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Stocks Tumble On Weakness In Banks, Health Care

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Preston Waters

The major U.S. equity averages fell sharply Thursday, led by financials as JPMorgan Chase (JPM) shares tumbled amid worries about its ballooning derivatives-related trading losses.

A gloomy outlook for the two-day eurozone summit and more weak U.S. economic indicators only added to the erosion of investor confidence. The Supreme Court’s decision to uphold the health care legislationchampioned by President Barack Obama was weighing on most stocks in the sector with managed care companies getting hit particularly hard.

At last check, the Dow Jones Industrial Averagewas down 131 points, or 1.04%, at 12,496. The blue-chip index, which began the day up 3.4% so far in 2012, scraped a low of 12,462 earlier in the session.

The S&P 500 was down 13 points, or 0.99%, at 1319, putting its two-day winning streak in jeopardy.

The Nasdaq was falling roughly 39 points, or 1.37%, at 2836.

The VIX, which measures market volatility through options activity in the S&P 500, was jumping more than 6% to 20.69. A move above 20 is viewed as indicative of rising market fear.

The sectors getting hit hardest were financials, conglomerates, technology and basic materials. All 10 S&P 500 large-cap sectors were trading lower.

All 30 components were down, led by Bank of America (BAC), JPMorgan Chase,Intel (INTC), and Microsoft (MSFT).

JPMorgan shares were off nearly 4% following a The New York Times report that said the losses tied to the firm’s $2 billion hedging-related trading debacle could balloon to as much as $9 billion. The report cited people who have been briefed on the situation. Previous reported estimates had the bank’s potential liability topping out at around $5 billion.

The Times said JPMorgan is now out of more than half of the trade and may be completely free this year. JPMorgan plans to disclose part of the total losses on the hedging bet on July 13, when it reports its second-quarter results.

Overall, decliners were outpacing gainers by a ratio of more than 2-to-1 on the New York Stock Exchange and roughly 3-to-1 on the Nasdaq.

The meeting of Europe’s leaders taking place in Brussels was a major worry for Wall Street on Monday but its importance seems to have faded as expectations dissipated that it would yield substantial progress on a unified plan to address the region’s debt crisis.

“Expectations for the summit seem to be so low as to create the risk of a positive surprise (perhaps on banking integration),” said Paul Donovan, a global economist with UBS. “However, there is also a credibility deficit around euro policy, so any surprise would need to overcome expectations and the credibility shortfall to prevent cynicism re-emerging.”

The summit could extend into the weekend.

“Europe continues to generate a great deal of heat but very little light,” a Birinyi Associates report said. “While the Greek drama has slowed somewhat with their election, the crisis is far from over. Now Spanish banks are the concern d’jour while Italy and the fate of the Euro are right behind.”

Birinyi noted that while it continues to be optimistic about the stock market, it also advises caution as there are still too many variables that are beyond the investor’s capability to absorb and forecast. Europe is one of them, as well as the slowing U.S. economy, and economies of China, India and Brazil; concerns about more financial regulation following the JPMorgan Chase, and MF Global debacles, and recent downgrades of banks by Moody’s; and the disillusioning impact of the problem that plagued Facebook’s (FB) initial public offering.

In this environment, the firm said, it would not necessarily reduce exposure to stocks except to “cull” names in a portfolio that haven’t performed as expected; stocks which someone said would be taken over but haven’t; stocks whose dividend is not as attractive as when they were initially bought; or stocks that haven’t rallied with the market.

The FTSE in London was slipping 1.11% and the DAX in Germany was sliding 1.27%. The Hong Kong Hang Seng index settled down by 0.79% and the Nikkei in Japan closed ahead by 1.65%.

In U.S. economic news, the Labor Department reported Thursday that initial jobless claims for the week ended June 23 fell 6,000 to 386,000 from the previous week’s upwardly revised figure of 392,000, foreshadowing weakness in the upcoming monthly jobs report. Economists were calling for initial claims of 385,000, according to Briefing.com.

The four-week moving average was 386,750, a decrease of 750 from the previous week’s average of 387,500.

Continuing claims for the week ended June 16 was 3.296 million, a decrease of 15,000 from the preceding week’s level of 3.311 million.

First quarter gross domestic product remained at the 1.9%, as expected, according to a final read by the Commerce Department, and continues to represent a slowing from the 3% gain reported in the fourth quarter of 2011.

RBC economists noted that this latest report does not alter the picture of the U.S. economy growing at a “sub-potential rate.”

August crude oil futures fell $1.68 to $78.53 a barrel. August gold futures shed $23.70 to $1,554.70 an ounce.

The benchmark 10-year Treasury was up 15/32, diluting the yield to 1.572%, while the greenback was up 0.25%, according to the dollar index.

In corporate news, the board of News Corp. (NWSA) unanimously approved a plan to split the media giant into two, separating its entertainment operations from its smaller publishing business. The split was formally announced early Thursday morning.

One company will house entertainment businesses like 20th Century Fox, Fox broadcast network and Fox News Channel, while the other would house the publishing assets, which include the The Wall Street Journal and HarperCollins book publishing. Shares were down more than 1.5%.

Family Dollar Stores (FDO) reported third-quarter net income Thursday of $124.5 million, or $1.06 a share, up from year-earlier earnings of $111.1 million, or 91 cents a share. On average, analysts were anticipating third-quarter profit of $1.07 a share.

Family Dollar said it expects fourth-quarter same-store sales to rise between 5% and 7% and projects fourth-quarter earnings per share of between 71 cents and 81 cents a share. For the fourth quarter, analysts are expecting earnings of 77 cents a share. Shares were falling nearly 2%.

Nike (NKE), the sneaker maker, is expected by analysts Thursday to post a fiscal fourth-quarter profit of $1.37 a share on revenue of $6.51 billion after the markets close. Shares were falling 1.5% ahead of the report.

The Street

Preston Waters

Preston Waters

Editor

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