MarketView for October 1

Summary

The upcoming vote in the Senate on the rescue plan for Wall Street kept investors on edge on Wednesday with the result that stock prices gyrated somewhat but at the end of the day turned in a minimal loss. It was just enough to act as a reminder that the current problem in the credit markets is not over but that investors are waiting to see what develops in the next couple of days.

As a result, shares of technology, industrial and energy companies, including economic bellwethers General Electric, down 3.9 percent to $24.50, while heavy-equipment manufacturer Caterpillar, off 4.5 percent to $56.95. GE had been down more than 8 percent earlier after Deutsche Bank cut its price target and outlook, but moved higher after it announced plans to sell $3 billion in preferred shares to Buffett's Berkshire Hathaway, with another $12 billion going to the public, though the gains were short-lived.

As expected, the main focus of the day was on the fate of the rescue plan, which was expected to come to a vote on the Senate floor after the market closed on Wednesday. The Senate's modified legislation will include a sharp increase in the amount of bank deposits insured by the Federal Deposit Insurance Corp and tax breaks that the House of Representatives rejected.

Financial shares rose as investors hoped for a thumbs-up vote from the Senate. Citigroup ended the day up 12 percent to $23 and JPMorgan Chase rose 6.3 percent to $49.63.

Reports showing weakness in manufacturing and the labor market, however, added to market anxiety, leaving some investors worried that more pain was inevitable even if the government's rescue bill is eventually voted into law.

Apple was again the top drag on NASDAQ, falling 4 percent to $109.12. Shares of IBM fell 5.8 percent to $110.13 and were the top drag on the Dow.

Energy shares also fell, with the S&P energy index down 1.7 percent, as crude oil futures for November delivery settled down $2.11 per barrel at $98.53.

Economic Data Shows Little Surprise

Factory activity was down once again in September, reaching to its lowest level since the 2001 recession, as employers cut 8,000 jobs in September jobs for the third time in four months according to a report by ADP Employer Services and Macroeconomic Advisers that did not include the impact of the financial chaos of the past few weeks.

Separately, the Institute for Supply Management said its index of national factory activity fell to 43.5 in September from 49.9 in August, under the level of 50 that separates contraction from expansion, thereby painting a comprehensive picture of weakness, which may only get worse as turmoil in the financial sector further constrains the credit companies need to fund their business.

It was the worst reading since the ISM reported a reading of 40.8 in October 2001, when the economy was still mired in the last recession. Factories have held up relatively well in the current slowdown thanks to booming exports, but the report indicated a stalling global economy was taking its toll.

The ISM manufacturing employment index hit its lowest since April 2003. The outlook also looked bleak, with the new manufacturing orders index sinking to its lowest since January 2001 and the export index sliding to its lowest since July 2006.

"We can't see strength in the overall index in the next couple of months," said Norbert Ore, head of the ISM's Business Survey Committee.

Meanwhile, planned layoffs rose 7.2 percent from a month earlier in September but jumped 33 percent from the same month a year ago, according to a report by employment consulting firm Challenger, Gray & Christmas. The September job cuts brought the third-quarter layoffs total to 287,142, the highest quarter of cuts since the fourth quarter of 2005, the report said.

Unfortunately, the figures might not fully reflect the recent trauma in finance, which included the record bankruptcy of Lehman Brothers and the collapse of Washington Mutual.

"It may take several weeks or months for the fallout from September's Wall Street turmoil to hit the employment numbers," John A. Challenger, chief executive officer of Challenger, Gray & Christmas, was quoted as saying in the report.

It was a similar story for the ADP data, which comes ahead of the government's comprehensive labor market report on Friday that is expected to show the U.S. economy as a whole shed jobs for a ninth consecutive month in September.

The September non-farm payrolls report from the Labor Department is expected to show a loss of 100,000 jobs, according to a median estimate from economists.

A machinists' strike at Boeing and disruptions from Hurricane Ike could add 77,000 job losses to the BLS data for September that were not reflected in the ADP data, he said.

Crude Prices Fall On Inventory Report

Oil prices fell on Wednesday as government data showed an increase in crude inventories. Crude oil inventories rose by 4.3 million barrels last week, data from the Energy Information Administration showed, as output from the Gulf of Mexico continued to recover from disruptions caused by Hurricane Ike.

Gasoline inventories showed a surprise 900,000-barrel rise as more refinery capacity came back online following the storm, which caused the worst disruption to the U.S. energy sector since the 2005 hurricane season.

Total U.S. oil product demand over the past four weeks fell 7.1 percent from a year earlier, as the growing economic crisis and high fuel costs continued to clip demand in the world's top consumer. Further signs of demand weakness came as industry data showed Japan's crude and main fuel inventories rising last week as refiners curbed production for a sixth straight week due to slowing consumption.

FDIC seeking temporary unlimited Treasury loans

The Federal Deposit Insurance Corporation is seeking temporary unlimited borrowing authority from the Treasury Department, according to a copy of the final Senate bailout legislation on Wednesday. In the bill, which is expected to be voted on by the Senate later Wednesday, the FDIC is seeking the borrowing authority through the end of 2009. The FDIC currently insures up to $100,000 per depositor and up to $250,000 per individual retirement account at insured banks.

The increase would be a big boost for the FDIC's ability to insure bank deposits and send a message of confidence to individuals and businesses thinking twice about leaving their money in their banks. The agency has access to a total of $70 billion in short- and long-term lines of credit. It can also charge banks higher premiums.

The 451-page Senate bill would increase the amount of deposit insurance coverage to $250,000 through next year from the current $100,000 in a bid to reverse the deteriorating crisis of confidence in the marketplace.

The FDIC had asked for an unlimited cap on insurance limits but was rejected by lawmakers, according to sources familiar with the FDIC request. According to the legislation, the FDIC may ask Treasury for "a loan or loans in the amount or amounts...without regard to the limitations on such borrowing."

The bill also seeks similar requests for the National Credit Union Administration, the regulator of federal credit unions.

FDIC Chairman Sheila Bair said on Tuesday that raising the limit to $250,000 would serve a dual purpose. It would reassure depositors and provide more liquidity to banks for lending.

Banks pay into the Deposit Insurance Fund, which stood at about $45 billion at the end of June, but the legislation says they would not be assessed for the temporary increased amount. So far this year 13 banks have failed, including IndyMac and Washington Mutual Inc, which was acquired by JPMorgan Chase & Co in a transaction that did not dent the insurance fund. More bank failures are expected.