MarketView for October 2

Summary

 

Wall Street underwent another body slam on Thursday as concerns over whether the bailout or rescue package will work even if it does pass in congress on Friday, which assumes that it is even brought up for a vote. Word is that the bill will not make it to the vote stage unless passage is assured. Since the beginning of the year, the Dow has lost 21 percent, while the S&P 500 has dropped 24 percent and the NASDAQ has fallen 25 percent

 

All that uncertainty has meant unmitigated disaster for stock prices as Wall Street remained concerned that the economy may slide into recession, further cutting into corporate profits. Adding to the day’s worries was the latest economic data, in which the Labor Department reported that the number of people filing for unemployment benefits hit a seven-year high. At the same time, the Commerce Department reported a steep drop in factory orders in August.

 

There was some good news on the energy front in that the price of crude oil futures fell more than 4 percent as financial market turmoil stoked concerns about demand for fuel and precious metals which moved lower as the dollar moved higher in foreign exchange markets. However, that also sent Freeport McMoRan Copper & Gold down 13.9 percent to $45.60, as Goldman Sachs removed the stock from its "buy" list.

 

Insurance stocks, led by Hartford Financial, Principal Financial and MetLife, fell after Senate Majority Leader Harry Reid raised the question of whether a well-known insurer could be in financial trouble. Hartford shares plummeted 32 percent to $25.91, MetLife slid 14.9 percent to $40.96 and Principal Financial shed 16.3 percent to $31.52.

 

Investors punished shares of technology companies such as Intel, off 7.1 percent at $17.20, and economic bellwethers such as heavy-equipment maker Caterpillar Inc, whose stock tumbled 8.3 percent to $52.22. Diversified manufacturers struggled after Barclays cut its outlook for the sector.

 

General Electric slid 9.6 percent to $22.15 after the company, seeking to raise cash, said it priced a share offering below the stock's closing price on Wednesday. IBM fell 4.9 percent to $104.74, while on the NASDAQ; shares of eBay Inc tumbled 8.2 percent to $19.15 after Morgan Stanley cut its price target on the stock of the Internet auctioneer and retailer.

 

Commodity-related companies' shares also weakened as commodity prices fell, with miner

The Senate passed a revised version of the financial rescue plan two days after the House rejected an initial plan that triggered the biggest slide in U.S. stocks in 21 years.

 

Still, credit market constraints persisted on Thursday. The commercial paper market, which are  short-term loans to corporations, contracted for the third straight week,as business lending and borrowing effectively shut down.

 

In the latest sign of faltering consumer and business spending, hotel operator Marriott International warned that 2009 would be tough, sending its shares down 5.3 percent to $23.74.

 

The Contagion on Wall Street Continues To Spread

 

The contagion on Wall Street has morphed into a major global credit crisis that has continued to spread, rattling industries around the world and raising the stakes for the Congress to finish up a $700 billion bank bailout. Thursday’s economic data amplified warnings that a recession is nearly upon us as European Central Bank President Jean-Claude Trichet said Europe's economy was weakening, opening the door for the first interest rate cut there in five years.

 

Across the spectrum, businesses have warned that a crisis that began with risky lending to the overheated housing market was on the cusp of a dangerous new phase if the bailout plan is not passed by Congress. Backers of the rescue plan, including U.S. Treasury Secretary Henry Paulson, called on members of the House of Representatives who voted down a similar measure on Monday to change their vote.

 

After the shock rejection of the plan, the Senate passed a sweetened version on Wednesday night and the House is expected to vote again on Friday. Meanwhile, it appears that people are looking for investments that will escape a global shutdown of economic growth. Latin American currencies fell and stocks sank, led by a nearly 8 percent drop in Brazil's benchmark stock index, as concern grew that the rescue package would be too little and too late to head off a deeper downturn.

 

Oil prices fell more than $4 a barrel on the expected slowdown, and the dollar rose to a year high against the euro on the speculation of a rate cut by the ECB, while credit markets remained under deep stress. With banks fearful of lending to each other, direct bank borrowing from the Federal Reserve hit a record high, averaging a staggering $368 billion per day. Our domestic commercial paper market also contracted for the third straight week as business lending effectively shut down.

 

House Speaker Nancy Pelosi said congressional leaders were scouring for votes to pass the bailout bill, cautioning that there was probably not time to change the version passed by the Senate late Wednesday. "We're not going to take a bill to the floor that doesn't have the votes. I'm optimistic that we will take a bill to the floor," Pelosi told reporters.

 

Meanwhile, a group of renegade Republicans, including 20 who voted no the first time, said they would seek to slash the amount authorized in the plan from $700 billion to $250 billion.

 

As the brinkmanship played out in Washington, new data underscored the growing threat to the world's largest economy. Factory orders tumbled in August and the number of workers seeking jobless benefits rose in the latest week to a seven-year high. Even if the bailout passes Congress, the key question is whether it will be enough to stop a disastrous domino effect..

 

Shares of General Electric fell to a five-and-a-half-year low. The bellwether conglomerate, involved in businesses from turbines to television, failed to soothe market concerns with sale of $15 billion in new stock to investors including Warren Buffett. Automakers including General Motors and Ford warned of tougher times, as evaporating credit raises the risk of deeper production cuts and job losses for a struggling industry.

 

The argued over bailout plan, equivalent to some $2,300 per American, has been aimed intended to reinvigorate credit markets that have stopped trading as financial institutions, staggered by failed mortgages, focused on preserving capital. A group of House Republicans led opposition to the bill on Monday over criticism it put the government at the center of a problem that capital markets had created and could still fix.

 

Many Americans also opposed the $700 billion rescue plan because of objections across the political divide, including criticism that it would bail out powerful bankers without doing enough to help families struggling to hang on to their homes.

 

The Senate added tax cuts for families and businesses and an increase in bank deposit insurance in a bid to win broader support for the bill. Monday's House vote was 228-205, requiring a net gain of 12 votes for it to pass.

 

Under the deal, the Treasury would buy illiquid assets held by financial institutions, in the hope of restoring confidence and thawing credit markets vital to the wider economy.

 

The crisis has become the biggest issue in the upcoming. election, now just over a month away. Both presidential candidates voted for the package.

 

Crude Falls

 

The price of crude settled down $4.56 per barrel at $93.97, while London Brent settled down $4.77 at $90.56 per barrel. The growing financial crisis has added to concerns about oil demand, which has slumped in industrialized countries sending crude prices plummeting from record highs of over $147 per barrel.

 

Additional pressure on crude prices came as speculators who used crude and other commodities earlier this year as a hedge against the weak dollar and inflation, seriously unwound those positions.

 

Dollar gains against the euro and other currencies have also helped to depress the price of crude. Government data points out that there are also rising inventories of crude, gasoline and natural gas as oil infrastructure recovered from Hurricane Ike, also weighed on prices.

 

Wall Street Unnerved By Senator Reid Comment

 

Insurance stocks, led by Hartford Financial, Principal Financial and MetLife were lower on Thursday, a day after Senate Majority Leader Harry Reid raised the question of whether a well-known insurer could be in financial trouble. Wall Street is already worried insurers will be hurt by investment losses and exposure to recent corporate collapses, including American International Group, Lehman Brothers and Washington Mutual, as well as commercial and residential real estate debt.

 

Reid said it was imperative that the $700 billion financial bailout plan get legislative approval, adding that a well-known insurer's solvency could be threatened if financial markets remained volatile. Speaking to Press on Wednesday, Reid did not name the insurer. A spokesman said Thursday the comments were not directed at any particular company.

 

Nevertheless, all but two of the stocks in the S&P Insurance Index fell Thursday, sending the index down 8 percent. Hartford Financial Services Group, a large life and property insurer, lost 32 percent, its worst one-day percentage drop since at least December 1995.

 

Principal Financial, a large life and health insurer, and MetLife, the largest domestic life insurer, also fell sharply, closing down 16 percent and 15 percent, respectively. Prudential Financial was down11 percent.

 

Options volatility was also high, indicating investors expected large swings in share price. Buyers of puts, which guarantee the right to sell at a specified price by a certain date, focused on MetLife.

 

The cost of protecting insurers' debt with credit default swaps also rose. Five-year credit default swaps on MetLife rose Thursday to 11 percent upfront, or $1.1 million a year to protect $10 million of debt, plus $500,000 in annual premiums, according to data from Phoenix Partners Group. The swaps closed at around 525 basis points on Wednesday, according to Phoenix.

 

The swaps trade upfront when investors grow more concerned that an issuer will default before all the annual premiums are paid. Hartford swaps rose to 10.5 percent upfront from about 550 basis points, while Prudential's swaps rose to 11 percent upfront from about 525 basis points.

 

Reid's comment prompted MetLife to issue a statement saying it was "financially sound" and not the subject of Reid's comments. A Hartford spokeswoman, Shannon Lapierre, said Reid was not referring to the company. Lapierre said Hartford's recent stock performance was due to "unprecedented market conditions," adding that the company had a "strong history of managing through challenging times."

 

Hartford shares have fallen nearly in half since Monday. The company may be downgraded by both Moody's and Fitch, thereby raising concerns that it will have to increase its capital base to address rating agency concerns.

 

Economic Data Remains Disconcerting

 

Factory orders fell sharply during August and the number of workers seeking jobless benefits rose in the latest week to a seven-year high as trauma in financial markets threatened to accelerate a deep downturn in the world's largest economy. Thursday's reports were just the latest in a series of grim economic reports.

 

The number of people filing initial claims for jobless benefits was 497,000 in the week ended Saturday, the highest since the weeks following the September 11, 2001 attacks, the Labor Department said in a weekly report. The Department estimated that the effects of Hurricane Gustav in Louisiana and Hurricane Ike in Texas added approximately 45,000 claims to the total. Even without that, claims would have been well above the level of 400,000 generally associated with a recession.

 

Weekly claims are one of the most up-to-date indicators, and the bad news is that even they probably do not fully reflect the effects of the heightened credit turmoil of recent weeks. Comments from automobile industry executives made clear that the credit crisis was having a real effect on business.

 

Ford indicated that it does not expect an automotive recovery until 2010 and urged governments and central banks to work together to bring stability back to the financial markets.

 

The economy was clearly struggling even before the latest downward spiral in financial markets, though, as evidenced by the August factory orders data. New orders at U.S. factories tumbled by an unexpectedly steep 4 percent in August, the sharpest contraction since October 2006, a Commerce Department report indicated.

 

Even when volatile transportation orders were stripped out, factory orders shrank 3.3 percent, the steepest slide in orders excluding transportation since September 2001.

 

There was little sign that financing conditions were improving for companies, which could deepen the economic rut. In fact, business lending and borrowing appears to have effectively shut down in some areas. Federal Reserve data showed the U.S. commercial paper market contracted dramatically for a third straight week. Commercial paper is a vital source of short-term funding for daily operations at many companies, and the weekly drop was the largest in at least seven years.