Stocks hit lowest levels in over a year

Wall Street tumbles to 2006 levels as investors eye the biggest job losses in 5 years and more financial sector problems source

NEW YORK (CNNMoney.com) — Stocks tanked Friday, falling to the worst levels in nearly 18 months after a weak February employment report and more financial sector woes exacerbated recession fears.

Oil spiked to a record $106 a barrel before retreating a bit, the dollar continued its plunge and traders continued to pour money into government bonds.

The Dow Jones industrial average (INDU) lost 1.2%, falling to its lowest point since Oct. 11, 2006.

The broader Standard & Poor’s 500 (SPX) index fell 0.8%, closing at its lowest level since August 23, 2006. The Nasdaq composite (COMP) lost almost 0.4% and ended at its lowest point since Sept. 11, 2006.

All three major gauges had posted gains through the late morning, before turning lower and tumbling through the afternoon.

“You can see as a general rule that there’s a revulsion to any risk and a lack of confidence in the market,” said Bill Stone, chief investment strategist at PNC Wealth Management.

He said that the economy has probably been in a recession since the start of the year. However, at some point, probably in the next few months, investors will begin anticipating a recovery a few quarters out and start pushing stocks higher.

Job losses are the worst in five years. Employers cut 63,000 jobs in February, the biggest monthly cut in five years. That fell far short of expectations, which had called for employers to add 25,000 to their payrolls, according to a Briefing.com survey of economists. January’s job loss was revised to 22,000.

The unemployment rate, generated by a separate survey, fell to 4.8% from 4.9%, versus forecasts for a rise to 5%. But the drop was a result of less people being in the workforce. Average hourly earnings, the report’s inflation component, rose 0.3%, as expected, after rising a revised 0.3% in the previous month. (Full story).

The report is the latest indication that the economy is headed for a recession, if it isn’t in one already.

“The report was horrible,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc.

“Even the one bit that seemed like good news was bad news,” he said. “The unemployment rate went down, but it was because the labor force shrank, which is not good news.”

The stock reaction was initially muted as investors bet that the weak labor market would spur the Fed to aggressively cut interest rates at its next meeting on March 18. Investors also initially focused on news that the Fed was boosting the size of its upcoming bank auctions.

However, by late morning, stocks had turned negative, and the selloff accelerated in the afternoon.

Meanwhile, President Bush’s top economic advisor said Friday afternoon that the nation’s economic growth could fall into negative territory this quarter, in line with outside experts, but more dour than the White House has been.

President Bush, also speaking in the afternoon, said “it’s clear our economy has slowed.”

JP Morgan Chase said in a note Friday that the U.S. economy is two months into a recession.

More woes for financials. Citigroup (C, Fortune 500) said late Thursday that it was shaking up its residential mortgage business, cutting assets by $45 billion over the next 12 months and halving the number of loans to be held in its portfolio. (Full story).

Ambac Financial (ABK), the troubled bond insurer, said it had successfully raised $1.5 billion in capital by selling stock and convertible bonds, in a move meant to preserve its financial strength rating. The plan got a lukewarm response when first announced Wednesday, disappointing investors who were expecting a bigger bailout plan.

Meanwhile, lenders to Dutch bond fund Carlyle Capital have begun to liquidate securities in its $21.7 billion portfolio, the Associated Press reported. The company said it received substantial additional margin calls and default notices from its lenders. (Full story).

Margin calls require borrowers to pay back loans or offer more collateral.

Thornburg Mortgage (TMA) continued to plunge after the company revealed it can’t cover current margin calls and that it will restate past earnings to account for a decline in the value of its mortgage securities held in a portfolio at the end of 2007.

Blue-chip declines were broad based, with 23 out of 30 Dow issues falling, led by Alcoa (AA, Fortune 500), DuPont (DD, Fortune 500), Chevron (CVX, Fortune 500) and Exxon Mobil (XOM, Fortune 500).

Select technology gainers protected the Nasdaq composite index from the same kind of losses as the Dow and S&P 500.

Market breadth was negative. On the New York Stock Exchange, losers beat winners 3 to 2 on volume of 1.7 billion. On the Nasdaq, decliners also topped advancers by 3 to 2 on volume of 2.38 billion shares.

Fed to lend banks more cash. The central bank said it was taking more steps to try and ease the liquidity crunch by increasing the amount of money it would make available to banks in its auctions on March 10 and 24. The Fed will increase the size of the auctions to $50 billion each from the original $30 billion.

The Fed, which has undertaken a series of auctions to get banks the cash they need to make loans, also said that, starting Friday, it will begin a series of repurchase transactions that should eventually reach $100 billion.

Meanwhile, on Capitol Hill, a hearing was underway to discuss the February jobs report. A separate hearing was underway on executive compensation, focusing on the link between pay packages and the mortgage crisis.

And consumer confidence continued to slump, according to the RBC Cash index, which fell to a nearly 6-year low in early March.

Other markets. U.S. light crude oil for April delivery fell 32 cents to settle at $105.15 a barrel on the New York Mercantile Exchange, after touching an all-time trading high of $106.54 earlier. Oil prices ended the previous session at a record high of $105.47.

In currency trading, the dollar touched a fresh record low against the euro on the weak jobs report. The greenback fell to its lowest level versus the yen in three years.

COMEX gold for April delivery fell $2.60 to $974.50 an ounce. Gold prices, along with other dollar-traded commodities, have surged in response to the weak greenback. But after a big rally, prices have retreated for the last two sessions.

Treasury prices rallied, lowering the yield on the benchmark 10-year note to 3.54% from 3.58% late Thursday as investors sought the relatively safer-haven of government debt. Bond prices and yields move in opposite directions.