Published February 22, 2011
FOX Business: The Power to Prosper
In Wall Street’s steepest selloff in three months, the blue chips plunged almost 200 points and the Nasdaq Composite shed nearly 3% on Tuesday as the snowballing violence in oil-rich Libya sent crude exploding above $93 a barrel.
The Dow Jones Industrial Average fell 178.46 points, or 1.44%, to 12212.79, the Standard & Poor's 500 lost 27.57 points, or 2.05%, to 1315.44 and the Nasdaq Composite slumped 77.53 points, or 2.74%, to 2756.42. The FOX 50 dropped 16.10 points, or 1.69%, to 936.15.
The situation in Libya has clearly spooked global financial markets as it marks the most violent outbreak in the tumultuous region this year and is the first example of the political unrest spreading to an oil-producing and OPEC nation.
In response, traders retreated from risky assets as the spike in crude to 2-1/2-year highs led to fears higher energy costs could eat into the strengthening U.S. economic recovery.
“If energy continues to rally it will have a dampening effect on any kind of [economic] rebound the market was pricing in,” said Peter Kenny, managing director at Knight Capital Group, warning of a potentially “dire impact on equity prices.”
Underscoring the level of concern on Wall Street, the VIX, or the markets’ so-called “fear gauge,” surged 29% -- its biggest one-day gain since May 2010 -- to its highest level in nearly three months.
Tuesday marked Wall Street's first opportunity to react to the growing unrest in the Middle East and North Africa as U.S. markets were closed on Monday in observance of Presidents Day.
The blue chips suffered their worst day since November 16. Almost all 30 Dow stocks lost ground, led by JPMorgan Chase (JPM), Bank of America (BAC) and Alcoa (AA). The biggest winners on the index were Kraft (KFT) and energy heavyweights Chevron (CVX) and ExxonMobil (XOM).
The selling marked an abrupt departure from Wall Street's 2011 surge as the Dow had been in the midst of its best three-week stretch since August 2010 and landed on Friday at its best level since June 2008. Given those gains, some traders were relieved to see the markets finally pull back.
“Certainly it’s healthy and it’s necessary. The market had gotten a little too complacently bullish,” said Michael James, managing director of equity trading at Wedbush Securities. “I wouldn’t be surprised to see it pullback further over the next couple of days.”
The blue chips made a midmorning comeback attempt that proved to be fleeting, erasing more than half of their initial losses after crude backed away from session highs and a new report showed U.S. consumer confidence jumped in February to a three-year high.
Almost all of the focus was on Libya on Tuesday as protesters demanding the end of longtime leader Muammar al-Qaddafi's rule clashed violently with his supporters, sending Africa's third-largest oil producer spiraling into chaos. More than 200 people were reported dead, key government buildings were on fire and oil firms evacuated.
Traders fretted about the possibility Libya's oil production could be halted by the violence there or that the unrest could spread to Saudi Arabia and other oil-producing nations.
Slammed by the political unrest, crude oil spiked $7.37 a barrel, or 8.55%, to $93.57 -- a level unseen since October 2008. The surge marked crude's biggest one-day percentage gain since April 2009. The most active contract, the April contract, surged $5.71 a barrel, or 6.36%, to $95.42. Gold rallied for the sixth day in a row, gaining $12.30 a troy ounce, or 0.89%, to $1,400.50 -- its highest settle since January 3.
As crude soars closer to $100 a barrel, it could seriously crimp the global recovery by raising energy prices on struggling U.S. consumers and businesses such as shipping giant FedEx (FDX) and cruise operator Carnival (CCL). Concerns about the impact on the global economy were illustrated by Caterpillar (CAT) and tumbling basic materials like U.S. Steel (X).
On the earnings front, Wal-Mart's stock retreated as its fourth-quarter EPS of $1.34 was overshadowed by weaker-than-expected sales growth of 2.5% and its guidance. Home Depot (HD) initially rallied but then turned red even after beating the Street with EPS of 36 cents and raising both its dividend and guidance.
Home builders such as Pulte (PHM) fell sharply as S&P/Case-Shiller said U.S. home prices fell by 1% in December from November, compared with calls for a drop of 0.7%. It marked the sixth straight month of declines.
The bulls failed to rally around some upbeat economic news as the Conference Board said its consumer confidence index soared in February to a three-year high of 70.4, up from 64.8 in January and beating forecasts for 65. The consumer expectations component jumped to its best level since December 2006.
Last month Wall Street experienced a similar pullback that was triggered by the exploding situation in Egypt but proved to be short-lived, with stocks subsequently rallying in the face of the crisis there.
“I don’t know if it’s going to be able to do that again. This selloff seems to have a different complexion,” said Kenny. “The internals seem decidedly more negative than during the Egyptian pullback. It seems more substantial.”
Barnes & Noble (BKS) tumbled 14% after the bookseller suspended its dividend and declined to give new financial guidance. The company’s EPS of $1.00 on $2.3 billion in sales also trailed consensus calls. Barnes & Noble said its January same-store sales slid 1.3%.
Apple (AAPL) slumped 3% after an analyst at Yuanta Securities predicted the tech giant’s iPad2 tablet will be delayed to June from April due to production delays. However, a source told Reuters the report of a delay until June is not true and the device will be launched in a similar timeframe to its 2010 April launch.
BHP Billiton (BHP) reached a $4.75 billion deal to acquire shale gas reserves from Chesapeake Energy (CHP) in its first major scoop of natural gas resources. BHP is buying Chesapeake's 75% stake in an Arkansas shale natural gas field.
Office Depot (ODP) revealed a surprise non-GAAP profit of 9 cents a share as it sales slid by an in-line 3% to $2.96 billion. Analysts had called for a loss of 3 cents a share.
The U.K.'s FTSE 100 slipped 0.30% to 5996.76, France's CAC 40 sold off 1.15% to 4050.27 and Germany's DAX slid 0.05% to 7318.35.
In Asia, Japan's Nikkei 225 tumbled 1.78% to 10664.70, Hong Kong's Hang Seng plunged 2.11% to 22990.80 and China's Shanghai Composite plummeted 2.62% to 2855.52.