Brutal February for Blue Chips

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FEBRUARY 27, 2009
Brutal February for Blue Chips
By PETER A. MCKAY

A late burst of selling sealed a dismal finish for the stock market, which hit a fresh 12-year low on Friday as Citigroup sold a bigger chunk of itself to the government and General Electric slashed its dividend, spooking investors who were already jittery.

The Dow Jones Industrial Average dropped 119.15 points, or 1.7%, to end at 7062.93. The blue-chip benchmark ended down 937.93 points, or 11.72% on the month -- the worst percentage drop for February since 1933, when it fell 15.62%. The Dow industrials have fallen six months in a row and are now more than 50% off their record highs hit in October of 2007.

The S&P 500 fell 17.74 points, or 2.4%, to 735.09. Its financial sector dropped 6.5% and its health-care sector sank 4% on fears that President Barack Obama's reform plans will carve into the profits of drug makers and insurers. The S&P is off 53% from its October 2007 peak and has now seen its worst six-month drop in percentage terms -- 42.7% -- since 1932, when it dropped 45.44% in the six months ending in June.

Major market yardsticks broke through one long-term low after another this week, but the slide never quite gained intraday momentum akin to that seen during the market's late-2008 plunge. Many market veterans now expect the market to continue such a slog in the days ahead, with both new lows and short-term rallies likely.

"This decline does put some emphasis to the downside going into next week, but I'm still in a wait-and-see mode," said John Bollinger, president of Bollinger Capital Management in Manhattan Beach, Calif.

General Electric shares fell 6.5% after the conglomerate said it planned to cut its quarterly dividend to 10 cents a share from 31 cents in a move that it hopes will save $9 billion and preserve its AAA credit ratings. GE, which has shed 75% of its market value over the past year, had said that it would preserve the dividend, but analysts and investors were skeptical.

Thirty-six companies in the S&P 500 have cut their dividends since the mid-September meltdown of Lehman Brothers Holdings marking the start of a full-blown financial crisis that has since tightened its grip on the global economy. That pace of reductions appears unprecedented over any three- or four-month period, with more cuts likely on the way, said Ashwani Kaul, research director at Thomson Reuters.

"If anything, I would expect the pace to pick up over the next few months," he said. "Let's face it, these companies are doing whatever they need to preserve their capital."

Concern about the financial sector has shaped trading around the world for months, and the banking sector remained a dominant theme on Friday.

Over the last few weeks, concern that banks would need even more capital has damped share prices across the sector and the few traders willing to even play in bank stocks are mostly holding short positions. According to Data Explorers, a short-selling data research firm based in New York and London, 2.6% of Citigroup is now out on loan, up nearly 38% from just less than two weeks ago.

"I don't plan on buying any banks anytime soon. That industry is going to zero, some winners, some losers," said Keith Walter, a portfolio manager with Artio Global Investors.

Citigroup unveiled a stock swap that would leave the government owning more than a third of the bank. The move is an acknowledgement that the billions that the U.S. has already deployed to aid Citi haven't been enough to stop its slide. Citi also said that it will record $10 billion in write-downs in its fourth quarter, boosting the year's net loss to $27.7 billion. Moody's and S&P cut their ratings on the bank's preferred stock.

The arrangement inflamed some investors' fears of bank nationalization.

"What I have more of a problem with than nationalization itself is the fact that [the government] debated nationalization for a couple of weeks," said strategist Jim Paulsen, of Wells Capital Management in Minneapolis. "That debate in itself was harmful because it created a run on the bank stocks."

The bank's stock plunged by 39% and caused a selloff in the shares of many of its peers. Bank of America, which has seen its shares battered in recent weeks in a similar manner as Citi, dropped 26%. The KBW Banks Index fell 8.7%.

The Nasdaq Composite Index fared better on the day than the other major indexes, falling 13.63 points, or 1%, to 1377.84. Intel, Research In Motion and Google managed to stake out gains. Dell jumped by 3.9% after the computer maker reported a steep loss but investors welcomed its efforts to trim its costs.

Gross domestic product decreased at a seasonally adjusted 6.2% annual rate October through December, the Commerce Department said Friday in a new, revised estimate of fourth-quarter GDP. The 6.2% decline meant the worst quarterly showing for GDP since a 6.4% decrease in first-quarter 1982 GDP.

In its original estimate, issued a month ago, the government had reported fourth-quarter 2008 GDP fell 3.8%. The sharply lower revision to a decline of 6.2% reflected adjustments downward of inventory investment, exports and consumer spending.

Treasury prices were mixed, with longer maturities sliding. The dollar gained against the euro but slid against the yen. Stocks in Europe slid on the Citi deal and U.S. economic news, with the FTSE 100 ending down 2.2%.

—Kejal Vyas contributed to this article

Write to Peter A. McKay at peter.mckay@wsj.com