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Wall Street slides as investors dump financials

INVESTORS are having doubts about banks' recent profit reports and wondering whether the better-than-expected performance masks larger problems with bad debt.

Stocks fell sharply yesterday as investors sold financial stocks and locked in profits after a six-week rally. The major indexes tumbled 2-3 percent, including the Dow Jones industrial average, which fell 230 points.

Worries about the financial industry overshadowed Oracle Corp.'s announcement that it would acquire Sun Microsystems Inc. for US$7.4 billion and a US$6 billion bid by PepsiCo Inc. to buy its two biggest bottlers.

Drops in commodities like oil weighed on energy and materials stocks.

The selling came at the start of the busiest week yet for companies reporting results from the first three months of the year. Investors are looking for signals that a rally from 12-year lows in early March can continue.

Wall Street has been emboldened by tentative signals that the economy could be stabilizing, but after a 24 percent surge in the Dow Jones industrial average some investors are asking whether the market has risen too quickly.

Joe Saluzzi, co-head of equity trading at Themis Trading LLC, said traders are now viewing bank earnings with more skepticism amid concerns that even the better-than-expected results are disguising problems. Income from trading and low-cost borrowing rates have boosted results but not erased more difficult problems with bad debt, he said.

"They're looking at bank numbers and are saying they are not that great," Saluzzi said.

In midday trading, the Dow fell 231.30, or 2.8 percent, to 7,900.03.

Broader stock indicators also lost ground. The Standard & Poor's 500 index fell 29.53, or 3.4 percent, to 840.07, and the Nasdaq composite index fell 58.45, or 3.5 percent, to 1,614.62.

About 10 stocks fell for every one that rose on the New York Stock Exchange, where volume came to 605 million shares.

Concerns about the sustainability of bank earnings weighed on financial stocks. Bank of America reported earnings that were higher than expected in the first quarter but also set aside US$13.4 billion to cover losses on souring debt. The stock fell 16.2 percent.

Citigroup Inc. fell 15.6 percent, while JPMorgan lost 4.5 percent.

Jeffrey Frankel, president of Stuart Frankel & Co. in New York, said the retreat in financial stocks is welcome after their sharp rise from early March since rising too quickly could endanger their gains. Many bank stocks have doubled in only weeks.

"These banks have had a tremendous run," Frankel said. "Now you're hearing the bearish camp speak up a little bit."

Investors are also cautious about financials after The New York Times reported that the White House and the Treasury Department could avoid having to ask for more money beyond the US$700 billion already allocated for the government's bank rescue fund by converting the government's loans into common stock. Such a move would give the government a controlling stake in banks.

Wall Street was more upbeat about the Oracle deal, which carries a 42 percent premium to Sun's Friday closing stock price of US$6.69. Sun jumped 36 percent, while Oracle slipped 2.7 percent.

Beverage and snack maker PepsiCo Inc. offered to acquire Pepsi Bottling Group and PepsiAmericas in an effort to cut costs. Pepsi lost 3.9 percent, while Pepsi Bottling and PepsiAmericas both jumped about 21 percent.

In earnings news, drug maker Eli Lilly & Co.'s first-quarter earnings rose 24 percent on higher sales of the antidepressant Cymbalta and as costs for Humalog, a form of insulin Lilly makes, remained flat. Shares slipped 1.3 percent.

Hasbro Inc. fell 3.8 percent after the nation's second-largest toy maker said first-quarter profit fell 47 percent because of a stronger dollar and as retailers reduced inventory levels.

Investors are parsing earnings for information on the direction of the economy. Since March, figures on home sales, manufacturing, retail sales and even unemployment have signaled that the economy might not be worsening as quickly as it had been earlier in the year.

Light, sweet crude fell US$4.21 to US$46.12 a barrel on the New York Mercantile Exchange.

Occidental Petroleum Corp. lost 5.9 percent, while Dow Chemical Co. fell 8.2 percent.

In other market moves, the Russell 2000 index of smaller companies fell 23.33, or 4.9 percent, to 456.04.


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