U.S. Stocks Decline, Dow Industrial Average Falls Below 10,000

By Elizabeth Stanton

Oct. 6 (Bloomberg) -- U.S. stocks dropped, driving the Dow Jones Industrial Average below 10,000 for the first time in four years, after bank bailouts in Europe widened and commodities producers slid on concern global growth is slowing.

Equities fell worldwide, erasing more than $2 trillion in market value. Bank of America Corp. and Citigroup Inc. sank more than 5 percent after the German government led a bailout of Hypo Real Estate Holding AG and BNP Paribas SA bought parts of Belgium's Fortis. Chevron Corp. lost 3.2 percent as oil declined to the lowest since February. The Dow rose 430 points from its intraday low on speculation the Federal Reserve will cut interest rates to unfreeze credit markets.

The Standard & Poor's 500 Index tumbled 42.34 points, or 3.9 percent, to 1,056.89, the lowest since November 2003. The Dow retreated 369.88, or 3.6 percent, to 9,955.50 and earlier fell as much as 7.8 percent for its biggest loss since October 1987. The Chicago Board Options Exchange Volatility Index surged to a record intraday 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.

Every company in the Dow average and all 10 industries in the S&P 500 retreated. Treasury securities rose and gold jumped 4 percent as investors sought the safest assets. Financial futures priced in 40 percent odds the Fed will cut the target rate for overnight loans 0.75 percentage point by the end of the month, up from 16 percent odds on Oct. 3.

9.4% Drop

The decline extended the S&P 500's 9.4 percent drop last week, the steepest slump since the September 2001 terrorist attacks. The index has fallen 508 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 Fed must cut its target rate for overnight lending between banks to 1 percent from 2 percent, said Bill Gross, who runs the world's largest bond fund at Pacific Investment Management Co. The next scheduled rate decision from U.S. central bankers is Oct. 29.

``The idea of a coordinated rate cut is certainly helpful,'' said Malcolm Polley, chief investment officer at Stewart Capital Advisors in Indiana, Pennsylvania, which manages $1 billion. ``What Bill Gross says carries a lot of weight.''

The Fed 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 $700 billion financial-rescue legislation.

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.

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.

Bank of America lost 6.6 percent to $32.22. The lender said after the close of trading that it will cut its dividend by 50 percent and sell $10 billion in common shares. Merrill Lynch & Co., set to be taken over by Bank of America, fell 9.3 percent to $24.20.

Citigroup, Wachovia

Citigroup slipped 5.1 percent to $17.41. The bank sued Wells Fargo & Co. and its takeover target Wachovia Corp. for $60 billion, claiming their agreement violates its rights to buy a portion of the Charlotte, North Carolina-based lender under a previous deal.

National City Corp. tumbled 27 percent to $2.56 for the biggest drop in the S&P 500. Fitch Ratings downgraded Ohio's largest bank on the prospects of rising loan losses amid a slowing economy.

Energy companies in the S&P 500 fell 3.6 percent as a group to the lowest since March 2007. The industry, the third-biggest in the U.S. stock benchmark as recently as Oct. 1, shrank to the fourth-largest behind the financial, technology and health care groups.

Chevron, the second-largest U.S. oil company, lost 3.2 percent to $76.84. ConocoPhillips, the second-biggest U.S. refiner, dropped 2.1 percent to $64.74.

Oil Tumbles

Crude dropped 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. Oil for November delivery fell $6.07, or 6.5 percent, to $87.81 a barrel.

Steelmakers including A.K. Steel Holding Corp. and U.S. Steel Corp. led materials producers in the S&P 500 to a 4.4 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 13 percent to $30.90 after Allianz SE said it will invest $2.5 billion in the insurer. Hartford, which lost half its value last week, also reported a third-quarter loss of $8.50 to $8.80 a share.

ImClone Systems Inc. climbed 3 percent to $66.89. 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.

Lilly fell 7 percent, the most in five years, to $38.42. Bristol-Myers dropped 5.4 percent to $19.32 for the steepest decline since January.

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 20 times profit from the past four quarters, according to data compiled by Bloomberg.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.