Banking Woes Clobber Stocks

Major U.S. indexes each fell more than 4% Tuesday as big financial names suffered double-digit percentage losses. Wall Street also watched Obama's inauguration

By Will Andrews

If he wanted to get a sense of the depth of the challenges he faces on his first day in office, the newly inaugurated 44th U.S. President just had to take a quick look at the stock ticker Tuesday.

U.S. stocks plunged Tuesday, with major financial issues getting clobbered with double-digit percentage losses. Investors focused on mounting problems in the banking system -- this time courtesy of bleak earnings news from State Street Corp. (STT) and Royal Bank of Scotland (RBS) on the day Barack Obama officially became U.S. President.

Obama called for using "hope over fear, unity of purpose over conflict and discord" to combat the worst economic crisis since the Great Depression, says S&P MarketScope. In his inauguration speech, Obama called for a new era of responsibility.

"The new era will be hampered at the outset by the need to raise trillions to stimulate the economy and bail out the banking system," notes S&P MarketScope.

On Tuesday, the 30-stock Dow Jones industrial average finished lower by 332.13 points, or 4.01%, at 7,949.09. Steep drops in JPMorgan Chase & Co. (JPM) and Bank of America (BAC) helped push the Dow industrials below 8,000, although all 30 Dow component stocks lost ground.

The broader S&P 500 index dropped 44.90 points, or 5.28%, to 805.22.

The tech-heavy Nasdaq composite index was the hardest hit of the major U.S. market benchmarks, tumbling 88.47 points, or 5.79%, to 1,440.86.

There were few places to hide in the market. On the New York Stock Exchange, 28 stocks were lower in price for every three that gained. Nasdaq breadth was 23-4 negative.

The VIX equity volatility index, the stock market's widely followed "fear gauge", jumped nearly 22% to 56.37 Tuesday afternoon from Friday's close of 46.11.

Prices for U.S. Treasuries sank Tuesday on worries the U.S. and UK governments will have to borrow heavily to boost the economy, which will leave deficits for years to come. The 10-year yield climbed to 2.36%. The dollar index was higher -- and the pound sterling and euro sharply lower -- after the U.K. unveiled a financial services rescue plan and Royal Bank of Scotland warned of a massive 2008 loss. Gold futures were higher amid reports of bank buying. Oil futures were mixed as the February WTI contract expired.

There were no significant economic reports released Tuesday.

There is much concern about the challenges the new administration faces in stimulating the economy out of a severe recession, says S&P.

The Obama White House released a broad overview of its U.S. economic recovery agenda on Tuesday. The plan looks to jump-start growth via 1) doubling the production of alternative energy; 2) modernizing more than 75% of federal buildings, 3)making the immediate investments necessary to ensure medical records are computerized within five years, 4) equipping schools with 21st century technology, 5) expanding broadband across America, 6) investing in science, research, and technology, reports Action Economics. .

After the latest capital injections in Citigroup (C) and Bank of America last week and confirmation of a $41 billion loss for the Royal Bank of Scotland in the UK over the weekend, losses in the financial sector show few signs of letting up, notes Action Economics.

The S&P Asset Management & Custody Banks industry index sank 21% Tuesday, while the Diversified Banks index also fell 21%. The S&P Other Diversified Financial Services index tumbled 23%; the Regional Banks index slid 18%.

Shares of BofA were down sharply Tuesday after an analyst downgrade, while other major lenders like Citi, Wells Fargo (WFC), and Goldman Sachs (GS) were also significantly lower.

Shares of State Street Corp. (STT) lost over 50% of their value Tuesday after the company posted fourth quarter earnings per share (EPS) of 15 cents, vs. 57 cents one year earlier, despite an 8% revenue rise. State Street posted $1.18 fourth-quarter operating EPS. Reflecting ongoing illiquidity in markets at Dec. 31, 2008, the company said that aftertax, unrealized mark-to-market losses in its investment portfolio increased to $6.3B. The company expects 2009 revenue to be approximately flat with 2008, down from its long-term goal of 8%-12% growth; and 2009 operating EPS to also be about flat with 2008, below its long-term goal of 10%-15% growth.

Standard & Poor's Ratings Services lowered its ratings on State Street debt one notch to A+ from AA-, with a negative rating outlook.

Regions Financial (RF) shares were sharply lower after the company posted a fourth-quarter non-GAAP loss of 35 cents per share, vs. 24 cents EPS one year earlier, on an 11% drop in net interest income. Wall Street was looking for a loss of 8 cents. The company noted that net loan charge-offs rose to $796 million, or to an annualized 3.19% of average loans, from $416 million in the third quarter; the provision for loan losses increased to $1.150 billion, $354 million above net charge-offs and $733 million higher than the third quarter.

PNC Financial (PNC) shares tumbled Tuesday. S&P Equity Research downgraded PNC to hold from buy, noting that PNC shares are down sharply this month, as investors flee most bank stocks due to general concerns about oversized loan-loss provisions, securities write-downs and possible dividend cuts. S&P lowered its estimates and price target for PNC.

Bank of New York (BK) shares also fell sharply Tuesday. The company rescheduled its fourth-quarter financial results conference call to 5 p.m. EST Tuesday from its previously scheduled date of Jan. 22. The company said its Tier 1 Capital Ratio was expected to be 13.1% vs. 9.3% at Sept. 30, 2008, and the Tangible Capital Equity Ratio is expected to be 3.8% compared to 3.9% at Sept. 30.

MGIC Investment (MTG) posted a $2.21 fourth-quarter loss per share vs. an $18.17 loss one year earlier on a 3.1% revenue rise. Wall Street was looking for a loss of $1.14. The company said losses incurred in the fourth quarter were $903.4 million, reflecting a continued increase in the number of delinquent loans, up from $788.3 million in the 2008 third quarter.

TD Ameritrade (AMTD) posted first-quarter EPS of 31 cents, vs. 40 cents, on a 4.8% revenue drop. The company adjusted its fiscal 2009 EPS guidance to 90 cents-$1.15.