The US stockmarket is moving rapidly towards bear territory after plunging more than 300 points overnight on the back of big losses from America’s biggest broker Merrill Lynch and Washington Mutual, the country’s biggest savings and loan. A slump in new home starts and building permits and a poor report on manufacturing activity in the US East Coast area also added to the losses.

A bear market occurs when it falls more than 20% from its peak and the Dow is now down more than 2,000 points from its peak late last year of 14,198 points. The market has fallen more than 9% this month so far and almost 6% this week! All major indices are at lows not seen for 10 months or more as last year’s gains have been destroyed by the run of bad news from the financial sector and the wider economy.

Merrill Lynch joined Citigroup in reporting a sea of red ink in its fourth quarter accounts, saying it lost $US9.8 billion in the last three months of 2007 following more than $US16.6 billion investment write-downs and losses. It was the firm’s worst ever performance in nearly 100 years history.

Wall Street’s slump, which saw 2% shed in value in the last hour of trading, came despite US Federal Reserve chairman, Ben Bernanke telling the US Congress that he agreed with the shape of proposed financial stimulus packages worth up to $US150 billion for the economy.

President Bush is due to make a speech on the economy tonight, our time, as is our Reserve Bank Governor, Glenn Stevens.

I know which one will have more impact on their respective economies, and it won’t be Bush. The US economy is sliding, and some US economists say the boom states of California, Florida, Nevada and Arizona could very well be in recession simply because that’s where the subprime mess and housing slump have hit hardest.

Overall it was a replay of two days ago when news of a slump in retail sales and Citigroup’s huge loss and write-downs shook confidence on Wall Street and markets around the world. That saw the market off more than 2% and the Dow down 277 points. Our market shed around 150 points on the day and will be battered again today after the bears pushed prices down in late trading yesterday, reversing the earlier gains.

The news won’t be good for sentiment in Asia, especially Tokyo where the market rose yesterday for the first time in days. The Tokyo market is off around 24% in value in the past few weeks and it looks certain to add to that, while the Chinese market fell 2.5% yesterday.

Washington Mutual reported its first quarterly loss since 1997 after writing down $US1.6 billion in the value of its home loan unit. The lender reported a loss in the fourth quarter of $US1.87 billion, much larger than forecast by analysts. It had signalled the write down in the home loan business last month, but operating losses were bigger than expected. It has already cut its dividend by 73%, sacked several thousand people and raised $US3 billion in new debt to raise new capital.

Worryingly Merrill’s write-downs included $US3.1 billion related to contracts Merrill entered into with bond insurance groups to hedge against losses.

Those insurers came under renewed pressure yesterday with news of a round of possible new credit downgrades and falling share prices on fears they could default. Shares in two of the big names, MBIA and AMBAC fell heavily today amid rising fears they could default, despite raising new capital in recent months. The two companies’ shares had their biggest ever falls on Wall Street on the news of the possible re-rating by major agencies.

This sector is being re-examined by rating agencies and should their credit ratings fall, it could trigger more unwanted losses for investment banks because their triple A ratings are vital for the banks’ issuance of bonds, especially municipal bonds which is a huge industry in the US.

Merrill also cut the value of asset-backed collateralised debt obligations on its books by a huge $US11.5 billion. CDOs are pools of mainly subprime housing mortgages and corporate bonds that are cut into tranches of varying risk and return and sold onto investors.

Merrill’s global markets and investment banking unit posted a loss of $US15.9 billion, driven by the $US11.5 billion write-down. The brokerage firm said its net exposure to US asset-backed CDOs had dropped from $US15.8 billion to $US4.8 billion, suggesting that the worst of the write-downs could be over. But in terms of the outlook, the new housing starts news sent the toughest message that the worst is not over.

But the economy needs the number of new houses and building permits to continue falling and run at depressed levels for sometime, simply to help cut the ever rising surplus of unsold new and existing homes.

Figures for December and 2007 from the US Government figures showed that new residential building across the US had its biggest drop in nearly three decades.

New house starts fell to an annual rate in December of 1,006,000 – the lowest since 1991 (when the US economy was much smaller), down 14% from November and a huge 38% from the same month in 2006. Permits issued to build new homes, which signal future construction trends and are more closely watched by analysts, fell 8% in December, and 34% from December of 2006.