Stocks sell off with concerns about credit, banking

NEW YORK -- Months of worries about the housing market and failing mortgages has brought Wall Street to one of its most painful places: a correction.

With the Dow Jones industrial average and Standard & Poor's 500 indexes down 10 percent from the highs they reached in October, the stock market is officially in a correction. Now it's anyone's guess whether stocks are near the bottom of their pullback or whether further substantial declines are in the offing. With banks continuing to struggle with home loans going bad in a faltering housing market, it's likely volatility will continue, observers say.

In any case, the pullback isn't welcome news for investors -- especially since the decline of the S&P 500 is the benchmark for mutual funds in many people's portfolios, including 401(k) retirement plans.

Stocks sold off Monday after a rally Friday amid new concerns about a weakening credit market evaporated some enthusiasm over retails sales reports from the first days of the holiday shopping season. The Dow Jones industrial average fell nearly 240 points.

Investors concerns are well-known at this point. Wall Street is unnerved by the latest announcements that point to continuing problems in the credit markets, the result of home loan debt going bad under the weight of a faltering housing market.

Comments from Citigroup Inc., which has announced major write-downs of debt, stirred concerns that the pain will continue. And HSBC Holdings PLC warned it plans to bail out two funds it manages. To do so, Europe's largest bank plans to move about $45 billion of the fund's assets onto its balance sheet.

Comments from Sen. Charles Schumer, D-N.Y., a key member of Senate finance and banking committees, about the exposure that the Atlanta-based Federal Home Loan Bank might have to Countrywide Financial Corp.'s debt stirred concerns about further weakening in the banking sector.

Meanwhile, The New York Federal Reserve, acknowledging "heightened pressures" in money markets that are expected to last through the rest of the year, said it plans to conduct a series of repurchase agreements aimed at boosting liquidity in the credit markets. The announcement from the New York Fed, which carries out monetary policy set by the U.S. Federal Reserve, essentially puts in writing many of the steps the Fed often takes at this time of year.

The Fed said it would inject $8 billion into the banking system on Wednesday. The amount of money is somewhat larger than in past years at this time.

A better-than-expected report on retail sales wasn't able to hold the market's early gains. Retail sales on Friday and Saturday combined rose 7.2 percent to $16.4 billion from the same two-day period a year ago, according to ShopperTrak, which tracks total sales at more than 50,000 U.S. retail outlets. That's helped ease investor concerns about consumer spending, which accounts for two-thirds of all economic activity.

"The early focus was on the consumer and the weekend sales but of course subprime always seems to pop its head up," said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners Inc., referring to loans made to borrowers with poor credit. Some of these loans are now souring, forcing banks to write off huge sums.

The Dow fell 237.44, or 1.83 percent, to 12,743.44, closing at the lows of the session. It peaked at 14,198.10 in mid-October.

Broader stock indicators also gave up ground. The S&P 500 declined 33.48, or 2.32 percent, to 1,407.22, and the Nasdaq composite index fell 55.61, or 2.14 percent, to 2,540.99.

Government bond prices rose as stocks declined. The yield on the 10-year Treasury note, which moves opposite its price, fell to 3.85 percent from 4 percent late Friday.

Illustrating investors' unease, the Chicago Board Options Exchange's volatility index, known as the VIX, and often referred to as the "fear index," jumped nearly 13 percent Wednesday.

Energy prices fell. A barrel of light, sweet crude fell 48 cents to settle at $97.70 a barrel on the New York Mercantile Exchange, after briefly crossing $99 overnight.

Gold prices rose, while the dollar fell against other major currencies.

The Fed's decision to inject liquidity into the market isn't unusual for this time of year. Last year, the Fed added a net $21.9 billion into the system from the Monday following Thanksgiving until the first week of January.

Lee Adler, publisher of The Wall Street Examiner, said the overall level of recent liquidity injections is consistent with past years.

"I think it's a confidence game here," Adler said. "The markets are obviously having liquidity problems. The Fed wants people to think that they're doing something about it."

He noted that Monday's announcement differs from past practices in that the bank is making a formal statement of its policy. Ultimately, though, the Fed is still doing what it always does, he said.

Concerns about banking dominated the session. Schumer's remarks followed a Wall Street Journal report about Countrywide's reliance on loans from the FHLB. He called overseers of the federally supported bank network to examine the risk of the collateral Countrywide has put up for the loans.

Countrywide, the nation's largest mortgage lender, fell $1.01, or 10.5 percent, to $8.64.

The Russell 2000 index of smaller companies fell 19.96, or 2.64 percent, to 735.07.

Overseas, Britain's FTSE 100 fell 1.30 percent, Germany's DAX index lost 0.55 percent and France's CAC-40 dipped 1.14 percent. In Asia, Japan's Nikkei stock average closed up 1.66 percent, Hong Kong's Hang Seng index gained 4.09 percent.