- The Washington Times - Wednesday, May 17, 2006

From combined dispatches

Stocks tumbled after the latest government report on inflation shocked investors and increased speculation that the Federal Reserve may have to keep raising interest rates and restrain the economy.

Goldman Sachs Group, Merrill Lynch & Co. and Morgan Stanley helped lead declines among financial companies, whose earnings are sensitive to rate changes. General Motors Corp. tumbled after saying its chief accounting officer resigned.

“The CPI [Consumer Price Index] data really kicked the market in the teeth today,” said Ken Tower, chief market strategist for Schwab’s CyberTrader. However, he said stocks are now oversold after several days of steep losses, suggesting that investors may start looking for positive signs to spur buying.

Exxon Mobil Corp. and Alcoa Inc. paced a sell-off in commodity producers, the market’s top performers this year, after government figures showed consumer prices rose more in April than economists forecast. Losses among technology stocks sent the Nasdaq Composite Index lower for the year.

“It’s finally dawning on people that the Fed is going to have to keep raising rates until the economy slows,” said Edgar Peters of PanAgora Asset Management. “It’ll be a more difficult year than they’d hoped.”

The Dow Jones Industrial Average dropped 214.28, or 1.9 percent, to 11,205.61. The Standard & Poor’s 500 Index lost 21.76, or 1.7 percent, to 1270.32 with all 10 of industry groups losing more than 1 percent. The Nasdaq decreased 33.33, or 1.5 percent, to 2195.80 and is now down 0.4 percent for 2006.

The Russell 2000 Index of smaller companies tumbled 11.62, or 1.58 percent, to 725.85.

More than six stocks fell for every one that rose on the New York Stock Exchange. About 2.09 billion shares changed hands on the Big Board, the heaviest volume since January.

Inflation concerns rippled across the Atlantic where European stocks fell the most in three years.

Federal Reserve Chairman Ben S. Bernanke “is taking a wait-and-see attitude,” said Scott Black of Delphi Management. “He will be compelled to raise rates” another one or two times if more numbers point to accelerating inflation.

The yield on the benchmark 10-year Treasury note rose the most in two weeks, increasing more than five basis points to 5.15 percent.

Goldman Sachs, the No. 1 independent securities firm, tumbled $4.49 to $148.21. No. 2 Merrill slid $2.21 to $70.49. Bank of America, the No. 2 U.S. bank, retreated $1.08 to $48.56.

Traders said hedge funds and other investors exacerbated the drop by selling borrowed shares as a bet on further declines.

“Investors are taking any opportunity to sell short,” said trader Ryan Larson of Voyageur Asset Management.

Applied Materials Inc. fell 92 cents to $16.93. Orders this quarter will rise 5 percent to 10 percent, well below estimates, from the period just ended, the company said.

Materials and energy shares dropped the most among the 10 S&P; 500 industry groups, down 2.7 percent and 2.6 percent, respectively. The energy index was up 12 percent for the year before yesterday and the materials index had gained 9.7 percent, the best and third-best performance in the S&P; 500.

Alcoa retreated $1.48, or 4.4 percent, to $32.16 for the worst performance in the Dow. Freeport-McMoRan Copper & Gold tumbled $3.69 to $56.94.

Crude oil for June delivery lost 1.2 percent to $68.69 a barrel after a government report showed U.S. gasoline supplies rose. Exxon sank $1.78 to $60.18.

Hewlett-Packard Co. provided one bright spot, climbing $1.05, or 3.4 percent, to $32.16 for the top gain in the Dow. The world’s second-largest personal computer maker reported quarterly profits rose 51 percent, with the PC unit’s earnings jumping 69 percent, as Chief Executive Officer Mark Hurd cut prices. Hewlett-Packard also forecast sales and profit ahead of estimates in the current quarter.

The dollar continued losing ground to the yen and weighed on the market’s mood, CyberTrader’s Mr. Tower said, since the retreat could propel inflation.

“The dollar has depreciated quite sharply since the Fed started talking about stopping its rate hikes,” Mr. Tower said. “It’s the speed of the depreciation that is worrying the currency market. The dollar is down 6 percent in one month, which is a lot.”

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