A bad day on Wall Street got even rougher late in the session today as the Dow Jones industrials closed down more than 360 points, a sell-off set in motion by a weak earnings report from the oil giant Exxon Mobil and concern that Citigroup’s woes may be worsening.
The Dow, down 200 points through much of the day, finished at 13,567.87, a loss of 362.14, or 2.6 percent, erasing gains from yesterday’s decision by the Federal Reserve to cut interest rates.
The Standard and Poor’s 500-stock index dipped 2.6 percent as well, or 40.94 points, to 1,508.44. The technology-heavy Nasdaq composite was down 2.25 percent.
Profit-taking and uncertainty overtook the commodities markets as well. Crude oil, which had surged over 4 percent to record levels in the past week, fell $1.04 to $93.49. The dollar, which was expected to weaken further after the Fed’s rate cut, rebounded against the euro.
A report that consumer spending slowed in September reinforced analysts’ concerns about a broad slowdown in the fourth quarter economy, spurred by surging energy costs and a recession in the housing market.
“People are getting nervous looking to the holiday season,” said Anthony Conroy, head equity trader at BNY ConvergEx Group. “Discretionary income is going to be a little bit less. People are going to be spending less because they’re paying more for oil and mortgage payments there.”
Again, it is the rising oil and gas prices, and the mortgage meltdown that has created this volatility in the stock market. In this case, it was Citigroup, which was hit with a stock downgrade after the bank wrote down $5.9 billion in assets in the third quarter after losses stemming from both "mortgage-backed securities and bad bets on asset backed commercial paper." In other words, Citygroup bought into the mortgage-backed securities, which were nothing more than the predatory adjustable-rate loans on on over-priced houses during the height of the housing boom. Now that the interest rates on the adjustable-rate loans have increased, Americans can't pay the interest on their loans, and have foreclosed. Citygroup is sitting on practically worthless paper now. Their securities are backed by the mortgages, and ultimately the foreclosed homes. But Citygroup cannot determine the value of the over-priced, foreclosed homes, since the bank will have trouble trying to sell the homes in a market that is both flooded with almost a year's supply of housing for sale, and other banks are trying to sell their own foreclosed homes to recoup their own losses. And it is not just Citygroup that is sitting on these worthless homes. Credit Suisse Group reported a $1.9 billion in write-downs and 31 percent drop in net profit. GMAC Financing is also reporting a $1.6 billion third-quarter loss due to the sub-prime mortgage mess. And finally shares of American International Group have fallen 5.6 percent to $59.57 a share, due to rumors of third-quarter losses because of the subprime mortgage mess. Shares of Citygroup stock fell nearly 7 percent to $38.51 per share. Now I'm giving a rather simplistic explanation here, but it shows the the real problems that are occurring within the financial markets, and how this subprime mortgage mess is causing havoc within the financials and with the economy as a whole. And I think it will continue for the next couple of years. First, we have to get through the entire interest rate adjustments, and interest-only loans that Americans took out the last couple of years. The interest rates on the ARMs will have to be adjusted, and Americans who can't afford to pay those loans, will have their homes foreclosed by the banks. Then the banks are going to be forced to sell those foreclosed homes in a glut market, while also tightening credit standards for Americans who want to purchase homes. And since we have a glut of homes on the market, you can be that the prices of homes are going to drop, causing these banks to write off even more losses. It is a completely screwed up system.
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