May 11, 2005 in Business

Hedge fund rumors prompt selling

Associated Press
 

Stocks tumbled Tuesday as rising crude oil prices prompted Delta Air Lines Inc. to warn of possible bankruptcy and Wall Street’s rumor mill chewed over the possibility of hedge fund losses due to steep investments in troubled General Motors Corp. The Dow Jones industrial average shed more than 100 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 $52 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 rumors were unsubstantiated, but were enough to prompt edgy investors to sell.

The Dow fell 103.23, or 0.99 percent, to 10,281.11.

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

The bond market rallied as stocks dropped, with the yield on the 10-year Treasury note skidding to 4.21 percent, down from 4.28 percent late 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 maximize 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 furor, GM’s stock stayed afloat, rising 20 cents to $31.53.

Crude prices were volatile ahead of today’s government energy inventory report, which often moves crude prices substantially. After rising as high as $53.10, a barrel of light crude for June delivery settled at $52.07, up 4 cents, on the New York Mercantile Exchange. While well off their $58-per-barrel highs, the consistently high prices for oil have exacerbated Wall Street’s worries about the economy.

Declining issues outnumbered advancers by more than 5 to 2 on the New York Stock Exchange, where preliminary consolidated volume came to 1.89 billion shares, compared with 1.84 billion on Monday.

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

Overseas, Japan’s Nikkei stock average fell 0.11 percent. In Europe, Britain’s FTSE 100 was down 0.36 percent, Germany’s DAX index dropped 0.96 percent, and France’s CAC-40 lost 0.50 percent.

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