Insurance probe spooks Wall Street

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Wall Street stocks closed lower on Tuesday as Eliot Spitzer, the New York attorney general, gave markets an early taste of Halloween with his broadening probe of the insurance industry.

By the close, the Dow Jones Industrial Average lost 0.6 per cent to 9,897.55 while the broader S&P 500 index eased 1 per cent to 1,103.23. The technology-laden Nasdaq Composite lost 0 .7 per cent to 1,922.90.

On the anniversary of the 1987 market crash, fears that worse was yet to come in Mr Spitzer's investigation of insurance brokers and health insurance groups chilled any early optimism from a falling crude oil price and encouraging results from several leading companies.

Arthur Hogan, chief US markets analyst at Jefferies & Co, said: "We're seeing the Spitzer effect on the insurance stocks, where the market is throwing the baby out with the bath water . Then there is the election ... we don't like it being so close with two weeks to go, we're a forward pricing mechanism and we don't know what to price now."

He added that the sell-off was likely to be exaggerated and a rebound likely once markets got a clearer picture of the effects of Mr Spitzer's latest campaign against alleged corporat e malfeasance.

Health insurance shares saw broad selling after one company confirmed it had received a subpoena from Mr Spitzer's office. The insurer in question, Cigna, saw shares trim 10.3 per cen t off their value to $59.73 as UnitedHealthcare lost 9.3 per cent to $66.50 while Aetna fell 11.8 per cent to $86.17.

The insurance groups initially cited by Mr Spitzer continued to suffer as Marsh & McLennan was 5.8 per cent off at $24.10 while ACE lost 6.4 per cent to $33.10.

The "Spitzer effect" trumped comments by Alan Greenspan, the Federal Reserve chairman, who said that "household finances appear to be in reasonably good shape". Some bearish market wa tchers have long warned about excessive household indebtedness in the US and a possible retrenchment in consumer demand.

Among the key stocks battling the downward pressures on the the market yesterday was IBM, the world's biggest computer company, which saw shares rise 4 per cent to $89.37 after it reported after the market close on Monday. Flat net profit was eclipsed by the company's optimistic outlook, as net revenue rose 9 per cent in the quarter. Excluding costs associated with a legal settlement, net profit was b etter than forecasts.

Texas Instruments,which also reported after the close on Monday, beat expectations with its quarterly earnings and its shares rose 6.9 per cent to $22.55.

EMC shares rose 1.1 per cent to $12.28 after the data storage company reported an in-line 37 per cent rise in third-quarter profit as it gained market share.

Ford Motor announced higher-than-expected quarterly profit as gains for the company's finance division offset losses at its auto unit. The company raised its full-year earnings outlook and the shares edged off 3.4 per cent to $12.93.

Ford's news came after rival General Motors announced sharp cost-cutting decisions at its European operations in a bid to stem losses there. GM shares were 2.3 per cent lower at $38 on the Dow.

Shares in McDonald's, another component of the blue-chip stock gauge, eased 0.7 per cent to $29 after the restaurant operator reported a 42 per cent rise in profits.

Leapfrog Enterprises cut its quarterly earnings outlook and sent shares 34.1 per cent lower to $11.99 as the educational toy company cited a challenging industry environment.

Boston Scientific shares lost 5.6 per cent to $35.71 as investors were disappointed by its guidance even after earnings grew amid strong demand for the group's medical devices.

Economic news gave a mixed reading of the recovery in the US. Consumer prices rose by 0.2 per cent last month, taking the annualised inflation rate in September to 2.5 per cent, but a sharp jump in lodging costs pushed core inflation up a surprise 0.3 per cent.

Stephen Gallagher, the chief US economist at SG Corporate & Investment Banking, said the data were unlikely to cause the Fed to interrupt its course of steady increases in interest rates. He added that employment trends would be more important in that process.

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