Timothy Geithner unveiled the government's revised financial-sector rescue plan on Tuesday, and investors turned an emphatic thumbs down on the eagerly awaited announcement from the Treasury Secretary. U.S. stocks plunged Tuesday, with the large-cap benchmark S&P 500 falling nearly 5% and the Dow industrials dropping below the psychologically significant 8,000 mark.
Financial stocks led the market lower, with the S&P Diversifed Banks index down nearly 14%, reflecting Wall Street's growing concerns about the government's ability to revive the banking industry. Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC) were among the industry stocks that finished significantly lower Tuesday. Homebuilding and consumer stocks were also hit hard.
The speech failed to deliver enough details to satisfy investors, says S&P MarketScope. Tuesday's sell-off came after investors last week scooped up issues in anticipation of the plan's unveiling.
Meanwhile, the Senate passed President Obama's economic stimulus plan. legislation, while
Federal Reserve Chairman Ben Bernanke defended the central bank's actions dealing with crises before a cantankerous House Financial Services Committee.
On Tuesday, the 30-stock Dow Jones industrial average finished lower by 381.99 points, or 4.62%, at 7,888.88. The broad S&P 500 index was off 42.73 points, or 4.91%, at 827.16. The tech-heavy Nasdaq composite index shed 66.83 points, or 4.20%, to 1,524.73.
On the New York Stock Exchange, 26 stocks were lower in price for every 5 that advanced. Nasdaq breadth was 22-5 negative. Trading was active.
Treasuries were sharply higher as stocks plummeted, aided by a strong three-year note auction, with the yield on the 10-year note falling to 2.83%. The dollar index rose. Gold futures were sharply higher in a flight to safety. Crude oil futures slid in New York trading ahead of Wednesday's weekly U.S. inventory data.
Geithner said Monday that the new administration will wage an aggressive two-front battle against the worst financial crisis in seven decades, while the Federal Reserve announced it was expanding a key lending program to up to $1 trillion. The efforts were part of the government's major overhaul of the widely criticized financial rescue program. The Fed said it would expand the size of a key lending program to as much as $1 trillion from $200 billion. The program, which has yet to begin operations, is designed to boost resources for consumer credit and small business loans. The Fed said the program would be expanded to cover the troubled commercial real estate market and certain residential mortgages.
"Right now critical parts of our financial system are damaged," Geithner said in his speech. "Instead of catalyzing recovery, the financial system is working against recovery and that's the dangerous dynamic we need to change." "It is essential for every American to understand that the battle for economic recovery must be fought on two fronts," Geithner said in a speech in Treasury's ornate Cash Room. "We have to both jump-start job creation and private investment and we must get credit flowing again to businesses and families," he said.
In responding to criticism and an implied rebuke from the stock market, the Treasury Secretary said in a subsequent CNBC appearance that the financial crisis is "enormously complicated" and a solution will take time to implement and heal. When posed a question on the miscues on the "bad bank" solution, Geithner said he will avoid any program that leaves the government and tax payers vulnerable to the accusation of overpaying for assets. He said parts of the financial system are functioning well, others are under repair and still others badly damaged, requiring a public-private partnership.
As to vagueness in the details on the plan, he emphasized the "complexity" of the issue.
The response from Wall Street was swift -- and negative.
"The lack of detail in today's announcement suggests that this is another hurried attempt to prop up the banks," says Grant Lewis, head of bond research at Daiwa Securities in London.
"Geithner spoke in plain terms, catering more to Main Street than to Wall Street, clearly showing the fear that exists within Washington over the use of taxpayer money," says Miller Tabak strategist Tony Crescenzi. "The problem is that Geithner needed to speak more to Wall Street, where the problems lie, rather than stay at a distance as he did, and leave Wall Street with too few details with no roadmap by how it might find its way out of current difficulties."
The drop in equities suggests the market isn't too impressed that this "new" Treasury plan will be any better than its predecessor, says Action Economics. "These guys really know how to disappoint, despite having many prior failures from which to learn."
Bernanke said in testimony before the House Financial Services Committee Tuesday that the Fed believes an array of extraordinary programs aimed at stabilizing credit and banking have improved market conditions and eased strains despite a drumbeat of negative economic news. "We have been encouraged by the responses to these programs," Bernanke said in testimony prepared for delivery to the House of Representatives Financial Services Committee. Aggressive efforts by the Fed and other central banks in response to the deep financial crisis of the last 18 months have helped reduced interbank lending rates internationally and took some of the steam out of liquidity pressures at the end of 2008, he said. Fed officials are considering providing the public with more information about the Fed's balance sheet and lending policies, Bernanke said.
President Barack Obama's economic recovery plan passed the Senate and is on its way to difficult House-Senate negotiations. Just three Republicans helped pass the plan on a 61-37 vote, and they're already signaling they'll play hardball to preserve more than $108 billion in spending cuts made last week in Senate dealmaking. Obama wants to restore cuts in funds for school construction jobs and help for cash-starved states. The Associated Press reports those cuts are among the major differences between the $819 billion House version of Obama's plan and a Senate bill costing $838 billion. Obama has warned of a deepening economic crisis if Congress fails to act. He wants a bill completed by the weekend.
Fannie Mae and Freddie Mac, the mortgage-finance companies seized by regulators, may need more than the $200 billion in funding pledged by the U.S. government if the housing market continues to deteriorate, Federal Housing Finance Agency Director James Lockhart said. Bloomberg reported the companies' needs will depend largely on the direction of home prices, Lockhart said in an interview.
In economic news Tuesday, U.S. wholesale sales dropped 3.6% in December after a 7.3% drop in November (revised from -7.1% previously). Weakenss was broadbased, but was paced by a 8.1% drop in auto sales. Inventories declined 1.4% following a 0.9% decline in November (revised from -0.6%), a function of a 1.4% decline in durable goods and a 1.5% slide in non-durables. The inventory-sales ratio rose to 1.27 versus 1.25 in November (revised from 1.24).
The International Council of Shopping Centers and Goldman Sachs chain store sales index was unchanged in the week ended Fe. 7 after rising 1.6% the week before. Consumers continue to pare their spending while remaining focused on staples. Year-over-year sales declined by 1.8% after declining 2.5% a week ago. "Milder weather helped traffic flow a tad this past week, but consumers remain focused on staples (food, drug) and continue to stretch their dollar by shopping at dollar stores," said Michael P. Niemira, ICSC chief economist.
UBS AG (UBS) posted a fourth-quarter loss from continuing operations of 2.56 Swiss francs per share vs. a loss of 6.04 francs one year earlier on a 55% drop in interest income. The company noted a substantial reduction in risk positions during the fourth quarter. UBS said its investment bank will also further reduce its headcount to 15,000 by the end of the year. The company said it had an encouraging start to the year.
Boeing Co. (BA) says its fourth-quarter and full-year 2008 per-share results are now $0.04 lower than was reported on Jan. 28, primarily because of two subsequent events that have been incorporated into the fourth-quarter results. With those adjustments, the loss for the quarter now stands at $0.12 per share, while Boeing's full-year 2008 EPS is $3.67.
Monsanto Co. (MON) expects to deliver $4.40-$4.50 fiscal 2009 ongoing EPS. The company says this outlook includes expectations for EPS growth in the second and third quarters to both be in the 10% to 12% range.
Molson Coors (TAP) posted $0.49 vs. $0.96 fourth-quarter GAAP EPS on 4.2% lower worldwide beer volume (pro forma). The company said results reflect combined challenges of a much stronger U.S. dollar vs. a year-ago, significant commodity inflation, and lower sales volume in its major markets.
Qwest Communications (Q) posted $0.11 (including a $0.01 severance charge) vs. $0.20 fourth-quarter EPS on a 3.5% operating revenue rise. Wall Street was looking for EPS of $0.10. For 2009, the company anticipates that adjusted free cash flow will be approximately $1.4 billion-$1.5 billion; adjusted EBITDA is expected to be $4.2 billion-$4.4 billion.
M.D.C. Holdings (MDC) posted a $1.92 fourth-quarter loss per share vs. a $6.14 loss on a 62% revenue drop. The company expects to receive a tax refund of $165 million during the first quarter.
IntercontinentalExchange (ICE) posted $0.67 vs. $0.90 fourth-quarter GAAP EPS as higher operating expenses offset a 30% revenue rise.
Omnicom Group (OMC) posted $0.88 vs. $0.96 fourth-quarter EPS on a 7% worldwide revenue decline.
Pepsi Bottling Group (PBG) posted a $1.28 fourth-quarter loss per share vs. $0.35 EPS on a 5.6% revenue decline. The current quarter included a net after-tax charge of $336 million, or approximately $1.58 per share share, due to restructuring and asset impairment charges. Excluding charges, EPS was $0.30; Wall Street was looking for $0.25. For 2009, the company expects to achieve currency neutral top-line growth in the low-single digits; it sees 2009 EPS of $2.15-$2.25 (including an $0.18 negative impact from forex).
Shares of Principal Financial Group (PFG) plummeted Tuesday after the company posted $0.69 vs. $0.87 fourth-quarter operating EPS on a 13% revenue decline. Assets under management were $247.0 billion as of December 31, 2008, compared to $311.1 billion as of December 31, 2007. Moody's lowered its ratings outlook on Principal Financial to negative.
American Financial Group (AFG) posts $1.04 vs. $1.21 fourth-quarter operating EPS, reflecting higher investment income and improved results in annuity and supplemental operations, which were more than offset by lower underwriting profits within specialty property and casualty insurance operations. The company raised its 2009 operating EPS guidance to $3.70-$4.00. The guidance excludes potential for significant catastrophe and crop losses, unforeseen major adjustments to asbestos and environmental reserves, and large gains or losses from asset sales or impairments.