Friday, October 24, 2008

US Economic Crisis Bulletin: Looming Capitalist Meltdown Batters Stocks; Letters Sent to Banks Around Country

Looming recession batters stocks

By Michael Mackenzie in New York and Michiyo Nakamoto in Tokyo and Song Jung-a in Seoul
October 24 2008 19:17

Global stocks slumped and currencies collapsed against the Japanese yen on Friday as investors rushed to sell risky assets, fanned by fears about the severity of the approaching global economic recession and bleak outlook for corporate earnings.

Traders said the massive reversal of currency positions in favour of the yen, reflected further liquidation of the so-called “carry trade”, in which investors had borrowed at low Japanese interest rates to fund risky global investments.

The sharp rise in the yen forced further sales of risky assets, with equities, commodities and emerging markets suffering sharp declines while investors sought the safety of owning short-term government paper. Redemption requests from investors in mutual and hedge funds intensified the wave of forced selling.

“The magnitude of such historical market moves in currencies could only be the result of imploding hedge funds leading to massive liquidations,” said Ashraf Laidi, chief currency strategist at CMC Markets.

Impetus for further gains in the yen came when the UK economy contracted during the third quarter and equity markets in London and Europe fell sharply, following a plunge in Asian shares. The yen surged to a 13-year high against both the dollar and pound and reached a six-year peak against the euro. Sterling plumbed a five-year low against the dollar and fell more than eight cents, the largest single-day decline since the era of floating currencies began in 1971.

The turmoil in shares, currencies and emerging markets triggered selling limits for US equity futures before Wall Street opened.

”I have never seen futures go down in a straight line like that before the opening bell,” said Anthony Conroy, head of equity trading at BNYConvergEx and veteran of the 1987 stock crash. “This is not just the US and that’s the problem. It’s a global sell-off and it’s hurting everyone.”

Asian markets ignited Friday’s sharp declines, with Japan’s Nikkei 225 index plunging 9.6 per cent to a five year low, while Korea’s Kospi lost 10.6 and Hong Kong fell 8.3 per cent. All three markets have now fallen more than 50 per cent this year.

In Europe stocks rebounded from their early losses of around 10 per cent and the FTSE Eurofirst 300 index ultimately fell 5.4 per cent. In London the FTSE 100 lost 5.6 per cent. Both markets closed at fresh five and-a-half year lows and are down more than 40 per cent this year.

In New York, the S&P 500 index was down 5.4 per cent in afternoon trade, having traded as low as 6.1 per cent. Mr Conroy cautioned that selling could intensify during the last hour of trading as some investors shun holding stocks over the weekend.

The yen rose as much as 12 per cent against sterling and rallied nearly 10 per cent versus the euro and rose 7 per cent against the dollar to Y90.93 in early trade.

Oil prices fell more than $5 below $63 a barrel, extending the decline in crude from above $75 on Tuesday. Gold traded below $700 an ounce, after being above $900 when stocks slumped earlier this month. An index of commodities fell to its lowest level since December 2003 and has slid more than 45 per cent from a record peak in July.

Copyright The Financial Times Limited 2008,0,5603846.story

From the Los Angeles Times

Stocks remain sharply lower in volatile trading

The Dow is down more than 400 points in a seesaw session as fears of a global recession continue to worry investors. The S & P 500 and Nasdaq indexes also fall sharply.

Martin Zimmerman
11:12 AM PDT, October 24, 2008

Stocks in New York were off their worst levels of the day but still down sharply in late-morning trading as investors reacted to overseas sell-offs sparked by fresh worries that the world is sliding into a deep recession.

As of 11 a.m. Pacific time, the Dow Jones industrial average was down 432.49 points, or 5%, at 8,258.76 in seesaw trading. The broader Standard & Poor's 500 index was also down 5%, and the tech-heavy Nasdaq composite was off 4.1%.

All three indexes were trading above their worst levels of the day. The Dow plunged more than 500 points before recovering, and the Nasdaq was down 100 points, or more than 6%, from the opening.

Still, losers led winners by 6 to 1 on the New York Stock Exchange, and all 30 of the stocks in the Dow were down for the day. All 10 industry groups in the S&P 500 index were in the red, led by energy and financial companies.

"There's a lot of panic out there today," Scott Fullman, director of derivatives investment strategy for WJB Capital Group, told the Associated Press. "People have been saying that we're in a recession. This is the realization."

Some analysts noted, however, that volume was moderate, possibly a sign that many investors are sitting on the sidelines rather than indiscriminately selling shares. Some were also encouraged that the selling was less panicky than had been indicated by the plunge in Dow futures that came before the market opened, a drop that was so severe, futures trading was halted.

In addition, the Dow was holding above a key indicator: the intra-day low of 7,884.82 that the index reached Oct. 10. Falling below that level could lead to a new burst of selling. The Dow, which hit a new 5 1/2 -year low today, hasn't closed below 8,000 since March 2003.

The downdraft on Wall Street followed a round of furious selling overseas. Stocks in Japan tumbled almost 10%. Markets in Germany and France also recorded double-digit percentage losses, but recovered to close down 5% and 3.5%, respectively. The London market closed down 5%.

Increasingly dire economic news underpinned the selling. Japanese electronics maker Sony and German automaker Daimler both fell sharply on poor earnings news. Third-quarter earnings reports from U.S. companies have also brought a slew of disappointments and lowered profit forecasts for the rest of the year and into 2009. Most recently, tech giant Microsoft last night reported a weak outlook.

Adding to the gloom today was an announcement by Chrysler, the No. 3 automaker, that it would lay off a quarter of its white-collar workforce.

Oil added to the downward spiral. Light, sweet crude was down $2.94 to $64.90 a barrel in New York after falling more than $5 in pre-market trading. Although good for consumers, falling oil prices depress energy stocks and, more importantly, are a key indicator that traders believe the world is falling into recession, cutting the demand for oil and other commodities. Gold prices initially plunged, but are now up about $16 to around $731 an ounce.

The news was a bit better in the credit markets, which investors are watching closely because it has been a meltdown in the global credit system that has sparked the current bear market on Wall Street.

The London Interbank Offered Rate, a key indicator of lending between banks, fell for the 10th straight day, indicating that credit markets continue to thaw. But the fall in Libor has slowed noticeably in recent days.

More worrisome, demand for Treasury securities jumped as investors sought a safe place to put their money. The yield on the three-month Treasury bill slid to 0.72%, down from 0.94% Thursday.

The Federal Reserve will meet next week in its regular policy meeting, and many analysts are betting that the U.S. central bank will cut its target interest rate from its current 1.5% level to 1% in an effort to boost lending and spur economic growth.

There was some good news from the housing sector, where a collapse in prices and spiraling foreclosure rates were the catalysts for the global credit crunch. The National Association of Realtors said sales of existing homes rose nationally by 5.5% in September compared to August, the biggest jump since July 2003. Prices continued to fall, however, down by 9% from a year ago.

Zimmerman is a Times staff writer.

'It's payback time,' banks warned in threat letters

WASHINGTON (CNN) -- Letters containing white powder that were sent to more than 50 financial institutions warned that "it's payback time," the FBI said Thursday.

Officials said most of the powder-laced letters were sent to branches of JPMorgan Chase.

"Steal tens of thousands of people's money and not expect repercussions. It's payback time. What you just breathed in will kill you within 10 days. Thank [word redacted] and the FDIC for your demise," said one letter released by the FBI on Thursday.

Most of the letters contained a powder that the FBI said is harmless.

But sending the letters is "a serious crime," even if they are a hoax, FBI spokesman Richard Kolko said in a statement.

More than 50 letters were received this week at financial institutions in 11 states and the District of Columbia, the FBI said.

The letters were all sent from Amarillo, Texas, to branches of Chase Bank; the Federal Deposit Insurance Corp., which insures bank deposits; and the U.S. Office of Thrift Supervision, a regulatory agency. Not all the letters contained exactly the same wording, the FBI said.

The U.S. Postal Inspection Service is offering a reward of up to $100,000 "for any information leading to the arrest and conviction of the person or persons responsible."

More banks report threatening letters

The FBI, U.S. postal inspectors and state and local authorities are investigating, resulting in "a drain on resources" for those agencies, Kolko said.

"Law enforcement will continue to work to identify and arrest those responsible," Kolko said .

As of Thursday, financial institutions in New York, New Jersey, the District of Columbia, Ohio, Illinois, Colorado, Oklahoma, Georgia, Texas, Virginia, California and Arizona have received the letters, the FBI reported.

Kolko said that field tests on the powder included in the letters have found no sign of a hazardous material but that additional tests were being conducted.

Most of the letters have been sent to branches of JPMorgan Chase, one law enforcement official said on condition of anonymity because the investigation is ongoing.

CNN's Kelli Arena and Kevin Bohn contributed to this report.

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