Wall Street tumbles after six-week rally

Plagued by fresh worries about US banks, Wall Street followed European markets in reporting heavy losses on Monday after six consecutive weeks of gains. The Dow Jones closed 3.56% lower, while the Nasdaq shed 3.88%.


AFP - US stocks plunged Monday as renewed jitters about the banking sector and the overall economic outlook sent investors scurrying to lock in gains from a six-week rally.

The Dow Jones Industrial Average slumped 289.60 points (3.56 percent) to close at 7,841.73 while the Nasdaq composite tumbled 64.86 points (3.88 percent) to 1,608.21.

The broad-market Standard & Poor's 500 index slid 37.21 points (4.28 percent) to 832.39.

Investors shrugged off news that Bank of America recorded a profit of 4.2 billion dollars in the first quarter, since the result was boosted by one-time gains and the lender set aside more cash to cover possible bad loans.

Paul Nolte at Hinsdale Investments said that even though banks have returned to profitability, the source of these profits may not be sustainable.

"With much of the gains coming from the benevolent government aid -- that is not likely to be repeated in subsequent quarters -- the above-average (and positive) earnings may be nothing more than a one-quarter phenomenon," Nolte said.

Analysts at Charles Schwab & Co. said investors were spooked by Bank of America's warnings of weaker loan performance and its boosting of reserves for bad loans.

The analysts said bank chairman Kenneth Lewis heightened fears by stating that "credit is bad and we believe credit is going to get worse before it will eventually stabilize and improve."

Others said the market was ripe for a pullback, after the Dow Jones index rose 22.7 percent over the past six weeks, the best performance over a similar period since 1938.

"Unfortunately, investors seem to have assumed recovery is at hand," said Donald Ratajczak at Morgan Keegan who argued that the market was "overdue" for a correction.

"While I believe that the foundations for a bull market have been laid and that another 20 percent gain in equity values should be expected in the next 12 months, markets need corrections to remove the speculative money."

Ratajczak said economic pressures are easing but that growth is not yet back.

"Claims that we are into recovery are very premature," he said. "I do not expect positive growth before the Christmas (retail sector) deliveries begin in September."

Michael Bratus at Moody's said investors were concerned by weekend comments from US administration officials about the outlook for the banking sector.

Bratus said the fears were based on comments by economic advisers on "the possibility of converting government loans to the country's largest financial institutions into stock."

"Although a conversion would add capital to these financial institutions, worries of share dilution and increased government involvement are weighing on financials," he added.

Leading the decline was the financial sector, which had led the rally over the past six weeks. Bank of America plunged 24.34 percent to 8.02 dollars as investors cashed in profits, looking past a better-than-expected profit of 4.2 billion dollars in the first quarter.

Others in the sector also retreated from strong gains over the past few weeks: Citigroup slumped 19.45 percent to 2.94 dollars after a negative research note and Wells Fargo lost 16.09 percent to 17.00 dollars.

Business software giant Oracle dropped 1.26 percent to 18.82 dollars after it announced a 7.4 billion dollar deal to buy tech sector rival and Java programming maker Sun Microsystems, up 36.77 percent at 9.15 dollars.

Bonds rallied on renewed investor caution. The yield on the 10-year US Treasury bond dropped to 2.843 percent from 2.930 percent Friday and that on the 30-year bond eased to 3.687 percent against 3.785 percent. Bond yields and prices move in opposite directions.

Other global markets were hammered as well on similar fears.

London's FTSE 100 index of leading shares closed down 2.49 percent, the Frankfurt DAX lost 4.07 percent and the CAC 40 in Paris fell 3.96 percent.

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