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Inflation, rate fears slam stocks

Major gauges slump, Dow suffers worst losses in two months as housing, rising Treasury bond yields, earnings among rattle investors.

By Alexandra Twin, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Stocks slumped Thursday, with the Dow industrials losing more than 100 points one session after hitting a record high after a weak housing report and a spike in Treasury bond yields revived worries about interest rates and the economy.

The Dow Jones Industrial average (down 119.21 to 12,502.56, Charts) lost 119 points, its biggest one-day decline in almost two months. The blue-chip barometer had ended the previous session at a record close.

The broader S&P 500 (down 16.23 to 1,423.90, Charts) index lost 1.1 percent, after ending the previous session at the highest point since September 2000.

The Nasdaq (down 32.04 to 2,434.24, Charts) composite lost 1.3 percent, erasing nearly all of its gains from the previous session.

After the close, Microsoft (Charts) reported strong quarterly sales and earnings that beat estimates, sending shares higher in extended-hours trading.

Also after the close, Amgen (Charts) reported higher quarterly earnings that missed estimates on higher sales that topped estimates. Shares slipped 3 percent in extended-hours trading.

Also after the close, General Motors (Charts) said it will delay the release of its fourth-quarter and full-year 2006 financial results, and will also restate results going back to 2002. Shares were modestly lower in extended-hours trading.

Friday brings earnings from Dow components Caterpillar (Charts) and Honeywell (Charts), as well as oil services firm Halliburton (Charts).

Friday also brings the December read on durable goods orders and the December read on new home sales.

Stocks rallied Wednesday after strong earnings from Yahoo and Sun Microsystems quelled worries about slower tech sector earnings growth.

But strong earnings had little impact on the market Thursday, with investors eyeing the housing report and selloff in bond prices.

Stock declines were broad based, with 28 out of 30 Dow components sliding, led by rate-sensitive issues such as financial leader American Express (down $1.16 to $57.77, Charts) and oil behemoth Exxon Mobil (down $1.38 to $73.52, Charts).

A variety of energy, gold, silver and other commodity shares tanked, after several up sessions.

Computer networkers led the tech declines.

"Yesterday we had a very good day, so we are seeing some profit taking," said Ram Kolluri, chief investment officer at GlobalValue Investors. "I don't think this is something more serious than that."

He said that longer term, the slowdown in the global economy and its subsequent pressure on earnings may be an issue for stock investors, but that in the short term, stocks should be able to hang on to the upward bias that has been in place since last summer.

In general, trading has been choppy this month as investors have watched a seesawing oil market, delved into the earnings and sought to digest some surprisingly upbeat reads on the economy - outside of housing.

"I think the strength we've seen in the economy has pushed back the likelihood of a Fed rate cut and that's put some jitters in the market," said John Forelli, portfolio manager at Independence Investments.

At the end of last year, investors were betting that the Federal Reserve might cut interest rates as soon as the first quarter of 2007, to stimulate a slowing economy. But a spate of strong economic reports in January have tempered such bets. Some economists have suggested the Fed will raise rates again, before cutting them.

A surge in bond yields Thursday added to such jitters.

Treasury prices slipped after a weak response to the day's 5-year note auction. The declines boosted the yield on the benchmark 10-year note to 4.87 percent from 4.81 percent late Wednesday. Treasury prices and yields move in opposite directions.

Adding to troubles Thursday: a report that showed existing home sales saw the biggest drop last year in 17 years. Home sales in December also saw a bigger-than-expected decline. However, the report also showed that home prices may have bottomed out in December. (Full story)

eBay and other earnings

Late Wednesday, eBay (up $2.45 to $32.45, Charts) reported higher quarterly earnings that topped forecasts and issued a bullish first-quarter and full-year profit outlook. Shares jumped 8.2 percent Thursday.

Also late Wednesday, Qualcomm (Charts) reported higher fiscal first-quarter earnings that topped estimates on higher quarterly revenue that missed estimates. The designer and seller of chips for mobile phones also gave a fiscal second-quarter forecast that is roughly in line with estimates.

But Qualcomm shares inched lower Thursday.

AT&T (up $0.16 to $36.79, Charts) reported quarterly earnings Thursday morning that rose from a year earlier and topped estimates, thanks in part to growth in its wireless unit Cingular. The telecom, a Dow component, also raised its forecast on the predicted benefits of its merger with SBC, completed late last year.

Cardinal Health (up $2.39 to $72.42, Charts) said it will sell its drug manufacturing unit to the Blackstone Group for roughly $3.3 billion in cash. The drug distributor also reported higher quarterly earnings that topped estimates. Shares jumped.

On the downside, Ford Motor (up $0.02 to $8.22, Charts) ended the worst year in its history with a bigger-than-expected fourth-quarter loss. The automaker also said it would cut production for the current quarter.

Roughly one-third of the S&P 500 has reported earnings for the December quarter so far. Earnings are currently on track to rise 9.4 percent, according to Thomson Financial. That's a blended figure, combining reported and expected earnings.

The 9.4 percent rate marks the slowest quarter of growth in nearly 5 years, reflecting both the effects of a slower growing economy and the tougher year-over-year comparisons after several years of strong growth.

Market breadth was negative. On the New York Stock Exchange, losers beat winners three to one on volume of 1.75 billion shares. On the Nasdaq, decliners topped advancers seven to three on volume of 2.23 billion shares.

U.S. light crude oil for March delivery fell $1.14 to settle at $54.23 a barrel on the New York Mercantile Exchange, having been on both sides of unchanged all morning.

COMEX gold for March delivery rose 20 cents to settle at $654.70 an ounce.

In currency trading, the dollar rose versus the euro and the yen.


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