MarketView for September 22

Summary

  

The major equity indexes fell sharply on Monday as the investment world tried to come to grips with what appears to be a $700 billion or more bailout that is in the offing. The concern is that despite its immensity, the bailout may not resuscitate a slumping economy. At the same time, a record spike in oil prices renewed concerns over a possible slow down in consumer spending.

 

The shares of banks, home builders and big manufacturers were among the day’s biggest losers.

Investors also dumped consumer-oriented companies and airlines as oil surged $16.37 to settle at $120.92 a barrel, its biggest one-day jump on record. A sharp fall in the dollar added to oil's gains.

 

A Wall Street analyst downgrade hit shares of JPMorgan Chase, which fell 13.3 percent, making it the top drag on both the Dow Jones industrial average and the S&P 500. Wells Fargo 11.6 percent.

 

Monday's decline went a long ways towards wiping out nearly all the gains seen on Friday when the bailout announcement sparked Wall Street's best one-day advance since 1987. Only 2 of the Nasdaq 100 stocks ended the day higher.

 

The Bush administration is pressing Congress to approve one of the costliest U.S. bailouts for financial companies since the Great Depression, but debate about the particulars of the plan continues on Capitol Hill. One key development, although the Administration is not happy about it, is that apparently the Treasury Department had agreed to take an equity stake in the firms that unload assets under the rescue plan, though other details remain unclear.

 

With oil prices up sharply, investors sold shares of consumer-oriented companies, such as Procter & Gamble, whose shares ended the day down 3.3 percent at $68.04. Target fell 6.6 percent to $49.80 after Lazard Capital Markets cut the stock to "hold" from buy."

 

Uncertainty about the bailout overshadowed news that Japan's largest bank, Mitsubishi UFJ Financial Group, planned to buy a stake in Wall Street bank Morgan Stanley. Goldman Sachs and Morgan Stanley are abandoning their investment bank model of two decades to become bank holding companies regulated by the Federal Reserve. Morgan Stanley shares fell 0.4 percent to $27.09 after earlier adding more than 10 percent, while Goldman Sachs shares dropped 7 percent to $120.78.

 

JPMorgan Chase shares fell 13.3 percent to $40.80 while Wells Fargo shares fell 11.6 percent to $35.18.

 

Caterpillar, an economic bellwether and a Dow component, lost 2.8 percent to close at $64.60. Kraft Foods Inc, the newest member of the 30 Dow industrials as it replaces AIG at Monday's opening bell, was down 4.6 percent at $33.09.

 

Apple fell 7 percent to $131.05 after JPMorgan cut its price target on the iPod and iPhone maker's stock.

 

Making Wall Street Pay

 

While there is almost unanimous agreement as to the absolute necessity of providing the credit markets with some sort of a bailout or relief program, the question as issue is how to make the Street pay for its sins. As a result, the planned $700 billion bailout to shore up the battered U.S. financial system looked set to drag into next week as Washington lawmakers continue to haggle over the terms of the deal.

 

Stock prices and the dollar both fell precipitously as emerging details of the plan left many players skeptical that the rescue, which would give the Treasury Department the authority to buy up toxic mortgage-related debt from financial groups, would actually solve the problem.

 

Lawmakers and Bush administration officials are hammering out details of a deal they hope will end the worst financial crisis since the Great Depression. Treasury Secretary Paulson and Fed Chairman Bernanke start two-days of congressional hearings on Tuesday to hasten approval of the bailout.

 

With the economy a key issue on which voters are fixated, and a presidential election only about six weeks away, lawmakers from both parties want a plan in place quickly so as to prevent the markets from reeling in red ink again. At the same time, with one-third of the Senate and the entire House of Representatives up for re-election the members of Congress want to sound tough on such hot-button issues as the pay of reckless executives.

 

Democrats, who control both chambers of Congress, pushed for changes to the plan on concerns that it could expand the powers of the executive branch without adequate oversight, a frequent Democratic criticism of the Bush administration.

 

"We are not sending a blank check to Wall Street," House Speaker Nancy Pelosi said after holding bipartisan talks.

 

With so many ideas being floated in Washington on Monday, one congressional aide apparently likened the scene to a "Turkish bazaar of public policy ideas." On a more serious note, the crisis has unsettled world markets, and Group of Seven finance ministers and central bank heads promised "heightened close cooperation" to safeguard the global economy.

 

The latest jitters came after the deal late Sunday scrapped the investment bank model synonymous with Wall Street, ensuring Goldman Sachs and Morgan Stanley will avoid the fate of rivals that collapsed or were bought in the brutal meltdown of recent weeks.

 

The Fed's agreement to convert the once high-flying Goldman and Morgan Stanley investment banks into more conventional depositary institutions was Washington's latest effort to restore calm to chaotic markets and avoid a deep recession.

 

Both Goldman and Morgan will now face a thicket of new regulations, which will bolster their resources but also curb the spectacular profit growth that made investment bankers among the highest paid in the nation.

 

The rescue came together after seismic shifts on Wall Street that saw Lehman Brothers file for bankruptcy, Merrill Lynch agree to sell itself to Bank of America and the Fed stage an $85 billion rescue of AIG. However, AIG shares gained 23 percent on Monday on reports its investors were hatching a plan to repay the government loan in order to prevent the insurer from falling into government ownership.

 

Morgan Stanley went a step further, striking a deal with Japan's largest bank, Mitsubishi UFJ Financial Group, on Monday to spend as much as $8.5 billion for about one-fifth of the prestigious 73-year-old investment bank, sending Morgan's shares higher before closing down.

 

After Monday's talks, Rep. Barney Frank, a top Democrat, said the government would take equity in the companies seeking a bailout. The White House said it agreed to an oversight board to monitor the bailout, which Democrats had pushed for. And Frank said there was also agreement that the plan should minimize the number of Americans who will lose their homes to foreclosure.

 

The touché point between lawmakers and Treasury officials is the emotional issue of whether executives at the companies in need of rescue must agree to limits to their compensation.

Rep. Henry Waxman, chairman of the House Committee on Oversight and Government Reform, voiced outrage at the notion of any bailout without a cap on executive pay.

 

"The administration's plan ... would enrich the Wall Street executives whose reckless investments caused the financial crisis," Waxman said. "The taxpayer is being asked to risk billions to protect the bonuses of investment bankers."

 

The crisis is threatening global markets. Central banks from Europe to Japan sought to shore up banks by injecting money into the banking system.. Even in the oil-rich Gulf region, the crisis was felt. The United Arab Emirates Central Bank launched its first-ever emergency funding facility to help fund banks as global lending between institutions shriveled.

 

Even some Republicans came out against the bailout. Alabama Sen. Richard Shelby, the top Republican on the Senate Banking Committee, said he feared the bailout was "neither workable nor comprehensive."

 

"It would be foolish to waste massive sums of taxpayer funds testing an idea that has been hastily crafted," he said. South Carolina Republican Sen. Jim DeMint called the Bush plan "completely unacceptable."

 

With details in such dispute, Frank said the legislation could take until next week to complete.

 

Buoyed by the 2 percent decline in the dollar, crude oil futures soared $16.37 to settle at $120.92, the largest jump in a trading session. At one point oil was up a stunning $25.45 per barrel, or 24.3 percent.

 

Crude Rises Sharply

 

Oil prices briefly spiked more than $25 a barrel Monday, shattering the record for the biggest one-day gain as unease about the government's $700 billion bailout plan pummeled the dollar. An expiring crude contract added fuel to the frenzied rally.

 

Light, sweet crude for October delivery jumped as much as $25.45 to $130 a barrel on the New York Mercantile Exchange before falling back to settle up $16.37 per barrel at $120.92. In London, November Brent crude settled up $6.43 per barrel at $106.04 on the ICE Futures exchange.

 

The contract expired at the end of the day, adding to the volatility as traders rushed to cover positions; the October price began accelerating sharply in the last hour of regular trading, a common occurrence when a contract is about to go off the board.

 

Still, the rally, which shattered crude's previous one-day price jump of $10.75, set June 6, showed the intensity of emotion in the market. The Nymex temporarily halted electronic crude oil trading after prices breached the $10 daily trading limit. Trading resumed seconds later after the daily limit was increased.

 

The November crude contract, which became the front-month contract at the end of Monday's session, settled up $6.62 per barrel at $109.37, still a very sharp gain. The severity of the price move shocked veteran market participants and prompted the U.S. Commodity Futures Trading Commission to launch an investigation into whether illegal manipulation was to blame.

 

Crude has gained about $30 in a dramatic four-day rally that has at least temporarily halted oil's steep two-month slide below $100. At this rate, crude is within striking distance of its all-time record of $147.27, reached in July.

 

The rally came as energy traders grappled with the implications of the government's proposed initiative to stem the financial crisis by absorbing billions of dollars of banks' bad mortgage-related securities. The fear is that the government will have to dramatically ramp up borrowing to pay for the mammoth rescue effort, an inflationary move that could further devalue the dollar and trigger another wave of safe-haven buying in investments like commodities.

The 15-nation euro rose to $1.4796 in afternoon trading, up from the $1.4470 on Friday. A weak greenback was a catalyst for the commodities boom of the past year, and analysts said large investment funds were expected to pour money back into the sector.

 

Crude's resurgence could halt steadily sliding pump prices. A gallon a regular fell 1.8 cents overnight to a new national average of $3.739, according to the AAA and the Oil Price Information Service.

 

In other Nymex trading, heating oil futures rose 14.52 cents to settle at $3.043 a gallon, while gasoline futures rose 10.41 cents to settle at $2.7038 a gallon. Natural gas futures rose 9.5 cents to settle at $7.943 per 1,000 cubic feet.