Dow drops 103 points

Delta’s news led many investors to wonder whether other companies may fall victim to high energy costs, and added to Wall Street’s now-chronic concerns that high oil prices may lead to an economic slowdown, inflation, or a worst-case combination of both.

“A lot of this downturn today coincided with Delta’s announcement and the fact that crude was above US$52 (€40.38) per barrel,” said Brian Williamson, an equity trader at The Boston Company Asset Management.

“That’s got to make you concerned about who’s next as far as companies go and whether this will really hit consumer spending.”

In addition, analysts speculated that several global hedge funds had suffered losses from holdings in General Motors’ stock and its bonds – downgraded to “junk” status last week.

The rumours were unsubstantiated, but were enough to prompt edgy investors to sell.

The Dow Jones industrial average fell 103.23, or 0.99%, to 10,281.11.

Broader stock indicators also fell sharply. The Standard & Poor’s 500 index was down 12.62, or 1.07%, at 1,166.22, and the Nasdaq composite index lost 16.90, or 0.85%, to 1,962.77.

The bond market rallied as stocks dropped, with the yield on the 10-year Treasury note skidding to 4.21%, down from 4.28% late on Monday. The dollar was mostly lower against other major currencies, while gold prices rose.

Hedge funds – which invest in a wide variety of stocks, bonds and derivatives to maximise returns and are considered riskier than typical stock or mutual fund investments – were said to have been hit hard following the debt downgrades, which eroded the value of GM’s bonds, and the significant investment in GM by billionaire investor Kirk Kerkorian’s Tracinda Corp.

“Obviously GM’s stock got a boost last week on the Tracinda offer, then the bonds got crushed by downgrades, so they would’ve gotten hurt on both sides of that trade,” said Todd Clark, head of listed equity trading at Wells Fargo Securities.

“Against the backdrop of crude trading higher, it’s a little unsettling.”

Despite the hedge fund furore, GM’s stock stayed afloat, rising 20 cents to 31.53.

Crude prices were volatile ahead of tomorrow’s government energy inventory report, which often moves crude prices substantially. After rising as high as US$53.10 (€41.24), a barrel of light crude for June delivery settled at US$52.07 (€40.44), up 4 cents, on the New York Mercantile Exchange.

While well off their US$58(€45.04)-per-barrel highs, the consistently high prices for oil have exacerbated Wall Street’s worries about the economy.

Delta tumbled 10%, or 33 cents, to US$2.97 (€2.31), after the airline warned that it would record substantial losses for the rest of the year, due in great part to high jet fuel prices. It said it may need to file for bankruptcy if its cash reserves fall too low or creditors call in the airline’s debts.

In the financial sector, Morgan Stanley fell 1.33 to 49.42 as Chief Executive Phil Purcell told an investor conference the Discover card spinoff would hurt revenues, and that the second quarter was shaping up to be difficult.

Morgan Stanley executives also said more employee departures could be forthcoming, but that the company had a deep pool of talent.

Cisco Systems was unchanged at 18.21 ahead of its earnings report, which was released after the close. Cisco beat Wall Street earnings forecasts by a penny per share and had strong revenue growth. The stock added 8 cents to 18.29 in after-hours electronic trading.

The Wall Street Journal reported that the problems plaguing insurer and Dow component American International Group may have involved more people than just the two recently departed executives, including former Chairman Maurice “Hank” Greenberg. AIG lost 1.31 to 53.27 on the news.

Declining issues outnumbered advancers by nearly 3 to 1 on the New York Stock Exchange, where volume totalled 1.48 billion shares, compared with 1.36 billion on Monday.

The Russell 2000 index of smaller companies was down 7.87, or 1.31%, at 595.04.