MarketView for September 24

Summary

Stock prices were on the down side on Wednesday as worries over the effectiveness of a still-emerging government plan to rescue banks from crippling debt continued at the forefront of everyone’s attention. The credit markets also showed added strain, with demand rising for short-term Treasury bills, considered the safest of investments. The atmosphere was uneasy enough to erode the market's initial enthusiasm over investor Warren Buffett's decision to invest $5 billion in Goldman Sachs Group Inc.

A key concern on Wall Street is that Washington could produce less potent dose of medicine than might be necessary to aid moribund credit markets. Fear about bad debt on the books of financial companies has led to tightness in credit markets. That, in turn, has made it difficult for businesses and consumers to borrow.

Treasury Secretary Henry Paulson told the House Financial Services Committee that he agreed to limit the pay of Wall Street executives whose companies might benefit from the proposed $700 billion measure for financial services firms.

Paulson appeared with Federal Reserve Chairman Ben Bernanke before Congress for a second day to brief lawmakers on the plan. Their appearance on Capitol Hill Tuesday unnerved investors, who began questioning whether lawmakers doubt the necessity and form of the government bailout.

The waiting was clearly wearing on the credit markets, raising concerns again about liquidity in the banking system. Demand for short-term government Treasuries increased as investors again sought safe places to keep cash. The yield on the 3-month Treasury bill, considered the safest short-term financial asset, was at 0.49 percent late Wednesday, down from 0.79 percent late Tuesday.

Last week, demand spiked so high that the yield briefly dipped into negative territory; investors were so focused on putting their money in safe assets that they have been willing to accept very little or even negative returns. In other Treasury trading, the yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.81 percent from 3.80 percent late Tuesday.

Shares of Goldman Sachs rose $4.85, or 4 percent, to $130 Wednesday after Buffett's Berkshire Hathaway said it was investing at least $5 billion in Goldman, a move Wall Street took as a sign of support for the independent investment bank model. Besides buying $5 billion in preferred stock, Berkshire also got warrants to buy another $5 billion of Goldman's common stock. Goldman said it will sell $5 billion worth of common stock to the public.

Beyond Goldman, investors put money into defensive areas like health care and utilities. For example, Merck rose 72 cents, or 2.3 percent, to close at $31.47.

By a margin of 55% to 31% in a Bloomberg/Los Angeles Times poll, American said that they don't believe the government should "bail out private companies with taxpayer dollars, even if their collapse could damage the economy," according to Bloomberg News.

Drop In Existing Home Sales

The National Association of Realtors reported on Wednesday that pre-owned single-family homes and condos fell 2.2% in August to a seasonally adjusted annual rate of 4.91 million units. Resales have fallen 10.7% in the past year. The inventory of unsold homes on the market fell 7% to 4.26 million units, a 10.4 month supply at the current sales pace. This is the lowest inventory level since March. The median sales prices fell 9.5% in the past year to $203,100. For July, resales rose a revised 3.5%, compared with the prior estimate of a 3.1% rise.

The Bailout Battle Continues

Bush administration officials warned Congress on Wednesday that the U.S. financial system would sink into Great Depression-style chaos unless it approved a $700 billion bailout plan, which has become a political football in the U.S. presidential campaign.

Meanwhile, Wall Street remains in turmoil. Investors stampeded into cash and safe-haven assets, briefly sending short-term interest rates below zero. Experts said banks were hoarding cash, fearful that if they loaned money to other banks they might not get repaid.

Wrangling over the bailout overshadowed Berkshire Hathaway’s $5 billion investment in Goldman Sachs, which is transforming into a traditional bank to shield itself from the crisis.

"I am to some effect betting on the fact that the government will do the rational thing and act properly," Berkshire's Warren Buffett told CNBC.

While investors see an 80 percent chance that Congress will approve the bailout by the end of the month, many lawmakers are demanding changes to the bailout plan. The changes include more protections for taxpayers and restrictions on the pay of executive at companies that unload their bad assets.

U.S. Rep. Barney Frank, chairman of the House Financial Services Committee, said Democrats would have their version of the bailout -- with changes -- ready by Thursday and would then start negotiations with Republicans.

Meanwhile, the uncertainty has roiled the financial markets as Fed Chairman Bernanke and Treasury Secretary Paulson try to convince Congress to approve the plan allowing the government to buy up toxic mortgages and other bad assets that have dried up global credit, financial markets showed extreme strain.

Scarce credit forced overnight lending rates for companies to 6.50 percent. The dollar fell against the euro and global stocks seesawed as unease over the rescue plan, which could cost every man, woman and child in America $2,300.

Washington Mutual's shares fell almost 30 percent after S&P lowered the largest savings and loan’s credit rating to junk status on expectations that any sale of would be done in pieces, and that its assets were worth less than its debts.

Other nations braced for fallout from the crisis. Business confidence weakened in Germany, France and Italy in September, raising fears that the euro zone is sinking into recession as the turmoil spreads.

In the second day of congressional hearings, U.S. Rep. Baron Hill, a Democrat from Indiana, told Bernanke, "There is great angst in Congress over whether we should do this," and asked how to explain the need for an expense greater than the cost of the Iraq war since 2003 to regular Americans.

Bernanke bluntly warned, "Choking up of credit is like taking the lifeblood away from the economy."

Asked if the crisis would match the Great Depression of the 1930s, Bernanke said, "I think this is the most significant financial crisis of the postwar period of the United States, and has in fact a global reach."

With many members of Congress up for re-election, lawmakers are reluctant to merely rubber-stamp the rescue plan. Meanwhile, the head of the Congressional Budget Office, Peter Orszag, warned lawmakers of possible "chaos" if Congress does nothing resulting in a meltdown, "maybe on the magnitude of the Great Depression," he said. That kind of rhetoric did little to warm the hearts of the average investor.

Crude Mostly Unchanged

Oil steadied below $106 a barrel on in early Asian trading as a drop in inventories was countered by further evidence of slowing demand. Light crude futures for November delivery settled down 4 cents per barrel at $105.69, after a drop of 88 cents to settle at $105.73 on Wednesday. London Brent crude rose 4 cents to $102.49.

Oil is down in price by about 25 percent since hitting record highs of more than $147 a barrel in mid-July, dragged down by mounting evidence that high energy costs and economic woes were cutting global fuel consumption.

In a further sign of slackening demand, a government report showed nationwide oil demand over the past four weeks running 5.3 percent below last year in the midst of mounting economic turmoil in the country.

In Japan, the world's third-biggest oil consumer, crude oil imports also fell 3.3 percent to 4.13 million barrels per day in August from the same month last year, data from the Ministry of Finance showed on Thursday.

Still, slow recovery in oil and gas production in the Gulf of Mexico, lower inventories and lower OPEC supplies would continue to offer some price support. Refinery utilization fell to the lowest level on record in the week through September 19, according to government data, reflecting shut-ins along the Gulf of Mexico caused by Hurricane Ike this month.

Crude stocks were down by 1.5 million barrels, while gasoline stocks fell for the ninth week by 5.9 million barrels to their lowest level since 1967. In the Gulf of Mexico, firms continued efforts to restart production at refineries and pipelines after Ike battered the oil infrastructure in the largest hit to the domestic energy supplies since the 2005 hurricane season.