Tuesday, October 7, 2008
Posted by Rubby at 12:53 PM
NEW YORK (AP) — Wall Street extended its steep declines Tuesday as enthusiasm over the Federal Reserve's latest efforts to inject frozen credit markets with a dose of much-needed confidence gave way to concerns about financial companies' balance sheets. Trading remained fractious, with the Dow Jones industrial average losing more than 225 points.
Federal Reserve Chairman Ben Bernanke warned in a speech on the economy Tuesday that the financial crisis could extend the difficulty the economy is facing. Some traders appeared to regard his remarks as a sign that an interest rate cut could be in the offing, but that did not stanch the losses that built on Monday's huge drop.
Investors appeared initially heartened but still very cautious following the Fed's announcement that it plans to buy massive amounts of corporate debt to jump-start lending in the markets where many companies turn for short-term loans. The evaporation of faith that loans will be repaid has lenders weary and is making it more difficult and expensive for businesses and consumers to borrow.
Credit markets showed some signs of easing as demand for safe-haven investments decreased. Credit markets seized up last month after Lehman Brothers Holdings Inc. declared bankruptcy and the government stepped in to rescue insurer American International Group Inc.
The Fed's latest move is designed to lubricate the lurching credit markets whose troubles have spread to other parts of the economy. Still, the measure stops short of a broad interest rate reduction that some investors say is necessary to restore confidence in the market. Other market watchers argue, however, that more focused steps like Fed's decision to buy commercial paper are what's needed.
But some investors remain worried about financial companies like Bank of America Corp., which after the closing bell Monday slashed its dividend and reported that its third-quarter profit fell 68 percent. The stock fell $6.18, or 19 percent, to $26.04 and was the steepest decliner among the 30 stocks that comprise the Dow industrials.
And a rumor that Mitsubishi UFJ Financial Group Inc. was pulling out of a deal to acquire up to 24.9 percent of the voting shares of Morgan Stanley sent the investment bank's stock tumbling $5.40, or about 23 percent, to $18.10.
Investors are fearful that financial companies will continue to face cash shortages even with efforts in Washington and by other governments to resuscitate lending.
"I think we have weeks of volatility ahead of us," said Kim Caughey, equity research analyst at Fort Pitt Capital Group.
She said the write-downs of bad debt at Bank of America are a reminder to investors that troubles within the financial sector remain.
The concerns weighed on stocks after Monday's rout. In early afternoon trading, the Dow fell 227.87, or 2.29 percent, to 9,727.63, a day after the blue chips dropped below 10,000 for the first time in four years. The Dow fell as much as 800 points on Monday before finishing with a loss of 370.
Broader indexes also fell. The Standard & Poor's 500 index declined 26.74, or 2.53 percent, to 1,030.15, while the Nasdaq composite index fell 55.39, or 2.97 percent, to 1,807.57.
The dollar was mixed against other major currencies, while gold prices fell.
Oil prices rebounded after plunging Monday to an eight-month low on concerns a global recession will undermine demand for crude. Light, sweet crude rose $1.25 to $89.06 a barrel on the New York Mercantile Exchange.
Concerns about the credit markets still fed demand for the relative safety of government debt, though pressures eased. The yield on the three-month Treasury bill, which moves opposite its price, rebounded to 0.88 percent from 0.50 percent late Monday. Demand for short-term Treasurys remains high because of their safety; investors are willing to take extremely low returns just to have their money in a secure place.
Some investors moved into longer-term Treasury bonds, which while still safe don't draw as much demand as shorter-term debt in times of fear. The yield on the 10-year note fell to 3.49 percent from 3.50 percent late Monday.
Investors are still hoping to see other moves from the Fed to boost confidence. Australia's central bank lowered interest rates by the largest amount since 1992 in a surprise move, and that reignited hopes that others, including the Fed and European Central Bank, might follow suit.
Though not giving the market a rate cut, the Fed has taken other steps to help unclog the credit markets. On Tuesday, policymakers provided more details about when it will make $900 billion in short-term loans available to squeezed banks.
The loans are made available to banks through auctions. The Fed, in coordination with other countries' central banks engaged in similar efforts, laid out dates that it will conduct the auctions through the rest of this year.
"The Treasury stepping into the commercial paper market is good news," said Peter Cardillo, chief market economist for Avalon Partners. "The Fed is doing everything they can to have confidence return to the markets, and maybe an interest rate cut is next. The central bank is doing what it should be doing as a lender of last resort."
Minutes from the Fed's last meeting described a U.S. economy that was slowing considerably and credit markets that were deteriorating rapidly. The meeting was held Sept. 16, the day after the failure of Lehman Brothers. The central bank's Open Market Committee found the risks from weaker growth and higher inflation were roughly equal; that was its rationale for leaving rates unchanged. Policymakers, who will meet again at the end of the month, left key interest rate unchanged at 2 percent.
Technology stocks saw some support after chip maker Advanced Micro Devices Inc. said it will spin off its manufacturing businesses into a new venture with Abu Dhabi-backed Advanced Technology Investment Co. AMD said the deal will dramatically cut costs and allow it to better compete with chief rival Intel Corp. AMD jumped 77 cents, or 18 percent, to $5. Intel slipped 17 cents to $16.76.
Wall Street is also looking for Alcoa Inc. to unofficially kick off earnings season when it releases results after the closing bell. Alcoa rose 10 cents to $18.21.
Declining issues outnumbered advancers by about 5 to 1 on the New York Stock Exchange, where volume came to 966.8 million shares.
The Russell 2000 index of smaller companies fell 24.98 or 4.19 percent, to 570.93.
Overseas, Japan's Nikkei stock average fell 3.03 percent. Britain's FTSE 100 rose 0.35 percent, Germany's DAX index fell 1.12 percent, and France's CAC-40 rose 0.55 percent.
Posted by Rubby at 12:52 PM
WASHINGTON (AFP) — The US opened up a major new front Tuesday in the global financial crisis, backstopping huge amounts of corporate debt as European governments staged new rescues, but the moves did little to boost market confidence.
The US Federal Reserve said it would buy up short-term commercial paper or company debt in an effort to kick-start credit flows and ease a squeeze in bank lending, a move described as "necessary to prevent substantial disruptions to the financial markets and the economy."
A Fed official said the move is aimed at restoring flows in a market worth some 1.3 trillion dollars needed for corporate day-to-day funding that has been nearly halted by a credit crunch.
Despite the dramatic move by the Fed and new actions in Europe, markets ran into new turbulence a day after a meltdown in most stock markets.
A rebound on Wall Street faded and skittish investors sent the Dow Jones industrials down more than 300 points or 3.07 percent to 9,656 in afternoon trading. European bourses were mixed a day after record falls in many countries.
EU finance ministers agreed at a meeting in Luxembourg to increase an EU-wide savings deposit guarantee to 50,000 euros from 30,000. They said they would coordinate their response to the crisis.
In Russia, the Kremlin pledged 36 billion dollars to strengthen banks, but the move failed to help confidence. The RTS market finished down 0.95 percent after a record 19 percent slide Monday.
Iceland, where the economy is imperiled by debt and the credit crunch, nationalized its second biggest bank, Landsbanki, and gave its biggest institution, Kaupthing, a 500-million-euro (678-million-dollar) loan. Glitnir bank, the third largest, was nationalized last week.
Russia also agreed to negotiate a four-billion-euro (5.4 billion dollar) emergency loan to help Iceland's fight against national bankruptcy.
The credit crunch remained acute with banks desperate to find dollars even at punitive interest rates.
The European Central Bank on Tuesday pumped 50 billion dollars (37 billion euros) back into interbank money markets, but it said banks sought more than twice that amount.
The ECB said 67 eurozone banks had requested more than 109 billion dollars, and paid a whopping 6.75 percent for dollars made available in the daily attempt to keep cash flowing through the financial pipeline.
It announced a schedule for new coordinated action with other central banks to support the provision of dollars to cash-strapped commercial banks.
The Bank of Japan also poured more billions into the system.
In the US, the Fed gave no estimate of how much money would be put into the new campaign, but said the new program to soak up corporate debt would begin rapidly.
The US administration has already committed 700 billion dollars to a bailout of banks' bad debt and the latest move extends the government support.
John Ryding, economist at RDQ Economics, said most of the new funds are likely to go to banks and financial companies that have been trying to roll over debts linked to troubled real estate investments.
"This is basically unsecured lending to the banks," Ryding said.
The market in short term company debt -- commercial paper and short-term securities issued by companies and banks for payrolls and day-to-day expenses -- is worth tens of billions of dollars each day.
The Fed action came a day after the Fed agreed to pay interest on commercial bank reserves with the central bank, a move aimed at helping the central bank keep control of interest rates in a frozen market.
Fed chairman Ben Bernanke said meanwhile the US central bank must consider whether its current interest rate policy "remains appropriate" in view of exceptional market turmoil.
Bernanke, speaking to business economists in Washington, provided a hint that the US central bank could cut rates as part of its efforts to stem a widening financial crisis.
He said the turmoil in markets and latest data suggest "that the outlook for growth has worsened and that the downside risks to growth have increased."
"In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate," he said.
Bernanke's comments came amid growing calls for rate cuts by the Fed, possibly coordinated with other central banks, to help augment the exceptional measures undertaken to battle a credit crunch that threatens economic activity.
The current base Fed rate is 2.0 percent, and some analysts have said they expect a cut on or before the Fed's next policy meeting October 28-29.
"There is little to keep the Fed from cutting interest rates as it attempts to protect against a more severe recession," said Ryan Sweet at Economy.com.
"We expect the Fed funds rate to be at 1.5 percent by year's end. The 50-basis point cut will not cure all that ails the economy, however."
Bernanke noted that financial systems in the US and much of the rest of world are "under extraordinary stress," but expressed confidence that the steps being taken would eventually ease the crisis.
US President George W. Bush discussed the global economic meltdown with leaders of Britain, France and Italy, seeking a common strategy ahead of weekend crisis talks.
"I was on the phone with them this morning to ensure that our actions are closely coordinated. We live in a globalized world; we want to make sure that we're effective," he said in a speech outside Washington ahead of a meeting Friday of finance chiefs from the Group of Seven industrialized nations.
Posted by Rubby at 12:43 PM