Stock rally short-lived

NEW YORK —  Steep drops in oil, gold and other raw materials Wednesday triggered heavy selling of commodity-related stocks, leading a broad market rout and dashing hopes that Wall Street would build on its big advance a day earlier.

Investors also were taken aback by new worries about the financial outlook for Merrill Lynch and other investment banks -- a reminder that the industry still faces major problems despite the Federal Reserve’s efforts to overcome the credit crunch.

Key market indexes gave back more than half their gains from Tuesday’s rally. The Dow Jones industrial average sank 293.00 points, or 2.4%, to 12,099.66, surrendering more than two-thirds of its 420-point advance in the previous session, after the Fed slashed short-term interest rates again.

The Standard & Poor’s 500 index skidded 32.32 points, or 2.4%, to 1,298.42, after surging 54 points Tuesday.

The Nasdaq composite was off 58.30 points, or 2.6%, to 2,209.96, following a 91-point rally the day before.

“It’s really disappointing because there have been some good signs from the markets but there’s no follow-through or consistency,” said Hugh Johnson, chief investment officer at Johnson Illington Advisors in Albany, N.Y. “The confidence is very low.”

Today’s session will be this week’s last: U.S. markets will be closed Good Friday.

Commodities tumbled as speculators cashed in some of their heady gains after months of rising prices.

Crude oil slumped $4.94, or 4.5%, to $104.48 a barrel. In its weekly report on energy use, the U.S. Energy Information Administration said consumption of oil and related products fell 5.8% in the last four weeks compared with a year earlier.

Gold, which on Monday closed above $1,000 an ounce for the first time, dived 5.8%, off $58.50 to $944.70 an ounce.

Other commodities down sharply included coffee, soybeans, wheat and cotton.

“It was pretty much across the board,” said William O’Neill, a partner at Logic Advisors in Upper Saddle River, N.J. “We had weakness in almost every commodity you can think of.”

The Reuters-Jefferies CRB index of 19 raw materials lost 4.1%. It’s down 6.7% for the week and is up 8.2% this year.

The plunge in commodity prices pushed the stock market down steadily through the day as energy and other natural resources shares tumbled.

In the energy sector, Exxon Mobil dropped $4.04 to $84.43; Apache sank $8.12 to $110.15.

Mining giant Rio Tinto plummeted $34.78, or 8.1%, to $395.50. Potash, which produces farm fertilizers, lost $16.27, or 10.1%, to $144.47. AK Steel slid $5.51, or 10%, to $49.96.

Hedge funds were heavy sellers of commodity futures, analysts said. Some said investors were selling to raise cash and reduce the amount of debt, or leverage, they had incurred in making their bets.

Commodities have surged in the last six months as speculators have jumped into one of the few areas of the markets with positive momentum.

“A lot of these markets had to a large extent really exceeded where they should have gone,” said Stephen Platt, commodities strategist at Archer Financial Services in Chicago.

Of course, falling commodity prices could help the economy by easing inflation worries. But investors failed to see much of a silver lining in the market action Wednesday.

Losers topped winners by more than 2 to 1 on the New York Stock Exchange.

Once again, some investors huddled into Treasury bonds for security. The yield on the two-year Treasury note fell to 1.46% from 1.61% on Tuesday.

In the financial sector, investors were spooked after Merrill Lynch sued to force a unit of bond insurer Security Capital Assurance to make good on its coverage of $3.1 billion in mortgage-related debt.

The lawsuit unnerved investors because it renewed concerns about so-called counter-party risk, the threat that some investment firms might default on their obligations on complex financial contracts. That could set off a chain reaction because of the web of interlocking trades that Wall Street companies have with each other.

Merrill’s shares slid $5.18, or 11%, to $41.45.

Among other brokerages, Goldman Sachs fell $9.10 to $166.49 and Lehman Bros. dropped $4.26 to $42.23. Shares of those firms had helped lead the powerful rebound in the financial sector Tuesday, after the companies reported quarterly earnings that were better than expected.

In another sign of worsening woes for real estate lenders, Merced, Calif.-based Capital Corp. of the West, the parent of County Bank, dived $6.90, or 65%, to $3.76.

The company late Tuesday said it delayed filing its 2007 annual report because it needed to make a “substantially greater provision for possible loan losses” as a result of the Central Valley’s real estate slump. Capital Corp. also said it found “material weaknesses in its credit/lending and accounting functions.”

Calabasas-based Beverly Hills Bancorp slumped 74 cents to $2.27, falling sharply for a second day after the company said Monday that it was unlikely to pay dividends in 2008 because of a “difficult economic environment.”

On the plus side, Fannie Mae gained $2.49 to $30.71 and Freddie Mac rallied $3.88 to $29.90 after their regulator eased capital requirements for the mortgage titans, enabling them to buy more loans.

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walter.hamilton@latimes.com