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Wall St hit by fears of prolonged credit crisis
By Jeremy Lemer in New York

Published: May 20 2008 14:23 | Last updated: May 20 2008 21:51

Wall Street stock markets were knocked off four-month highs on Tuesday after a rise in core inflation and record high oil prices threatened to trim corporate profits and a leading banking analyst said the credit crisis could extend well beyond 2009.

The latest inflation figures gave a mixed picture of the price pressures on US businesses. Prices paid to producers in April, excluding food and fuel, rose twice as fast as forecast but a surprise decline in gasoline prices restrained overall increases to 0.2 per cent.

EDITOR’S CHOICE
Oil price heads towards $130 - May-20Asia slips on financials and property shares - May-20Inflation worries end Europe’s rally - May-20Euro lifted by German inflation data - May-20Mining sector’s slide weighs on FTSE - May-20Still, analysts said the trend was clear. “Inflation pressures are mounting and that is spooking the market,” said Peter Cardillo, chief market economist at Avalon Partners. “And of course record oil prices aren’t helping.”

Crude prices pushed above $129 for the first time after billionaire investor T. Boone Pickens predicted oil could hit $150 and a number of analysts raised their price targets for 2008.

The strains on the consumer of high fuel prices appear to be limited – so far. Home Depot joined the group of retailers who have posted first-quarter results that were not as bad as feared.

The numbers were poor nonetheless. The home-improvement retailer said on Monday that net income slumped 66 per cent to $356m on revenue down 3.4 per cent to $17.9bn.

Home Depot shares, which have lost about a quarter of their value in the last year, fell another 5.2 per cent to $27.37.

The benchmark S&P 500 index closed the day down 0.9 per cent at 1,413.42 while the Dow Jones Industrial Average was 1.5 per cent lower at 12,828.68. The Nasdaq Composite fell 1 per cent to 2,492.26.

On Monday US stocks pared gains in late trading but held on to close at their highest levels since early January after new data suggested that the US economy may skirt outright recession.

Significant drag factors remain, foremost among which are the cascading effects of the credit crisis.

According to Meredith Whitney and a team of analysts from Oppenheimer, the extended credit crisis will result in further multi-billion dollar revenue reversals at the major banks.

“We believe the real harrowing days of the credit crisis are still in front of us and will prove more widespread in effect than anything yet seen,” Ms Whitney said.

The culprit is less the writedowns themselves than the “shut-down” in the securitisation market which at its height provided 66 per cent of household borrowings in the first quarter of 2007.

Without that market, consumer credit losses may be “far worse than what is currently estimated, even by the most draconian of investors”. Ms Whitney and her colleagues also slashed their 2008 earnings estimates for the large-cap banking stocks they cover by an average of 17 per cent.

Financial stocks were among the leading fallers in the S&P 500, dropping 2.2 per cent while an index of investment banking shares also slumped 2.2 per cent.

Morgan Stanley fell 3 per cent to $44.80, JPMorgan lost 5 per cent to $43.70 and Citigroup slipped 3.8 per cent to $22.11.

Elsewhere, AIG, the insurer hit by massive subprime-related losses, said it would raise about 60 per cent more capital than it originally indicated in order to strengthen its balance sheet, knocking its share price 2.1 per cent to $38.12.

On Tuesday, concerns about rising input costs, as well as a credit rating downgrade for a leading homebuilder, hurt the consumer discretionary sector in particular. The sector fell 1.6 per cent, led down by Centex and KB Home which lost 5.5 per cent to $21.81 and 5.5 per cent to $23.15 respectively.

Amid the broader market malaise, energy was one of the few sectors to find any positive momentum. ConocoPhillips rose 0.9 per cent to $93.55, Chevron added 0.9 per cent to $103.09 and the broader sector climbed 0.8 per cent.

After a strong run last week materials were largely flat on Tuesday, as rising gold prices weighed against analysts’ comments that weaker demand from China might result in soft metal prices. Newmont Mining rose 1.7 per cent to $49.88 but Alcoa fell 3.1 per cent to $43.23.

Packaging stocks were also hit by a number of analyst downgrades. Sealed Air deflated, falling 4.4 per cent to $23.96 while Bemis dropped 4.1 per cent to $26.45.

Copyright The Financial Times Limited 2008