Wall Street's brief caffeine-led rally turns flat on mortgage-related fears and rumours By Jennifer Coogan and Ellis Mnyandu of Reuters
NEW YORK -- US stocks dropped sharply on Tuesday after Bloomberg reported that AT&T sees softness in its consumer business, sending shares of the phone company tumbling nearly 8 per cent.
By late afternoon, the Dow Jones industrial average was down 130.47 points, or 1.02 per cent, at 12,697.02. The Standard & Poor's 500 Index was down 13.01 points, or 0.92 per cent, at 1,403.17. The Nasdaq Composite Index was down 26.56 points, or 1.06 per cent, at 2,472.90.
AT&T shares were down 7.9 percent at $US37.78
Earlier, US shares were little changed as investors bought defensive shares such as utilities and food producers, offsetting the drag from financial companies and fallout from the mortgage market.
Shares of Countrywide Financial Corp were down 13.9 per cent but well off their lows after the company said there was "no substance" to market rumours the largest US mortgage lender was facing bankruptcy.
But those rumours effectively extinguished a morning rally on Wall Street, though Countrywide's denial helped the market erase most losses.
Among gainers, blue-chip drug maker Merck & Co was up 3.6 per cent to $US60. Power generator Exelon Corp rose 3.7 per cent to $US86.93. Beverage producer PepsiCo Inc climbed 1.8 per cent to $US78.71.
Those stocks "are as defensive as you can get: utilities, food, beverages, consumer nondurables -- the stuff you've got to buy all the time," said Paul Nolte, director of investments at Hinsdale Associates in Hinsdale Illinois. "For those who have to be fully invested, those are about the only places you can hide."
Big decliners were mortgage bond insurers MBIA Inc, down 13 per cent at $US15.28, and AMBAC Financial Group Inc, down 16.6 per cent to $US19.59.
Shares of Countrywide fell more than 24 per cent and came close to an eight-year low on the New York Stock Exchange before paring losses. They were trading at $US6.57, off 14 per cent.
With the Countrywide rumours cited by traders, shares of mortgage-related companies dropped sharply. "There is renewed speculation that Countrywide will declare bankruptcy or have some default action," said Al Greenberg, head floor trader at broker-dealer BNY ConvergEx Group in Chicago.
Earlier, US stocks rose as investors took the market's recent declines as a sign equities had become cheap, spurring buying especially among beaten-down sectors like technology.
"There are just compelling valuations even in the face of a possibly poor economy," said David Bianco, chief US equity strategist at UBS in New York.
"The valuations are now subsidising most of the risk. I'd say technology and industrials are where I'd be picking up stocks that have sold off in the past couple of weeks."
According to Reuters data, the broad market is technically oversold, with the S&P 500 relative strength index at its lowest levels since November.
Since last Wednesday, the first trading day of 2008, the S&P 500 is down nearly 3 per cent, while the Nasdaq is off 5 per cent and the Dow has declined 3 per cent.
Shares of Apple Inc, the maker of the iPod, led the tech advance on the Nasdaq, with a gain of 2.3 per cent to $US181.80.
Another tech standout was Research In Motion Ltd, maker of the BlackBerry. Tech shares took a beating as Friday's weak jobs data heightened fears of a recession.
In economic news, pending sales of existing US homes fell 2.6 per cent in November, but analysts said investors took some comfort from an upward revision in the October level.
And Starbucks said late on Monday that Howard Schultz, its founder and chairman, will take over as CEO and it would slow an aggressive US expansion. Bank of America raised its rating on Starbucks, according to theflyonthewall.com
At Starbucks, Mr Schultz replaces chief executive Jim Donald whose tenure coincided with increased competition and a decline in the company's stock of nearly one-half over 2007.
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