The Dow Takes A Deep Leap In The Wrong Direction
Friday, February 29, 2008PAUL KANGAS: Stocks on Wall Street took a big leap backwards on this leap day. The Dow tumbled 315 points and lost 3 percent in February, its fourth straight monthly decline. The NASDAQ dropped 60 points. Triggering the sharp sell-off, a string of bad news: a regional report from Chicago showing business activity fell to its lowest level since 2001; a huge loss at AIG stirring up fears of more big write-downs in the financial sector and last night's disappointing earnings from Dell. Alec Young of Standard & Poor's says these developments do not bode well for the economy and the markets.
ALEC YOUNG, EQUITY STRATEGIST, STANDARD & POOR'S: What we're seeing today in the news flow yesterday, growing evidence that the economy continues to weaken, credit market problems continue to deteriorate. That increases the likelihood of a more prolonged recession that moves into the second half of the year. That threatens corporate profits and that's very broad-based. That has negative implications for all of the stocks in the market and that's why you're seeing broad-based selling.
GHARIB: Adding to that market anxiety, another spike in oil prices. Crude rose above $103 a barrel for the first time before falling back. In New York trading, April crude futures settled at $101.84, down $0.75. But as Erika Miller explains, some experts don't think oil will be a major negative for the U.S. economy.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Stagflation is a painful economic condition the nation hasn't seen in three decades. It is characterized by a sharp increase in inflation at a time when growth is stagnant. Some investors worry stagflation could be coming back again, exacerbated by $100-a-barrel crude oil. But not economist Lakshman Achuthan.
LAKSHMAN ACHUTHAN, MANAGING DIRECTOR, ECONOMIC CYCLE RESEARCH: If we see these levels sustained for a long period of time, it does not necessarily mean some permanent damage to the economy. What is shocking, as it were, when we talk about oil shocks, it's not a number -- $80, $90, $100 that's the shock. It's the rate of change.
MILLER: Still, investors remain concerned that because energy is so widely used, rising prices will eventually push up the cost of most other goods and services. Another fear is that rising gasoline prices will force consumers to slash spending in other areas, stunting economic growth. There again, Achuthan disagrees.
ACHUTHAN: So many times, we've looked for this tipping point on the consumer. So many times people have said that's it. It's going to break the back of consumers. It has not happened, largely because there are jobs. People still have reasonably steady incomes.
MILLER: Over the past six months, crude futures have risen about 50 percent to record levels. Oil analyst Fadel Gheit says two major factors have been propelling prices.
FADEL GHEIT, OIL & GAS ANALYST, OPPENHEIMER & CO.: Lower interest rates, a lower dollar, push commodity prices up, including oil. So, every time you have an interest rate cut, followed by a drop in the value of the dollar, you expect oil prices to move higher and that's exactly what has happened for the last six months.
MILLER: Many industry experts predict energy prices will continue to climb near-term, especially given supply concerns. Rebels have been attacking oil facilities in Nigeria and Venezuelan President Hugo Chavez is threatening to cut off U.S. oil supplies from his country. In addition, hopes are dimming that OPEC will increase production when it meets next week.
GHEIT: The only thing that will stop oil prices from rising in my view, is not supply and demand; it's deep recession, which will curtail demand in an absolute term -- not demand growth will slow down, actual demand will decline.
MILLER: Economists say energy prices will be watched closely by the Fed. They warn that if there's a big up-tick in inflation overall, the Fed could stop cutting rates, even at the risk of prolonging the economic downturn. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
