Stocks Tumble to Cap Another Week of Worry

NEW YORK—Wall Street dropped again Aug. 19 on renewed fears that the global economy may be heading into another recession, and continued worries that European banking firms may not be financially sound enough to withstand the ongoing sovereign debt crisis.

The blue chip Dow Jones Industrial Average dropped 173 points, or 1.6 percent; the wider S&P 500 Index fell 17 points, or 1.5 percent; and the technology-laden Nasdaq Composite Index shed 39 points, 1.6 percent off Thursday’s close.

All three major indices were down by more than 4 percent on the week, with Nasdaq suffering the heaviest losses, shedding 6.6 percent since last Monday.

There is a perceived lack of confidence in the financial markets globally. Investors have been shedding stocks, and even some lower-quality bonds, in a flight to safety.

Yields on U.S. Treasurys continued to rise. The 10-year Treasury note saw its yield drop to below 2 percent last Thursday, Aug. 18, the first of such occurrence in decades. It increased slightly, to 2.1 percent, on Friday. Gold futures, meanwhile, continued its recent climb, by topping $1,852 per ounce. Yield is total percentage of return at maturity of a certain bond; higher prices mean lower yields.

The return to volatility began last Thursday, when analysts at Morgan Stanley issued a grim report on the global economy, saying that the U.S. and European economies are “dangerously close” to a new recession.

On Friday, JPMorgan Chase & Co. fanned the flames, issuing a similar report stating that it believes that fourth-quarter economic growth would slow to 1 percent, down from a previous forecast of 2.5 percent. The company’s report was another reason investors sold off stocks last Friday.

Activity typically slows in August prior to the Labor Day holiday weekend in the United States, but this year with the state of the global economy, the markets are expected to continue its recent gyrations.

HP’s Woes

The Dow was heavily affected by a crash in the shares of computer and equipment maker Hewlett-Packard Co., (NYSE: HPQ), that declined by more than 20 percent last Friday.

The plunge was due to investors reacting from last week’s news from HP that the company would cease making smart phones, tablets, its webOS operating system, and that it would try to exit the personal computer business, which makes a large portion of the company’s revenues.

According to a previous Epoch Times report, the Palo Alto, Calif.-based company said that it would attempt to spin off its consumer PC business as a new and separate company, in an attempt to model itself after International Business Machines Corp. and transform itself from a computer hardware manufacturer to a computer software and services firm.

The rationale is in the numbers. While the PC business generated 30 percent of HP’s topline revenues, it only contributed to a little more than 5 percent of its operating margin, signaling the unprofitability and intense competition of the sector.

Today, profits from PCs—which have seen their prices lowered over the course of the past decade—are dwindling, and Asia-based, lower-cost manufacturers such as China’s Lenovo Group and Taiwan’s Acer have recently dominated the sector.

Its decision to abandon the tablet computer and smart phone business was a surprise, given that as late as this year it has touted its future and was gearing up for a big fight with Apple Inc.

When it bought the remnants of Palm Inc., the venerable handheld computer and software maker, an HP executive said at the time, “Palm’s innovative operating system provides an ideal platform to expand HP’s mobility strategy and create a unique HP experience spanning multiple mobile connected devices.”

HP has been hit with controversy in recent years. Besides the $1.3 billion purchase of Palm, last year its CEO Mark Hurd was forced to resign after allegations of an improper sexual relationship, and in 2005, former CEO Carly Fiorina left the firm not too long after HP’s controversial merger with Compaq.

Last week, it also announced that it would purchase U.K.-based search software maker Autonomy Corp. for $10.3 billion.

Overseas Still Weak

European markets continued their slide, as the FTSE 100 Index fell 1 percent in London last Friday, and the DAX Index in Frankfurt was off by 2.5 percent. Paris’s CAC 40 dropped 1.9 percent.

European investors were worried that European banks, which hold a majority of the continent’s sovereign debt, may not be healthy enough to withstand the impact of default or write downs, despite the diligence of stress tests and capital ratio scrutiny by regulators.

Even Germany, the continent’s strongest economy, may be showing signs of weakness as last week’s economic growth report was disappointing.

Major banks suffered the brunt of the selloff. Societe Generale, France’s second biggest bank, saw its shares drop 3.4 percent. French banks BNP Paribas and Credit Agricole were also down by 4.3 percent and 1.7 percent respectively.

In Germany, Deutsche Bank AG dropped 2.2 percent. British banking firm Llyods TSB fell 4.8 percent, and Barclays Plc fell 2.2 percent.

French President Nicolas Sarkozy and German Chancellor Angela Merkel met last week to discuss the region’s economy amid debates of a common Eurozone bond.

“While the market was disappointed not to receive confirmation of an official euro bond, the mounting transfer of liabilities from ‘periphery’ to core that will be affected both by the European Central Bank and the European Financial Stability Facility stands to see this issue move increasingly toward the center of its radar,” Rabobank said in a research note.

But European Union President Herman Van Rompuy was opposed to the idea last week, saying that such an action would not make sense and could only be considered when the eurozone economies are better aligned and more homogeneous.