"Put Your Helmets On! Bail Out and Head for Cover!"

May 20 (Bloomberg) -- A weeklong rout in stocks deepened, with U.S. benchmark indexes losing the most in more than a year, as reports cast doubts about the strength of the economic recovery and European leaders struggled to contain the region’s debt crisis. Commodities plunged and Treasuries soared.
The Standard & Poor’s 500 Index plunged 3.9 percent to 1,071.59 at 4 p.m. in New York, its biggest drop since April 2009. The Stoxx Europe 600 Index lost 2.2 percent and the S&P GSCI Index of commodities tumbled to the lowest since October. The losses accelerated even as the euro rallied as much as 1.5 percent to $1.2598 after earlier flirting with a four-year low. Ten-year Treasury yields sank to the lowest level of the year, down 15 basis points at 3.22 percent. The yen rallied against all 16 major counterparts.
Tomorrow’s expiration of U.S. stock options and progress on a financial-reform bill may have added to volatility after U.S. jobless claims unexpectedly increased to 471,000 last week and the Conference Board’s index of leading economic indicators posted a surprise drop of 0.1 percent. The slide came a day before the German parliament votes on the country’s share of a $1 trillion bailout to halt a worsening sovereign debt crisis.
“Put your helmets on if you are long risk here,” Nicolas Lenoir, chief market strategist at ICAP Futures LLC in Jersey City, New Jersey, said in a note to clients before markets opened today. “A lot of stops have been triggered when the S&P future crossed 1,100 and anybody still long will probably have to bail out and head for cover.”
S&P 500 Correction
Gauges of financial, industrial and commodity companies tumbled more than 4.4 percent each to lead declines in all 10 of the S&P 500’s main industry groups. Bank of America Corp., Alcoa Inc. and General Electric Co. dropped more than 5.7 percent as all 30 stocks in the Dow Jones Industrial Average fell, dragging the gauge down 376.36 points, or 3.6 percent, to 10,068.01 for its biggest tumble since March 5, 2009. Both the S&P 500 and Dow closed at their lowest levels since Feb. 10.
Today’s plunge in stocks came as the Securities and Exchange Commission continues its autopsy of the chain reaction of selling that briefly erased $1 trillion in stock value on May 6. Kentucky Republican Senator Jim Bunning and Virginia Democrat Mark Warner today said at a committee hearing that they were concerned the so-called flash crash could be repeated.
‘Question of Confidence’
“It’s a question of confidence,” said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees $55 billion. The almost 1000-point decline in the Dow average on May 6 “not only rattled the confidence of investors, but everyday policymakers are digging in and not giving us answers as to what’s causing this problem.”
At 1,071.59, the S&P 500 is 24 percent below its level 10 years ago, just after the peak of the Internet bubble. The index is 17 percent below its level on May 18, 2001, and 3 percent above its closing price on the first trading day after the Sept. 11, 2001, terrorism attacks.
Stock futures extended declines before exchanges opened in New York after the S&P 500’s June futures contract slipped below its average price over the past 200 days, a level watched by technical analysts as an inflection point that may trigger deeper losses. The S&P 500 itself closed below its 200-day moving average today for the first time since July 2009.
The drop below the level may not necessarily signal more losses to come, according to Harrison, New York-based Bespoke Investment Group LLC. On the previous occasions when it closed below the 200-day moving average after having stayed above it for at least 100 days on a closing basis, the S&P 500 “has actually done well” in the following months, according to a Bespoke note yesterday, with positive returns one, three and six months later.
Economy Watch
Today’s rout came as initial jobless claims rose by 25,000 to 471,000 in the week ended May 15, exceeding the median forecast of economists surveyed by Bloomberg News and the highest level in a month, Labor Department figures showed. Losses accelerated in the regular session after the Conference Board’s index of leading economic indicators unexpectedly slumped 0.1 percent.
The S&P 500 has plunged about 12 percent from a 19-month high on April 23, a retreat surpassing 10 percent typically known as a correction. The index has pared its rally from a 12- year low in March 2009 to 59 percent. The Nasdaq Composite Index today joined the Dow Jones Industrial Average and S&P 500 in erasing its 2010 advance.
‘Corrective Territory’
“We are clearly in corrective territory,” Robert Doll, who helps oversee $3.36 trillion as vice chairman and chief equity strategist at New York-based BlackRock Inc., said in a Bloomberg Television interview. “Europe has to stabilize, we need further evidence of cyclical improvement here in the U.S. and a little less volatility. When we get those things, we believe the cyclical bull market will resume.”
The Chicago Board Options Exchange Volatility Index, the benchmark gauge of U.S. stock options known as the VIX, jumped 30 percent to 45.79, its highest level since March 20, 2009. The gauge usually goes up as stocks fall on rising demand for options to protect against further losses. U.S. May options expire tomorrow.
“It adds to the pressure,” Stephen Lieber, chief investment officer of Alpine Woods Capital Investors LLC, which manages more than $7 billion from Purchase, New York, said of options expiration. “People are particularly nervous about the outlook of Europe.”
Naked-Short Ban
Stocks plunged yesterday as German Chancellor Angela Merkel’s unilateral effort to control what she called “destructive” markets rattled investors. The German ban on some bearish bets against financial companies and government bonds wasn’t replicated in other European states and European Central Bank council member Nout Wellink said Germany should have consulted other countries before introducing the ban.
The S&P 500 Financials Index tumbled 4.7 percent today, with Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. pacing declines among all 79 companies.
President Barack Obama said the financial regulation overhaul moving through Congress will help the economy and protect consumers by bringing greater accountability to Wall Street.
The “hordes of lobbyists” from financial firms have failed to block the legislation, which will bring “sensible” rules to the market place, Obama said at the White House after the Senate voted 60-40 to clear the way for a final vote on the legislation. The measure would create a consumer financial- protection bureau at the Federal Reserve, overhaul rules for hedge funds and derivatives, and create a mechanism for dissolving failed firms whose collapse would roil the economy.
European Stocks
Only 30 of 600 stocks rose in Europe’s Stoxx 600. Yesterday’s 3 percent plunge left the benchmark gauge trading at less than 15 times its companies’ reported earnings, near the lowest level since December 2008. National Grid Plc, the operator of the U.K.’s power and gas networks, slumped 7 percent in London after announcing a 3.2 billion-pound ($4.6 billion) rights issue. SABMiller Plc, the world’s second-largest brewer, tumbled 6 percent as earnings missed estimates.
The MSCI Emerging Markets Index fell 3.1 percent as China’s Shanghai Composite Index slipped 1.2 percent, Russia’s Micex Index dropped 4.3 percent and Turkey’s ISE National 100 Index lost 4.4 percent. Dubai’s DFM General Index climbed 0.4 percent after creditors of Dubai World agreed to restructure $23.5 billion of liabilities as the state-owned holding company seeks to resolve a debt crisis that roiled global markets last year.
‘Unchartered Waters’
The global slide in equities may worsen and inflows to Treasuries will increase amid concern that Europe’s debt crisis will derail global growth, said Mohamed A. El-Erian, chief executive officer of Pacific Investment Management Co.
“This is not a typical retracement,” El-Erian, 51, whose firm runs the world’s biggest bond fund, wrote in an e-mail. “We are in uncharted waters on account of several issues, including what is going on in Europe and other important structural regime changes. In economic terms, European developments are unambiguously bad for global growth.”
The 10-year Treasury yield touched 3.2 percent today, the lowest level since Dec. 1. Yields on British, French and German 10-year bonds lost at least eight basis points, while Italy’s and Spain’s rose at least five basis points.
The benchmark U.S. Treasury note’s yield may drop to 2.5 percent as investors lose confidence in some European nations’ ability to repay their debts, Royal Bank of Scotland Group Plc said.
‘Political Risk’
“It’s difficult trading Treasuries right now because we are trading almost solely on European political risk,” said Donald Ellenberger, who oversees about $6 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh. “I do think that it’s safe to say that a lot of people have underestimated how far down yields could fall from a problem that started in a relatively tiny country.”
The euro erased earlier losses against the dollar amid speculation the Swiss National Bank sought to support the franc drove traders to theorize that the European Central Bank may do the same for the shared currency. The euro rose against all 16 major counterparts except the yen, gaining more than 3 percent against the Canadian dollar, the South Korean won, Brazil’s real and the Australian dollar.
Germany Vote on Bailout
Volker Kauder, who heads Chancellor Angela Merkel’s Christian Democratic alliance in parliament, said the almost $1 trillion emergency lending package for indebted European nations should be approved when it goes to a vote tomorrow. The three parties in Merkel’s coalition, which together have 332 of the 622 seats in the lower house of parliament, conducted a trial vote today, Kauder told reporters in Berlin. Seven lawmakers voted against and two abstained, giving the required majority to approve the bill, he said.
Crude oil tumbled 2.7 percent to $68.01 a barrel in New York and touched $64.24, the lowest level since July, as stocks fell and the euro weakened.
The cost to protect against defaults on U.S. corporate bonds rose to the highest since May 6, trading in a benchmark credit derivatives index shows. The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, increased 11 basis points to a mid-price of 124.5 basis points.