MarketView for October 10

Summary

 

It was a wild ride on Wall Street on Friday, one that saw the Dow Jones industrial average gyrate within a 1,000 point range for the first time ever before closing with a relatively mild loss despite having its worst week on record in both point and percentage terms. Even in a market whose recent hallmark has been volatility, Friday's action was exceptional. The volume on the New York Stock Exchange was more than double the average of 2008 so far.

 

The Dow is now down 40.3 percent since reaching a record high close of 14,164.53 a year ago, on Oct. 9, 2007. The S&P 500, which reached its high of 1,565.15 the same day, is down 42.5 percent. The NASDAQ composite index actually ended the day with a modest advance, While the S&P 500 index, the indicator most watched by market professionals, posted its worst weekly run since 1933.

 

However, there were signs Friday that the market is near a bottom. On Thursday, selling accelerated in the last hour of trading. The Dow was down 221 points at 3 p.m. but closed down 679 points an hour later. On Friday, the Dow was down 468 points at 3 but rocketed 790 points and was up 322 points just after 3:30. It then sold off but closed down only 128.

 

Some investors may have been placing bets ahead of the weekend meeting of officials from the Group of Seven nations, who gathered in Washington to discuss the economic meltdown. One of the potential remedies expected to be reviewed at the meeting is for governments to guarantee lending among banks.

 

Still, Friday's widely mixed finish was proof that Wall Street still has a long list of troubles, and trading is likely to remain volatile when the market reopens on Monday.

 

The intense anxiety on the Street, was evident from the opening bell. The Dow fell 696 points in the first 15 minutes, recovered to gain more than 100 before that first hour was over and then turned sharply lower again. It spent much of the session with a deficit between 300 points and 500 points, regaining some ground and then falling again, until the last hour, when the average had swings spanning hundreds of points that took the Dow up as much as 322.

 

Friday's gainers included financial stocks, the ones most decimated by the credit crisis. The major indexes' sharp swings Friday were likely exacerbated by the computer-driven "buy" and "sell" orders that kicked in when prices fell far enough.

 

At its low point Friday, the Dow was down 696.68 at 7,882.51, some 600 points above its low in Wall Street's last bear market, 7,286.27, reached Oct. 9, 2002. It crossed the line between gains and losses 32 times during the session. Its close was the lowest since April 25, 2003.

Market index stats again told how horrific the run has been on Wall Street:

• The Dow lost 1,874.19 points, or 18.2 percent, during the week. Its dismal performance outdid the week that ended July 22, 1933, which saw a 17 percent drop — and back then, during the Great Depression, there were six trading days in a week.

• The Dow has fallen for eight straight sessions — the longest losing streak since the eight days of declines following the Sept. 11, 2001, terror attacks, when the blue chips lost 1,038.12, or 10.8 percent.

• It's been the worst run for the Dow since the nearly two-year bear market that ended in December 1974 when the Dow lost 45 percent.

• Since hitting their record highs a year ago, the Dow has lost 5,713 points, or 40.3 percent, while the S&P 500 is off 665.90 points, or 42.5 percent.

The S&P 500 index fell 10.70 or 1.18 percent, to 899.22. The 18.2 percent drop for the week was the S&P's steepest decline since the week ending May 21, 1933; its worst loss was in 1929, when it fell 19.9 percent. The index lost 200.01 points for the week. For the week, the NASDAQ lost 297.88, or 15.3 percent.

 

Most major central banks around the world slashed interest rates this week after continuing problems in the credit market triggered concerns that banks will run out of money. Analysts have described the mood on trading floors this week as panicked at times, with investors bailing out of investments on fears there is no end in sight to the financial carnage.

 

A stream of selling forced exchanges in Austria, Russia and Indonesia to suspend trading, and those that remained opened were hammered. The rout in Australian markets caused traders there to call it "Black Friday."

 

European stocks sank Friday, with Britain's FTSE-100 falling 8.85 percent, German's DAX declining 7.01 percent, and France's CAC-40 ending down 7.73 percent. In Asia, the collapse of Japan's Yamato Life Insurance caused already nervous investors to pull even more money out of the market. The Nikkei 225 fell 9.6 percent.

 

An index considered to be Wall Street's fear gauge reached record highs on Friday in another sign of massive investor anxiety. The Chicago Board Options Exchange Volatility Index, known as the VIX, rose to an all-time intraday high of 76.94 Friday. The VIX, which usually trades under 50, tracks options activity for the companies that make up the S&P 500.

 

Still, prospects of further government help and, perhaps, attractive prices helped parts of the financial sector show signs of life. Large national banks were among the gainers, including Bank of America.

 

Not all financials enjoyed a bounce, however. Morgan Stanley fell over concerns that even with a major investment from Japan's Mitsubishi UFJ Financial Group the company was still facing troubles.

 

Technology stocks also advanced on Friday, with Apple up $8.06, or 9.1 percent, to $96.80, while eBay Inc. rose 77 cents, or 4.8 percent, to $16.73.

 

Investors appeared unfazed by final results arriving in afternoon trading from an auction Friday that set the price of debt issued by now bankrupt Lehman Brothers Holdings Inc. at 8.625 cents on the dollar, down from a preliminary estimate of 9.75 cents.

 

The auction was for credit default swaps, which are contracts used to insure against the default of financial instruments like bonds and corporate debt. Traded in a $60 trillion, unregulated market, many of the instruments have fallen sharply because of their ties to bad mortgage debt.

 

Those large losses, combined with the nervousness regarding who holds what CDS has made financial institutions hesitant to lend to one another. The auction could help the market determine which companies are most at risk from CDS losses.

 

Two Bank Lead Parade

 

JPMorgan Chase and Bank of America led the financial parade on Friday, in stark contrast to former investment banks Goldman and Morgan Stanley, closing up 13.52 percent and 6.32 percent, at $41.64 and $20.87 respectively. The shares of Citigroup, which withdrew its bid on Thursday to buy struggling regional bank Wachovia also closed higher, up 1.18 or 9.13 percent.

 

Part of the reason for the rise in financials is short covering, as investors bought up shares believing government action to stabilize Morgan Stanley and the rest of the market may be possible this weekend. There was also a slight easing in the commercial paper market, which is crucial for bank funding, as a possible reason for the boost in bank shares.

 

However, Morgan Stanley and Goldman Sachs, which recently converted to bank holding companies to boost deposits and calm investor concern about their funding sources, saw their share prices fall 22.25 percent, or 2.77, and 12.38 percent, or 12.55, respectively.

 

Merrill Lynch, which agreed last month to sell itself to Bank of America, rose from a year low set on Thursday to $15.75, up 18.24 percent. At this level the shares are trading at a 14 percent discount to the price implied by Bank of America's offer, which suggests some doubt the deal will go through.

 

Crude Falls...Again

 

Oil prices dropped more than 10 percent on Friday and touched 13-month lows in a global flight from risk amid concerns of a worldwide recession and further signs of slumping energy demand.

 

The International Energy Agency slashed its estimate of worldwide 2008 oil demand growth to its lowest rate since 1993, and lowered its 2009 growth forecast by 190,000 barrels per day.

 

The price of sweet domestic crude futures for Nov. delivery settled down  $8.89 per barrel at $77.70, the lowest levels since September 10, 2007, and down 17 percent from last Friday's settlement. London Brent crude settled down $8.57 per barrel at $74.09.

 

The price fall has caused some OPEC members to call for a cut in production levels, and the cartel has agreed to hold an emergency meeting in Vienna on November 18 to discuss the impact of the global financial crisis on the oil market.

 

Credit Markets Start To Thaw

 

Banks cut the rates they charge each other for overnight loans in dollars and euros on Friday, and the rate on one-day corporate paper eased somewhat from Thursday, providing tentative signs that some corners of the credit market are thawing. Nonetheless,  rates for longer interbank loans pushed higher again and the drop in overnight rates was not universal. The cost to borrow pounds sterling funds overnight jumped as dealers reported some U.K. banks faced a shortage of cash.

 

And even though overnight rates in some countries moved closer to central bank targets they remain well above where they were four weeks ago before the bankruptcy of investment bank Lehman Brothers locked up credit markets around the world.

 

The Libor offered rate for overnight sterling funds was fixed almost 40 basis points higher at 5.81250 percent, more than 140 basis points above the Bank of England's target rate of 4.5 percent. Overnight dollar Libor fell by half, at 2.46875 percent, as compared with Thursday's rate of 5.09375. Overnight euro Libor fixed at 3.89250 percent, down from 3.93625 percent the previous day.

 

The jump in sterling overnight rates was the most eye-catching change in the Libor fix, particularly following the Bank of England's half percentage point rate cut on Wednesday. The Federal Reserve, European Central Bank and other major central banks cut benchmark interest rates this week in a coordinated global coordinated move.

 

Interest rates on U.S. overnight commercial paper also fell on Thursday, according to the most recent data available from the Federal Reserve. That suggests the start of a thaw after global government efforts to resuscitate ailing credit markets.

 

The $1.55 trillion commercial paper market has been in near paralysis for almost a month, leaving many companies scrambling to find alternative sources of funding. Improvement in the commercial paper sector is considered vital to a turnaround of the credit crisis, which began more than a year ago.

 

In fact, it may be cheaper for some banks to issue overnight commercial paper than borrow from the interbank market. Interest rates on overnight commercial paper issued by AA-rated, or mid-investment grade, financial companies averaged 1.71 percent on Thursday, down from 2.59 percent on Wednesday, according to the Fed. The average rate on overnight paper sold by AA-rated nonfinancial companies fell to 1.52 percent from 2.27 percent on Wednesday.

 

However, by other measures, such as the premium paid for three-month or "term" funding over government borrowing costs or expected future policy rates, money markets are as dislocated as ever. All eyes are now on Washington D.C., where finance ministers and central bankers from the Group of Seven rich nations, and the International Monetary Fund, meet Friday and Saturday. With stock markets around the world plunging, investors dumping virtually all asset classes to get their hands on cash and money markets paralyzed, market participants are desperate for action from G7.

 

"Most euro zone governments have relied mostly on political promises of rescue if needed (but) we doubt stability will be restored until these promises are converted into concrete actions, preferably with an interbank guarantee," Goldman Sachs' European economists wrote in a note to clients on Friday.

 

The sense of distrust and fear in the interbank market was reflected by the latest data from the ECB that showed how much euro zone banks deposited at the central bank on Thursday rather than lend out. Euro zone banks deposited 64.364 billion euros of overnight funds at the ECB on Thursday, up from 39.831 billion euros the previous day.

 

In Asia, a freeze in the repo market left dealers short of the cash needed to fund their books, prompting a massive selloff in Japanese government bonds.