Stocks decline as AIG reveals need for cash, oil surges

Friday, May 09, 2008 - 07:26 PM

By TIM PARADIS
AP Business Writer

NEW YORK

Wall Street retreated Friday as investors contended with two of the biggest threats to the economy: fallout from turmoil in the credit market and surging energy prices. The Dow Jones industrial average lost more than 125 points.

Insurer American International Group Inc. rattled investors after posting a wider-than-expected first-quarter loss, rekindling investors´ anxiety about the strained state of the global financial system. AIG reported a loss of $7.81 billion _ its second straight quarterly loss _ and revealed plans to raise $12.5 billion in the coming months. The world´s largest insurer, like many of its peers in the financial services sector, has seen its investments in the credit markets plunge in value.

Meanwhile, rising crude oil prices remained a source of worry for investors, as they had much of the week and in recent months. Oil futures rose above $126 a barrel for the first time, further stoking Wall Street´s concerns about inflation that could curtail consumer spending. Light, sweet crude rose as high as $126.20 on the New York Mercantile Exchange before settling at a record $125.96. For the week, oil jumped nearly $10.

"I think what we´re seeing so far is a reaction principally to the AIG news," said Phil Orlando, chief equity market strategist at Federated Investors. "That news came as something of a surprise to some and a wake-up call to most that the financial-service companies are not yet out of the woods."

But Orlando noted that the market has pulled back this week after a sizable rebound in the last two months and that some investors might be eager to lock in profits while Wall Street irons out some concerns about the financial sector.

"Our view has been that the market, generally speaking, is in pretty good shape with the exception of the financial service companies and the consumer dictionary companies," he said, noting that the news from AIG is an important reminder of the troubles remaining among financials.

In late afternoon trading, the Dow fell 125.22, or 0.97 percent, to 12,741.56.

Broader stock indicators were also lower a day after the stock market notched a modest advance. The Standard & Poor´s 500 index fell 9.85, or 0.70 percent, to 1,387.83, and the Nasdaq composite index fell 8.22, or 0.34 percent, to 2,443.02.

Bond prices rose as investors sought the safety of government debt. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.76 percent from 3.78 percent late Thursday.

Gold prices advanced, while the dollar traded mixed against other major global currencies.

The economic figures arriving Friday underscored the slowdown in the U.S. economy. The Commerce Department said the U.S. trade deficit narrowed in March as demand for imports registered the biggest decline since the last recession was ending. The deficit stood at $58.2 billion, a decrease of 5.6 percent from February. The 2.9 percent drop in demand for imports was the steepest monthly decline since December 2001 _ a month after the last recession ended.

In corporate news, AIG fell $3.60, or 8.2 percent, to $40.55 after reporting its loss. The stock was by far the steepest decliner among the 30 that comprise the Dow industrials.

Citigroup Inc. said it hopes to shed about $500 billion in assets and increase revenue by 9 percent over the next few years as it tries to recover from big losses tied to deterioration in the mortgage and credit markets. Citi, one of the Dow 30 stocks, slipped 66 cents to $23.64.

General Motors Corp., also a Dow component, said in a regulatory filing it would provide financial support to help settle the 10-week strike at auto parts supplier American Axle and Manufacturing Holdings Inc. GM fell 76 cents, or 3.6 percent, to $20.39.

Consumer electronics chain Circuit City Stores Inc. said it received a letter from suitor Blockbuster Inc. that the company´s largest shareholder, financier Carl Icahn, is prepared to buy Circuit City even if the video rental chain can´t win the necessary financing or shareholder approval.

Circuit City jumped 34 cents, or 7.1 percent, to $5.13, while Blockbuster slipped 3 cents to $2.65.

Investors´ caution Friday precedes what will likely be a busy week of economic news now that the flow of quarterly earnings reports is beginning to ebb.

"Next week I think will be a fairly important economic week," Orlando said, pointing to expected reports on retail sales, retail inventories, industrial production and regional manufacturing.

Declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange, where volume came to 827.6 million shares.

The Russell 2000 index of smaller companies fell 0.67, or 0.09 percent, to 718.88.

Overseas, Japan´s stock market fell 2.06 percent. Britain´s FTSE index fell 1.05 percent, Germany´s DAX index fell 0.97 percent, and France´s CAC-40 fell 1.88 percent.

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