Thursday, October 09, 2008

US Economic Crisis Bulletin: Stocks Plunge Again; Dow Under 8,600

October 10, 2008

Stocks Plunge Again; Dow Under 8,600

New York Times

A vicious late-day decline once again pushed the markets down sharply Thursday.

Stocks, which had paused for breath during light trading early in the day, were down about 200 points at around 3 p.m., but simply fell away in the last hour.

The Dow Jones industrial average lost 678.91 points, or 7.3 percent, on the day, while the broader Standard & Poor’s 500-stock index ended down 7.6 percent. The technology-heavy Nasdaq was down 5.47 percent.

And the reasons, by now, are a familiar litany — concerns about the credit markets, a slowdown in consumer spending, worries about the economy as a whole and the financial sector in particular.

“This is the virulence of a bear market that we have not seen in a generation,” said Michael Holland, chairman of Holland & Company.

Thursday’s decline came despite a coordinated effort by central banks around the world this week to lower crucial benchmark lending rates.

“There was no specific story about today; right now we are in a freefall of fear and people are using any opportunity to sell,” said Richard Sparks, senior equities analyst at Schaeffer’s Investment Research. He said the falls were driven by pessimism that the series of actions unveiled by governments around the world were still not enough to end the financial crisis.

Investors “still think that this is not out of the woods yet,” he said. “Even with government help, you may have banks that may not make it.”

Some analysts said that the end of a ban on short-sellers may have played a part in the falls, contributing in particular to the sharp declines in some bank share prices, such as that of Morgan Stanley.

But Mr. Sparks said the sharp declines were occurring even when the ban was in place.

Financial stocks continued to struggle. Shares of Morgan Stanley were down about 22 percent on more speculation about the status of a planned $9 billion investment by Japan’s top bank, Mitsubishi UFJ Financial Group. Morgan Stanley, as it did earlier this week, denied the speculation and again said that the deal was on track.

Other bank shares were mixed. Wells Fargo shares were down 16.9 percent, and Citigroup was down 7 percent, JPMorgan Chase 3.7 percent and Bank of America 9 percent higher.

Shares in the insurance giant, American International Group, were down almost 21 percent, after the Federal Reserve Board said that it would provide up to $37.8 billion to the company to help it deal with a rapidly dwindling supply of cash.

Shares of the automaker, General Motors, fell almost 31 percent, to $4.76, after the company said its European sales declined through the first three quarters. Ford shares were down 21.8 percent, to $2.08.

Analysts took some solace from the report that the Treasury may be considering taking ownership stakes in United States banks, along the lines of the strategy adopted by the British government.

But Mr. Sparks said a report that the Treasury might consider taking ownership stakes in United States banks was not news and was not necessarily playing a role in the market.

He said some banks might take part in the plan if it came to fruition. “I think that some banks may be essentially forced to take part in order to get through this crisis,” he said.

John Ryding, chief economist of RDQ Economics, said he had been intensely pessimistic about the future of the economy but now saw reason for hope.

“At a minimum we are in a moderate recession,” Mr. Ryding said. “But for the first time I have a glimmer of hope that we have the tools to move forward.”

He said he was looking to the Group of 7 meeting of central bankers and finance ministers in Washington on Friday for signs that the United States was moving more concretely in this direction.

On credit markets, Michael T. Darda, chief economist at the research firm MKM Partners, said spreads in short-term funding markets had hit a record high this morning. He said “corporate and high-yield markets remain under incredible stress, meaning long-term funding markets are dislocated as well. In sum, it is still too soon to call for a lasting bottom in stocks or the economy.”

In European trading, the DJ Euro Stoxx 50 index, a barometer of euro zone blue chips, closed down 2.4 percent, while the FTSE 100 index in London declined 1.2 percent. The CAC-40 in Paris fell 1.5 percent, and the DAX in Frankfurt 2.5 percent.

A day after interest rate cuts elsewhere in the world, central banks in Taiwan and South Korea both cut their main rates by a quarter-point. The Hong Kong Monetary Authority also cut its base rate by a half-point to 2 percent.

In Moscow, where Russian equities have been under severe pressure, the Micex exchange initially suspended trading until Monday after stocks rose more than 10 percent at the opening, but then said it would reopen after the market regulator ordered it to do so.

Meanwhile in Iceland, the government seized Kaupthing Bank, the country’s largest lender, effectively completing the nationalization of its banking system.

Bank stocks were among the biggest gainers in Europe. Royal Bank of Scotland rose 18 percent, UBS rose 7.2 percent, Deutsche Bank rose 7.5 percent and Société Générale rose 5.8 percent.

ArcelorMittal, the world’s biggest steel maker, rose nearly 10 percent in Paris trading after it reaffirmed its earnings outlook.

In Asia, the Nikkei 225 stock average fell 0.5 percent, after a rout Wednesday wiped 9.4 percent off the index.

In Hong Kong, the Hang Seng index was up 3.3 percent, after an 8.2 percent slump Wednesday. The S.&P./ASX 200 index in Sydney fell 1.5 percent.

The United States Federal Reserve, the European Central Bank, the Bank of England and other central banks moved Wednesday to jointly cut their benchmark interest rates by half a point, seeking to renew confidence in an increasingly panicked international financial community.

“I’m taking a slightly positive view,” Mr. Wheeldon said. “I think we are well on the way to sorting out the underlying issues in the capital markets.”

In spite of the central bank moves this week, which have included a flood of liquidity into the markets, the strains in the credit market showed little sign of easing.

Banks in Hong Kong left their main lending rates unchanged, even after the central bank’s move, as the rates lenders must pay to borrow in the interbank market remained prohibitive.

The three-month London interbank offered rate, or Libor, for dollars rose 23/100ths of a percent to 4.75 percent, according to the British Banking Association.

The spread, or gap, between the yield on safe three-month United States government securities and the rate that banks charge one another for dollar loans of the same duration rose slightly, to 4.11 percentage points, suggesting that banks remain extremely reluctant to lend to one another.

“To see little or no reaction in the fixings is very disappointing and reinforces the fact that Libor is broken and that the transmission mechanism from central banks isn’t working,” Barry Moran, a Dublin-based currency trader at Bank of Ireland, told Bloomberg News. “Things are still very stressed and we don’t know what’s going to fix it in the short term.”

In a research note, Dariusz Kowalczyk, chief investment strategist at CFC Symour in Hong Kong, said: “Lower policy rates did little to diminish market rates and failed to restore confidence in the banking system. In fact, using up of monetary ammunition with such little effect may hurt sentiment by highlighting the severity of the crisis.”

“Deep recession in all major developed economies and many others is still looming,” he said.

The euro rose to $1.3755, from $1.3656 late Wednesday in New York, while the British pound rose to $1.7342, from $1.7308. The dollar rose to 101.08 yen from 99.14.

Oil prices continued to decline, falling to $86.59 a barrel, a low for the year, as inventories at wholesalers rose twice as much as forecast in August. “Be it in November or in December, be it formally or informally, OPEC will need to reduce production not because the price is currently too low but because there is not enough demand,” Olivier Jakob, an oil analyst at Petromatrix in Zug, Switzerland wrote in a note to clients. “The problem facing OPEC is that demand is too poor but crude prices too high, hence the worry that prices catch up to demand before they can act.”

David Jolly, Bettina Wassener and Graham Bowley contributed reporting.

Dow plunges more than 660 to fall below 9,000

By TIM PARADIS, AP Business Writer

Stocks plunged in the final minutes of trading Thursday, sending the Dow Jones industrials down more than 600 points to their lowest level in five years after a major credit ratings agency said it was considering cutting its rating on General Motors Corp. The Standard & Poor's 500 index fell more than 6 percent.

The selloff came as Standard & Poor's Ratings Services put GM and its finance affiliate GMAC LLC under review to see if its rating should be cut. GM has been struggling with weak car sales in North America.

The action means there is a 50 percent chance that S&P will lower GM's and GMAC's ratings in the next three months.

General Motors Corp. led the Dow lower, falling about 30 percent.

The Dow fell more than 660 points, or 7.2 percent, to about 8,586 in late dealings. The blue chips hadn't fallen below the 9,000 level since Aug. 6, 2003.

The Standard & Poor's 500 index fell 74.73, or 7.6 percent, to 910.12 in late dealings.

Stocks falter as fears persist

Stock markets have lost ground, erasing earlier gains as nervous investors remained concerned that the financial crisis would lead to a world recession.

On Wall Street, the Dow Jones was down 3.2%, - sinking below 9000 points for the first time since August 2003.

European shares followed their US counterparts lower, with the FTSE 100 ending down 1.2% and France's Cac 40 down 1.55% by the close of trade.

Investors had earlier taken some comfort from Wednesday's rate cuts.

"A lot of people believe the bottom has been reached but that doesn't mean volatility hasn't gone away," said Howard Wheeldon, senior strategist at BGC Partners.

"The underlying fear is how much hell we have in terms of recession," he added.

As the turbulent week continued, in other developments:

US Treasury Secretary Henry Paulson is considering capital injections into troubled US banks, a White House spokeswoman

The oil producers cartel OPEC will hold an emergency meeting in Vienna on November 18 to discuss the impact of the financial crisis on oil prices, which fell below $87 a barrel.

The IMF head said the world economy was on the "cusp of a recession". Dominique Strauss-Kahn called on countries to work in joint action and forecast that a slow recovery would begin in the second half of 2009.

The British Bankers' Association said the interbank cost of borrowing overnight had fallen - a day after interest rate cuts and governments provided additional liquidity. However, longer-term lending rates rose to their highest this year.

Iceland suspended trading on its OMX Nordic Exchange until Monday, citing "unusual market conditions". Earlier, its largest bank, Kaupthing, became the third financial institution to be taken over by the country's government in the past week.

Ireland extended its guarantee of bank deposits to cover savings in Irish branches of five foreign-owned institutions Northern Ireland's Ulster Bank, British-owned First Active and HBOS, Belgium's IIB Bank and German-owned Postbank.

Gordon Brown wrote to G7 and EU leaders suggesting that the UK government's bank rescue plan could be a template for other nations to help unfreeze credit markets.

Dexia shares jumped 25% after France, Belgium and Luxembourg announced they would provide state guarantees for its borrowings.

UK Chancellor Alistair Darling flew to the US to discuss the co-ordinated cutting of interest rates by six central banks.

After trading on Russian stock markets had been suspended following sharp share falls earlier this week, they were again halted - this time after stocks climbed too high after trade resumed.

'False dawns'

Seven central banks on Wednesday cut interest rates in an effort to steady the faltering global economy.

It came after the UK government's announcement of a package of measures aimed at rescuing the banking system.

This package makes available £400bn ($692bn) of fresh money.

There was "an air of cautious optimism" that such measures would have some impact on the financial crisis, said Richard Hunter, head of UK equities at Hargreaves Lansdown stockbrokers.

"Banking shares have been the main beneficiaries of the UK's rescue plan, and the interest rate cuts," he added.

"We've had a few false dawns over the past couple of months and it's too early to call a complete recovery, but there's hope that these measures will get some traction at some point."

Asian stock markets rose, though Japanese shares closed lower.

Story from BBC NEWS:
Published: 2008/10/09 19:19:07 GMT

Share price falls blamed on short selling return

By Joanna Chung, Francesco Guerrera, Julie MacIntosh and Anuj Gangahar in New York and Bernard Simon in Toronto
October 9 2008 19:05

The return of short sellers to the US market after a near-three-week ban was blamed for a sharp drop in prices on Thursday as General Motors and Morgan Stanley led stock markets sharply lower.

In another rollercoaster trading day, shares in Morgan Stanley were 16 per cent lower at $14.09 at midday in New York, while GM shares had lost 15 per cent of their value shortly before noon, falling to $5.87, their lowest level since the early 1950s.

The share price declines coincided with the lifting of a ban on traders who aim to profit from share price declines. The ban had prevented short selling on nearly 1,000 companies, including financial firms and industrial groups such as GM. The ban was lifted by the US Securities and Exchange Commission late on Wednesday night.

Morgan Stanley insiders said they expected short-sellers to target its shares on Thursday but added that the sharp fall would not affect the bank’s deal to sell a 21 per cent stake to Japan’s Mitsubishi UFJ Financial Group for $9bn.

Michael Ward, analyst at Soleil Securities, was among those who linked the latest tumble in GM’s share price to the lifting of the ban. Other analysts ascribed the selling pressure to worries about the carmaker’s ability to continue funding its operations in the face of the credit crunch and weakening sales.

Indeed, the return of short selling was welcomed by many traders, who said it helped bring liquidity to the markets. Many noted that shares of many companies on the banned list were hit sharply in recent weeks despite the short selling ban.

While the ban may have created an initial short squeeze that buttressed financial stocks, traders say hedge funds were then forced to bring down their corresponding long positions in other financial stocks, which created new selling pressure.

“I’m not sure whether today’s activity is a continuation of long selling or if it’s the shorts piling on,” one trader said. “My guess is that it’s a combination of the two.”

Many market participants believe regulators will be forced to quickly bring back measures similar to the so-called “uptick” rule. The rule, which was scrapped last year, allowed short selling only when the last tick in a stock’s price was positive.

Copyright The Financial Times Limited 2008

Wall Street stocks sink again

By Alistair Gray in New York
October 9 2008 19:47

Wall Street stocks extended their losing streak to a seventh session on Thursday in volatile trading even after the SEC lifted its temporary ban on short-selling.

The market once again swung from losses to gains, as investors faced ongoing uncertainty over the likely success of a series of interventions in the financial system by the authorities.

Earlier, relatively positive results from technology bellwether IBM provided a glimmer of hope that corporate earnings may not be as dire as the worst five-day sell-off for stocks since 1987 had implied.

The results modestly improved relentlessly negative sentiment, particularly in the technology sector, which has been hit hard by mounting fears of a global recession. IBM, which also reaffirmed its profit forecast, rose 1.8 per cent to $92.20 while Apple and Intel gained more than 2.5 per cent.

The S&P 500 rose as much as 2.1 per cent, with technology up 3.3 per cent, but later lost as much as 2.5 per cent.

In holiday-thinned trading, the benchmark index was 1.2 per cent lower at 972.77 by mid afternoon in New York, below the psychologically significant barrier of 1,000 breached earlier in the week and on track for its longest run of losses in 12 years.

The Dow Jones Industrial Average, which has also sunk far beneath an important barrier of 10,000, was 1 per cent down at 9,163.80. The technology-heavy Nasdaq Composite Index was 0.1 per cent higher at 1,741.17

General Motors, Merrill Lynch and Morgan Stanley all sustained heavy losses after the SEC lifted its temporary ban on short-selling.

GM, which reported a decline in European sales, fell 15.4 per cent to $5.85 and sank at one point to its lowest level since 1950. Ford lost 12.8 per cent to $2.32.

Merrill Lynch and Morgan Stanley fell 9.3 per cent to $16.31 and 10.7 per cent to $15 respectively.

Investors were also examining reports that the US government could take stakes in banks, which would be the latest in a series of measures to shore up confidence. Hank Paulson, Treasury secretary, on Wednesday stressed that rescue legislation allowed the authorities to recapitalise financial institutions. Bank of America stood 0.2 per cent lower at $22.06 while JPMorgan rose 2.1 per cent to $40.14.

Elsewhere, Abercrombie & Fitch continued a string of poor performances in the retail sector with a 14 per cent drop in September like-for-like sales, worse than expected. The shares tumbled 11.4 per cent to $28.82.

In economic news, workers continuing to file existing claims for unemployment benefit rose to a five-year high, according to the US Labor Department.

Ian Shepherdson of High Frequency Economics said: “The only thing preventing a run of 2001-style drops in payrolls is that companies have not yet cut the pace of gross hiring as much as they have raised the pace of gross firing. We don’t think this is sustainable – expect faster payroll declines.”

Materials and technology, up 1.4 and 1.7 per cent respectively, led the sectors. Most steel producers gained even after Goldman Sachs cut its steel price forecast by 29 per cent, due in part to the slowdown in emerging markets.

In technology, Quest Software jumped 9.8 per cent to $11.62 after the group unveiled plans plans for a $400m share buy-back.

The financial and energy sectors were the biggest losers, down 2.6 per cent and 2.1 per cent respectively. Insurance company XL Capital sank 54 per cent to $3.99, while Allstate recovered 3.8 per cent to $31.09 after losses of more than  a fifth in the previous session.

Hartford Financial lost 8.3 per cent at $22.80 after UBS slashed its price target from $70 to $26 and on speculation that talks between it and Metlife had fallen through. Metlife, which priced new shares at a discount in the previous session, gained 6.3 per cent to $28.70 after heavy losses on Wednesday.

Federal litigation on the dispute between Citigroup and Wells Fargo over the fate of Wachovia was extended by two days. Citigroup lost 2.2 per cent to $14.44 while Wells Fargo sank 11.4 per cent to $28.25. Wachovia dropped 16.6 per cent to $4.22.

Energy producers suffered as oil fell below $87 a barrel. Chevron was among the biggest losers, down 5 per cent at $69.43.

Copyright The Financial Times Limited 2008

Paulson warns of bankruptcies, economic impact

Thursday, October 9

WASHINGTON (AFP) - - Treasury Secretary Henry Paulson warned Wednesday that more financial firms would go bankrupt in the United States and that recent market turmoil had "seriously impacted" the economy.

Paulson cautioned that a 700-billion-dollar government rescue package for the financial sector approved last week would not mean an end to bankruptcies and that it would take several weeks to put in place.

"One thing we must recognize -- even with the new Treasury authorities, some financial institutions will fail," Paulson said at a news conference.

The aim of the rescue package is for the Treasury to buy up toxic debt being held by banks, but Paulson said it would be "several weeks before our first purchase."

The new law "doesn't exist to save every financial institution for its own sake," he added.

Reflecting the international scope of the crisis, Paulson also called for emerging market countries to be included in broad international talks on stabilizing the financial system.

Brazilian officials told AFP that a meeting of central bank chiefs and finance ministers from the G20 emerging and rich country group would take place in Washington on Saturday alongside a gathering of the G7 rich countries.

Paulson said a meeting of the Group of Seven afforded an opportunity to discuss "ways to further enhance our collective efforts."

In comments about the US economy, Paulson underlined that turmoil in the banking sector caused by declining house prices was already reducing growth in the non-finance economy.

"A chain of events caused by the ongoing housing correction has reverberated through US banks and financial institutions and has seriously impacted the underlying economy," he said.

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