Not the time for toll roads: Dow plunges after warning of 'financial tsunami'

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Dow plunges after warning of ‘financial tsunami’
By Tom Bawden in New York
The Times Online
September 5, 2008

Weary investors in the United States received a further pummelling yesterday as data showed new unemployment claims at a near-five-year high last week, a leading fund manager gave warning that America faced a “financial tsunami” and key retailers released disappointing sales figures.

The mounting nervousness about America’s economy dragged down shares. The Dow Jones industrial average fell 344.60 points, or 3 per cent, to 11,188.20, and the S&P 500 closed down by 38.20 points, or 3.3 per cent, at 1,236.80 points.

The Labour Department reported that the number of Americans claiming unemployment benefits for the first time rose by 15,000 to 444,000 in the week to August 30. The disappointing figures came after companies cut staff in the face of a weakening global economy and contrasted with a consensus forecast that new jobless claims would fall to 420,000.

The data, combined with a call by the manager of the world’s biggest bond fund for the Government to inject more money into the banking system, spooked US investors already jittery about the outlook for the global economy. Bill Gross, co-chief investment officer of Pimco, said that the US was confronted by “systematic debt liquidation”. He added: “Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami.”

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Mr Gross said: “If we are to prevent a continuing asset and debt liquidation of near-historic proportions, we will require policies that open up the balance sheet of the US Treasury.”

Hugh Johnson, head of Johnson Illington Advisors, the US fund manager, said: “The stock market declines are more than just the jobless figures. Although they are not good, it is more that they tap into growing concerns that the global economy is weaker than expected and that the problems facing financial institutions are not going away.”

Furthermore, Gap and Abercrombie & Fitch, the clothing retailers, and Target, the discount retailer, all reported a decline in same-store sales for August. Gap said that its sales fell by 8 per cent in August.

Saks, the luxury department store chain, and Limited Brands, the owner of the Victoria’s Secret lingerie chain, also reported weaker sales.

A separate Labour Department report provided a glimmer of hope, announcing that productivity – the amount of output for every hour of work – rose to an annualised rate of 4.3 per cent in the second quarter, one percentage point above consensus forecasts. Analysts said that the higher productivity was encouraging because it helps to keep a lid on inflation.