Wall Street falls further after big sell-off as Fed chairman warns of slower economic growth

By Tim Paradis

NEW YORK – Stocks extended their losses Thursday after Federal Reserve Chairman Ben Bernanke warned he expects a raft of economic troubles will cause business growth to slow and as a lackluster forecast from Cisco Systems Inc. made investors wary of technology stocks. The Dow Jones industrials fell more than 150 points after dropping 360 points Wednesday.

Bernanke, appearing before Congress’ Joint Economic Committee with the Fed’s economic forecast, said the central bank is tracking developments closely but didn’t offer solid evidence the bank is prepared to further cut interest rates. Cisco’s sales forecast further dampened investor enthusiasm as investors worried about spending.

The market’s renewed slide comes a day after stocks tumbled amid concerns about continuing credit woes, a weakening dollar and rising oil prices.

The market also had fresh reason for concern about toxicity within the credit markets. Morgan Stanley issued a detailed accounting of its exposure to subprime debt, pleasing investors by eliminating some of the uncertainty that has wracked Wall Street to varying degrees in recent months. But Morgan said late Wednesday its fourth-quarter profit could be reduced by $2.5 billion in write-downs related to troubles in the credit market, a reminder of the widespread damage from soured loans.

“There is still a lot of fear out there about what hasn’t has been uncovered yet about subprime issues,” said Brandon Thomas, chief investment officer of Portfolio Management Consultants, the investment arm of Envestnet Asset Management.

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    He contends concerns about bad credit brought by a spike in mortgage defaults have given rise to fears of an overall economic slowdown.

    “The worry was on the housing side – that it would cause a consumer spending slowdown. Now with the issues that we’re seeing in the credit sector, that’s causing a business-spending slowdown, which Cisco is alluding to.”

    In early afternoon trading, the Dow Jones industrial average fell 166.07, or 1.25 percent, to 13,133.95. The Dow at one point was off more than 200 points and its drop of more than 350 points Wednesday was the third decline of such magnitude in a month, offering the latest sign of how jittery many investors remain.

    Broader stock indicators declined. The Standard & Poor’s 500 index fell 22.22, or 1.51 percent, to 1,453.40, and the technology-heavy Nasdaq composite index fell 90.98, or 3.31 percent, to 2,657.78.

    Declining issues outnumbered advancers by more than 2 to 1 on the New York Stock Exchange, where volume came to a heavy 1.13 billion shares.

    Government bonds rose as stocks retreated. The yield on the 10-year Treasury note, which moves opposite its price, fell to 4.27 percent from 4.30 percent late Wednesday.

    The Chicago Board Options Exchange’s volatility index, known as the VIX, and often referred to as the “fear index,” which jumped nearly 24 percent Wednesday, rose 9.1 percent in Thursday’s session.

    The dollar was lower against most other major currencies, while gold prices rose.

    Light, sweet crude fell 72 cents to $95.65 on the New York Mercantile Exchange.

    Bernanke’s words – even those that might have helped ease some of Wall Street’s concerns – appeared to leave investors with little optimism.

    Bernanke acknowledged the market’s recent jitters but said he believes the economy will rebound from recent problems by the second half of next year. But he added that rising prices for oil and other commodities had stoked concerns about inflation and repeated the Fed’s assessment made last week that monetary policy seemed well-balanced to allow for growth while curtailing inflation.

    Thomas contends the Fed will only be able to do so much, particularly because a rate cut could give way to higher inflation and could further undermine the dollar.

    “It’s a real difficult time because whichever way they push and pull the level it causes problems,” he said.

    While investors parsed Bernanke’s comments for clues about the Fed’s plans, they also looked to mixed corporate news.

    Cisco fell $2.76, or 8.4 percent, to $29.99 after the world’s largest maker of networking equipment issued forecasts that disappointed Wall Street and stirred concerns of a further slowdown in spending by businesses.

    A narrower-than-expected third-quarter loss at Ford Motor Co. and word of a buyout offer in the mining sector weren’t able to sustain higher prices.

    Stripping out items that analysts typically exclude, Ford’s loss came to a penny a share. This was far less than the 46 cent-a-share loss analysts had been expecting on average, according to a Thomson Financial poll. Ford fell 7 cents $8.15.

    Mining company BHP Billiton PLC confirmed speculation it would go after rival Rio Tinto PLC, according to Dow Jones Newswires. While Rio Tinto rejected the offer, the notion that BHP would make a buyout offer given recent uncertainty in the world’s markets seemed to please investors. BHP Billiton fell $4.55, or 5.7 percent, to $75.80, while Rio Tinto surged $81.05, or 23 percent, to $438.55.

    And some well-known soft spots in the economy continued to show signs of distress. Luxury homebuilder Toll Brothers Inc. fell 77 cents, or 3.7 percent, to $20.26 after reporting its revenue and backlog in the fourth quarter fell sharply amid a supply glut.

    “What we’re seeing is classic late-cycle behavior in the market,” said Michael Jones, chief executive at Clover Capital Management in Rochester, N.Y., citing Wall Street’s recent volatility. “Weakening earnings prospects make for difficult markets. While the economy and earnings are still growing they’re growing at a decelerating rate.”

    The Russell 2000 index of smaller companies fell 11.72, or 1.51 percent, to 764.24.

    Overseas, Japan’s Nikkei stock average closed down 2.02 percent and Hong Kong’s Hang Seng index fell 3.19 percent. Britain’s FTSE 100 fell 0.05 percent, Germany’s DAX index rose 0.25 percent, and France’s CAC-40 fell 0.91 percent.