Wall St drops as mortgage worries hit banks

Wall St drops as mortgage worries hit banks

New York: US stocks posted their biggest loss in two months on Tuesday on fears banks might be on the hook for billions of dollars in souring mortgage bonds.

The afternoon selloff hit investors already reeling from an unexpected credit tightening by China and disappointing financial results from Apple and IBM.

The biggest scare came on news that Bank of America and possibly others may be forced to take back billions of dollars in mortgages that should not have been bundled into bonds.

The broad selloff came on high volume in a pattern similar to last week’s when fears over banks surfaced.

“It’s reminding investors of what was the main impetus for the horrific selloff we had a few years ago," said Eric Kuby, chief investment officer at North Star Investment Management in Chicago. “If you were recently struck by lightning, you are a little skittish when there is a thunderstorm."

Bank of America shares fell 4.4% to $11.80, their lowest close since June 2009, after a Bloomberg report, citing people familiar with the matter, said investors PIMCO and BlackRock, along with the New York Federal Reserve Bank, were seeking to force the lender to repurchase $47 billion in mortgage bonds.

The bank, the New York Fed and PIMCO declined to comment.

The Dow Jones industrial average dropped 165.07 points, or 1.48%, to 10,978.62. The Standard & Poor’s 500 Index lost 18.81 points, or 1.59%, to 1,165.90. The Nasdaq Composite Index fell 43.71 points, or 1.76%, to 2,436.95.

The S&P 500 fell the most since mid-August when equities were in a steep selloff. The index closed below its 10-day moving average, which some traders see as a bearish sign.

“A clear break of the 10-day moving average at 1,170 on the S&P 500 will be the catalyst for the start of a real pullback/correction in my opinion," said Elliot Spar, options market strategist for Stifel Nicolaus in Shrewsbury, New Jersey.

In an almost perfect storm for equity markets, China’s decision to raise interest rates drove the dollar higher as investors cut exposure to risk, putting downward pressure on commodities and related stocks.

Selling in commodities accelerated as fears in the mortgage market grew. U.S. copper prices finished near the sharply lower levels hit on Tuesday, while crude oil futures fell 4.5% to under $80 per barrel.

Oil company Exxon Mobil fell 1.8% to $65.12 while the S&P energy index lost 2.4%. Industrial company Caterpillar Inc lost 2.1% to $78.55 and was among the biggest drags on the Dow.

Gold, which has rallied in recent weeks as a safety play against a weaker dollar, fell nearly 3%.

The Arca gold bugs index, which tracks 16 big gold miners, fell 5.1%. Barrick Gold was the biggest drag on the index, down 4.9% to $45.46.

Apple’s shares fell 2.7% to $309.49 and weighed on the Nasdaq after iPad sales fell short of some analysts’ expectations. Only the day before, Apple shares hit a lifetime high.

Yahoo announced that its third quarter net income more than doubled to $396 million from a year ago but sales missed analysts’ forecast. The stock dropped 2.7% Tuesday.

International Business Machines Corp fell after it won fewer technology service deals than expected in the third quarter. Its shares were down 3.4% at $138.03, even as it announced stronger profits and raised its full-year outlook.

Goldman Sachs Group Inc said net trading revenues fell by more than a third in the quarter, but the company’s profits beat analysts’ estimates, sending its shares up 2% to $156.72.

And there was mixed news in the real estate sector, with a report showing that the number of new homes being built, or housing starts, increased in September, beating estimates. However, building permits to build new homes, a measure of future activity, fell 5.6%. Housing starts are up 28% from their low in April 2009 but down 73% from their January 2006 peak and 40% below the 1 million annual rate that analysts say defines a healthy housing market.

Investors’ jitters coincided with the anniversary of the 1987 stock market crash when the Dow fell over 20% in one day.

The CBOE volatility index, a measure of market volatility, rose 8.1% in a sign investors may be expecting turbulence ahead.

About 9.83 billion shares traded on the New York Stock Exchange, the American Stock Exchange and the Nasdaq -- above the year’s average so far of about 8.77 billion.

Declining stocks outnumbered advancing ones on the NYSE by a ratio of nearly 5 to 1. The ratio was about the same on the Nasdaq.