MarketView for October 21

Summary 

 

Stock prices were lower again on Tuesday, as signs of a healing credit market meant that Wall Street began to turn its attention turned to the dismal outlook for corporate profits. Commodity shares fell on fears of a global recession and a rash of disappointing earnings heightened worries about the deteriorating profit picture.

 

Oil and mining companies weighted on the broader market as commodity prices slid and Freeport-McMoRan Copper & Gold's profit dropped sharply and its shares lost 10.8 percent. Freeport, the world's largest publicly traded copper producer, said quarterly profit fell by a third and would curtail planned mine expansions because of weaker metals prices and current economic conditions. Caterpillar missed profit expectations, sending its shares down 5.1 percent to $38.83.

 

Earnings disappointments were widespread. Texas Instruments warned of slowing sales for its widely used analog chips, while DuPont reduced its full-year forecast. Technology companies slid in the regular session, driving the NASDAQ down more than 4 percent, ahead of results from Apple and Yahoo. Texas Instruments shed 6.3 percent to $16.85, while shares of Dow component DuPont slid 8 percent to $33.28. 3M managed to climb  4.4 percent to $60.04, lending support to the Dow Jones industrial average after the company posted a stronger-than-expected quarterly profit.

 

However, after the closing bell the tone changed for tech companies. Apple's shares rose more than 3 percent on the announcement that its quarterly profit rose 26 percent, though it gave an outlook for the current quarter well below expectations. Yahoo rose more than 8 percent in after-hours trading despite the company's posting of sharply lower profit.

 

The gloomy corporate news underscored the severity of the fallout from the housing slump and the impact of the prolonged global credit crisis. Even though there were further signs on Tuesday of a thawing of credit markets, the fear is that the damage is not going to be irreversible in the short-term.

 

In volatile trading, the Dow swung 280.28 points from its intraday high of 9,284 to its session low of 9,004. The Chicago Board Options Exchange Volatility Index, or VIX, known as Wall Street's fear gauge, edged up 0.26 percent on Tuesday to 53.11 at the close. Last Thursday, the VIX hit a record intraday high at 81.17.

 

The Fed Continues Its Resuscitation of the Economy

 

The Federal Reserve and governments around the world loosened strained financial markets on Tuesday by pumping in more money and launching bank rescue programs. The Fed unveiled Washington's latest program to help the money market industry, saying it could lend up to $540 billion to five "special purpose vehicles" set up to buy certificates of deposit and commercial paper from money market mutual funds, which reeled after too many investors tried to take out their money.

 

Treasury Secretary Henry Paulson said he is not opposed to the idea of a second fiscal stimulus program, another piece of evidence that the Bush administration may accept another wave of government spending to help the economy, following Fed Chairman Ben Bernanke's endorsement of a new plan on Monday.

 

Japan and France earlier extended more help to banks and the IMF prepared to intervene in trouble spots such as Pakistan, Ukraine and Iceland. According to the IMF, it is ready to assist Pakistan, which said it needed up to $15 billion to avert a balance of payments crisis.

 

Ukraine also said it was close to agreeing to measures to allow it to receive IMF aid. Iceland as well appeared close to a deal with the IMF.

 

 

Interbank lending costs came down again, offering tentative signs of renewed confidence in the financial system, as weeks of bailouts and rescue plans appear to have cooled the worst crisis since the 1930s Great Depression.

 

Paulson also said Treasury is looking at purchases of whole mortgage loans and the credit freeze is beginning to melt. Nonetheless, he warned there may be "a number of difficult months" ahead before conditions improve. "We have a resilient economy but it will take time," Paulson said in an interview with the Charlie Rose show on PBS.

 

In the latest sign of the huge impact the financial crisis is wreaking in emerging markets, the government of Argentina said it was planning to take control of private pension funds. Labor leaders and many lawmakers applauded the nationalization as a way to guarantee pensions in a time of market turmoil, but the surprise move sent Argentine stock and bond prices into freefall.

 

Governments around the world have promised $3.3 trillion to guarantee bank deposits and bank-to-bank lending, and in many cases have taken stakes in struggling banks.

 

The hit a year-and-a-half high against a basket of currencies as investors and companies continued to deleverage. The stronger dollar, in turn, sent gold and oil prices down nearly 4 percent.

 

In the United States, the economy continued to dominate the presidential campaign two weeks before the November 4 vote. Democrat Barack Obama, who extended his lead over Republican John McCain in the polls, convened a panel of economic advisers and accused McCain of fumbling his response to the financial crisis.

 

Canadian banks cut their prime lending rates in response to lower funding costs and the Bank of Canada's 25 basis point interest rate cut earlier in the day, giving customers a shot at lower rates on various loans. French banks won some respite from the ravages of the financial crisis through a 10.5 billion-euro ($13.9 billion) state cash injection.

 

However, the Bank of England said Britain's economy is probably entering its first recession in 16 years, and the outlook has not worsened as rapidly as it has in the past month for a very long time, BoE governor Mervyn King said.

 

"We are far from the end of the road back to stability, but the plan to recapitalize our banking system, both here and abroad, will, I believe, come to be seen as the moment in the banking crisis of the past year when we turned the corner," King said. Sterling fell 2 percent after King's comments.

 

 

NASDAQ Ignores Its Own Rule

 

The NASDAQ’s decision to suspend one of its own listing rules comes as an avalanche of shares tumble below the $1 threshold, and is intended to avoid the mass delisting that followed the burst of the dot-com bubble. Last week, parent company Nasdaq OMX Group filed a request with the SEC to temporarily suspend the minimum price requirement that protects listed companies from becoming penny stocks.

 

It said in the filing that "U.S. and world financial markets have faced almost unprecedented turmoil," which has undercut the share prices of companies that would otherwise remain suitable for continued listing. The SEC endorsed the suspension, which went into effect on Friday and will end Friday January 16.

 

NASDAQ said in the filing that the number of stocks falling below $1 has increased "dramatically" from last year, particularly this month. At the end of September, 227 securities were penny stocks, up from 64 at the same time last year, the exchange said. By October 9, the number had jumped to 344.

 

Among the NASDAQ’s new penny stocks, satellite radio company Sirius XM Radio said it is considering a reverse stock split, which would double its share price while halving the number of shares.

 

On the rival New York Stock Exchange, drugstore chain Rite Aid, retailer Circuit City Stores and Vonage all recently dipped below the $1 level. They now trade on NYSE's small-cap Arca platform. Glenn Tyranski, senior vice president of financial compliance at NYSE Regulation, the arm's length regulatory arm at exchange parent NYSE Euronext, said about 20 listings are below the minimum price requirement.

 

However, NYSE is not now considering suspending its price requirement, he told Reuters. "It's more than we've had previously, but we don't have that wave of people that are tripping the requirement yet."

 

While NYSE has never suspended its price requirements, NASDAQ did so shortly after the September 11, 2001 attacks on the United States, in an effort to keep plunging stocks on the public market.

 

That suspension also came amid the stock market downturn caused by tumbling tech stocks, or the bursting of the "dot-com bubble," which swelled to its maximum size in 2000. Scores of Internet companies were wiped out over the next two years, badly shaking the tech-heavy NASDAQ. Although the current crisis is centered on the financial sector, the exchange wants to avoid a similar exodus of listings, from which it derives about 16 percent of overall revenue.

 

As of September 30, NASDAQ had delisted about twice as many stocks as it had in the same period last year, according to data from the exchange. The two dominant U.S. exchanges have slightly different price requirements.

 

On the larger NYSE, a listed company whose average closing price dips below $1 in the last 30 days receives a warning that it must boost its share price within 6 months or face delisting. On the NASDAQ, companies receive the warning when they close below $1 for 30 consecutive days. After the suspension, NASDAQ said it would reevaluate the share prices of its listed companies based on January 19, 2009 data.

 

Wall Street Is About To Get A Nanny

 

The long road to financial oversight of Wall Street began to take shape on Tuesday at a congressional hearing where many lawmakers clamored for more transparency in exotic debt securities. With markets in turmoil over the worst financial crisis in generations, members of a House of Representatives committee sharply criticized bankers for a decade-long surge in leverage, risk and mortgage-lending abuses that produced a bonanza for a handful of elite investors, but a disaster for the economy.

 

As emergency measures to bail out banks and stabilize markets are implemented in the Bush administration's last days, Congress in the months ahead will tackle longer-term reforms likely to reshape the Washington-Wall Street relationship. The goal is to never again have the taxpayers pay for Wall Street's mistakes. That is commendable but probably a bit too ambitious.

 

Lawmakers at the hearing called for more disclosure by hedge funds and private equity firms, as well as more openness in markets for credit default swaps -- one of the many complex financial instruments behind the global credit crunch.

 

Credit rating agencies failed to do their jobs, lawmakers said, while debt piled up, the home-price bubble grew and regulators fell hopelessly behind rapid innovation that spawned a tangle of complex new debt instruments.

 

"Part of the problem in the past was that we had regulators who didn't believe in regulation," said Nobel Prize-winning economist Joseph Stiglitz, a witness at the hearing. The Columbia University professor urged Congress to do more soon to stem the tide of home foreclosures engulfing many U.S. families. "We need to do something about the foreclosure problem and that needs to be done quickly," he said.

 

The future of housing finance giants Fannie Mae and Freddie Mac, seized by the government last month, needs clarity, lawmakers said. In addition, lawmakers said, they will try again next year to bring order to the patchwork of federal agencies that regulate banking, markets and financial services.

 

Republicans blamed Democrats for allowing Fannie and Freddie to run amok in the markets and the halls of Congress. Democrats replied that Republicans for years failed to rein in the companies while in charge of Congress and the White House.

 

Former Federal Reserve Vice Chairman Alice Rivlin, now a senior fellow at the Brookings Institution think tank, assured lawmakers at the hearing that recent cries about creeping socialism and the downfall of capitalism were overheated.

 

"But market capitalism is a dangerous tool," she said. "Like a machine gun or chainsaw or nuclear reactor, it has to be inspected frequently to see that it is working properly and used with caution according to carefully thought out rules."

 

Resetting the rules will be Congress' job next year, with either Democratic Sen. Barack Obama or Republican Sen. John McCain in the White House. Rivlin urged lawmakers to approach the task with an open mind.

 

"Getting financial market regulation right is a difficult, painstaking job. It is not a job for the lazy, the faint-hearted or the ideologically rigid -- applicants should check their slogans at the door," she said.