities firms.

They have to move fast, said Mark Batty, who helps manage about $77 billion including Merrill shares as an analyst at PNC Wealth Management in Philadelphia. They have risk management issues that need to be tackled quickly.

O'Neal, 56, and the board of directors agreed that a change in leadership would best enable Merrill Lynch to move forward, the company said in the statement announcing O'Neal's retirement after 21 years at the firm. The board will consider internal and external candidates, the company said.

List of Candidates

Possible replacements include Laurence Fink, 54, who sold almost 50 percent of the BlackRock Inc. money management firm to Merrill last year, and Fleming, 44, who has spent most of his career as an investment banker at the firm. Another candidate is Robert McCann, 49, who heads Merrill's wealth-management division, including the firm's network of 16,600 brokers.

Merrill lost $2.41 to $65.01 in 1:03 p.m. New York Stock Exchange composite trading. The stock climbed 11 percent in the past two days on speculation O'Neal would go and the company might be a takeover target. Deutsche Bank AG analyst Mike Mayo estimates the firm may be worth $120 a share in an acquisition.

Some investors were probably too optimistic, expecting a quick resolution, said Benjamin Wallace, who helps manage $750 million, including Merrill shares, at Grimes & Co. in Westborough, Massachusetts.

The company said today that Fleming and Fakahany will stay in their jobs as co-presidents and chief operating officers. Cribiore, founder of New York-based private-equity firm Brera Capital, has been a Merrill board member since 2003.

Housing Slump

Merrill reported an $8.4 billion writedown for subprime mortgages, asset-backed bonds and loans gone bad last week, the biggest quarterly debacle in the history of the securities industry.

The loss followed O'Neal's $1.3 billion acquisition of mortgage lender First Franklin Financial Corp. in December. At the time, O'Neal said the purchase would add revenue velocity. Instead, the takeover contributed to losses as the U.S. housing market suffered its worst slump since the 1991 recession.

First Franklin was embarrassing for O'Neal since he had criticized acquisitions made by his predecessor, David Komansky, whose expansion culminated in a $1.7 billion charge in the fourth quarter of 2001. That's now dwarfed by O'Neal's third-quarter loss. Merrill may have to write down another $4 billion in the fourth quarter, said Meredith Whitney, a New York-based analyst at CIBC World Markets, in a note sent to clients last week.

The truth is there's probably an additional writedown coming in the fourth quarter, said Fitzpatrick. Until we get a little more color on that, it's probably a good time to be sitting on the sidelines.

Less Equity

Merrill's $8.4 billion writedown may have wiped out a fifth of shareholders equity, leaving the firm with $38.8 billion of assets minus liabilities. The probability of Merrill defaulting on debt within five years more than doubled since June 30, rising to 7 percent yesterday from 3 percent, according to credit- default swap traders.

Losing 20 percent of shareholders' equity in one fell swoop is a serious blow, said Robert Willens, the accounting analyst at Lehman Brothers Holdings Inc. in New York. It might take them two to three years to earn that capital back.

O'Neal angered the board by approaching Wachovia Corp. Chairman and CEO Kennedy Thompson earlier this month about a possible merger without consulting Merrill directors, the New York Times reported Oct. 26, citing people with knowledge of the matter. The board has discussed replacing O'Neal with candidates, including Fink and NYSE Euronext CEO John Thain, the Times said.

Discretion on Pay

O'Neal, who earned his way through college by working at a General Motors Corp. assembly plant in Georgia, may receive about $160 million to $200 million from Merrill, said James Reda, managing director of James F. Reda & Associates, a New York-based compensation consultant that has analyzed O'Neal's pay package.

Merrill has said in its annual proxy statement that the size of any payment would be at the discretion of the board. O'Neal has received stock bonuses of almost $80 million during the past three years.

O'Neal got a master's degree from Harvard Business School in 1978 and worked as a finance executive at General Motors before joining Merrill as an investment banker in 1986. He was promoted to president in July 2001.

Source - Bloomberg

Early signs of easing seen in subprime lending

Former Federal Reserve chairman Alan Greenspan defended the U.S. subprime mortgage market Monday, arguing that the securitization of home loans for people with poor credit not the loans themselves were to blame for the current global credit crisis.

Greenspan also said there were some early signs of an easing in the crisis, but warned that the longer term effects on the economy were still being determined.

"Subprime mortgages were and are risky, but they are worth it," Greenspan said, adding that is better to have a larger property owning class with a vested interest in the system.

"I'm terribly concerned that we would cut back on the availability of subprime that has enabled a very significant increase in mortgages among minorities in the United States," he added.

The current credit market turmoil began with rising defaults in the United States on subprime mortgages. Those problems have since spread as banks repackaged risky loans with the more reliable and sold them to a wide range of investors, including several European banks.

Credit dried up in early August, roiling financial markets, as banks became wary of exposure to the risky loans.

Greenspan acknowledged that a number of people should not have been taking out those mortgages, but that the current crisis was due "not the subprime problem itself, but to the securitization of subprime."

Greenspan said there are "some positive signs" that the crisis is calming.

"For example, the yields on what has been the poster child of this crisis, asset backed commercial paper, have jumped up sharply," he said. "It has since come down, but not all the way."

Similarly, the interbank lending rate, which jumped in recent weeks amid fears about insolvencies, have started to come down, but "not all the way," he said.

"We are not through with this yet," he added, suggesting there could still be what he termed an "Act II," in which falling house prices feed into slower consumer spending.

However, he reiterated earlier comments that he believed the probability of a recession in the United States was "less than 50/50."

Greenspan also implicitly criticized the role of ratings agencies in the crisis.

"The problem was that people took that as a triple-A because ratings agencies said so," he said. Yet when they tried to sell the products they ran into difficulties, which shook confidence.

"What we saw was a 180 degree swing from euphoria to fear and what we've learned over the generations is that fear is a very formidable challenge," Greenspan said.

Ratings agencies such as Standard & Poor's Corp., Moody's Investors Service Inc. and Fitch Ratings have come under fire for being slow to lower their ratings on securities based on mortgage loans to U.S. borrowers with poor credit records.

Source - The Associated Press