The market capped an ugly week with fresh losses as a dismal U.S. jobs report trumped the House passage of the U.S. financial rescue plan
The stock market got what it had been fervently hoping for Friday: The U.S. House of Representatives passed the revised version of the government's $700 billion financial rescue plan. And President Bush signed the bill into law shortly thereafter. An excuse for a nice rally in equities, right?
An old saying on Wall Street is "Buy the rumor, sell the fact." Markets had reacted positively when the plan was first announced two weeks ago, and had also moved higher on any subsequent perceptions of the success of the plan. Indexes cratered Monday on the House's initial rejection of the bill. They moved higher again Friday in anticipation of passage by the House, with the Dow industrials climbing over 300 points at one point during the session.
When the bill was finally passed Friday, by a 263 to 171 margin, the market had gotten exactly what it wanted. So, naturally, it was time to "sell the fact": Equity indexes moved solidly into negative territory in the final hour of trading Friday, capping a tumultuous week that included the stock market's worst one-day losses since 1987 on Monday.
It seems that even amid the bailout optimism, investors couldn't shake off some dismal economic news Friday. A report that that U.S. nonfarm payrolls fell 159,000 in September heightened speculation the Federal Reserve will cut interest rates soon in response to a weakening U.S. economy. There was even some market chatter about coordinated interest-rate cuts by global central banks.
"It appears that the financial markets will need further convincing before becoming optimistic that banks will start lending to each other again," says S&P MarketScope.
On Friday, the blue-chip Dow Jones industrial average fell 157.15 points, or 1.5%, to finish at 10,325.70. The broader S&P 500 index shed 15.05 points, or 1.35%, to end at 1,099.23. The tech-heavy Nasdaq composite index lost 29.33 points, or 1.48%, to 1,947.39. The declines followed Thursday's losses of 3.22% for the Dow, 4.03% for the S&P 500, and 4.48% for the Nasdaq.
On the New York Stock Exchange Friday, 20 stocks were lower in price for every 11 that declined. The ratio on the Nasdaq was 21-7 negative.
Gold and oil futures were lower as Friday's weak economic data suggest the U.S. may be heading into recession. Bonds, with the Treasury facing the need to issue more debt, were flat. The dollar index was little changed amid perceptions the European Central Bank and Bank of England will cut rates soon to combat recession.
The market's heightened unpredictability has many observers scratching their heads. "If I knew we'd get a week or two without any news, I'd favor the short side of the market," says S&P technical analyst Chris Burba. "But that's not the case. What happens if there's a concerted effort by global central banks to cut interest rates Monday morning?"
The House of Representatives voted Friday to approve the Bush administration's revised $700 billion financial markets rescue plan, four days after its rejection of the original bailout bill that sent the Dow down 777 points, it's biggest one-day point drop in history. The U.S. Senate approved the revised bill on Wednesday.
As the vote count implied, there was some objection among House members, mostly surrounding tax provisions in the bill and giving the Treasury secretary extraordinary power to buy bad assets.
Some are implying that the market's decline after the bailout bill was passed is a signal to the Fed that a rate cut is still wanted by the markets, says S&P MarketScope.
"The rescue bill may stop the recession from getting deeper and longer, but we're already in it," says S&P chief economist David Wyss.
Stocks got an early boost from news of a major banking industry merger: Wells Fargo (WFC) agreed to acquire Wachovia (WB) in a $15.1 billion deal. However, the deal ran into immediate resistance from Citigroup (C), which had struck an earlier deal to acquire Wachovia's retail banking assets.
Wells Fargo and Wachovia signed a definitive agreement whereby Wells Fargo will acquire Wachovia in a whole-company transaction requiring no financial assistance from the FDIC or any other government agency. Under the agreement, Wells Fargo will acquire all outstanding shares of Wachovia common stock in a stock-for-stock transaction with a total value of about $15.1 billion. Wachovia holders will get 0.1991 Wells Fargo share per Wachovia share held. Wells Fargo will record Wachovia's credit-impaired assets at fair value. The deal is expected to add to Wells Fargo's EPS in the first year of operations, excluding related charges expected to be about $10 billion.
Shares of Citigroup tumbled Friday after news of the Wells Fargo-Wachovia deal. Citi had previously agreed to acquire parts of Wachovia.
"Wells Fargo has come to the rescue of the taxpayer, much to Citi's dismay, and offered to buy WB without government assistance. This should help the other lousy regional banks which are struggling to possibly find a suitor," wrote Jay Collins of DT Trading in a note Friday.
However, Citi may be fighting back. The Wall Street Journal reports Citigroup executives, blindsided by the Wells Fargo agreement to buy Wachovia, are considering filing a lawsuit against the two banks and also may sweeten their bid for Wachovia, according to a person familiar with the matter. Citigroup is accusing Wachovia of breaching the "exclusivity agreement" between the two banks. Citi, which hoped to gain access to Wachovia's deep well of deposits, is considering its legal options, including suing Wachovia for breach of the exclusivity pact.
Insurers were also in the spotlight Friday, one day after a big sell-off for stocks in the group. UBS reiterated its buy rating on Prudential Financial (PRU), believing that the recent hit to large cap life insurers like Pru, MetLife (MET), and Hartford (HIG) seemed "particularly overdone". Also, Keefe Bruyette reportedly upgraded MetLife to outperform from market perform.
American International Group (AIG) said it intends to refocus on its core property and casualty insurance businesses, generate sufficient liquidity to repay outstanding balance of its loan from Federal Reserve Bank of New York, and address its capital structure. The company said it will sell a number of businesses. AIG said its global coordinators for divestiture program are The Blackstone Group and J.P. Morgan.
U.S. payroll employment fell 159,000 in September, its ninth consecutive decline, more than the 100,000 expected by the consensus forecast of economists. The unemployment rate held at 6.1%, as expected, after jumping 0.4 the previous month. The payroll decline was concentrated in the goods producing sector, as manufacturing shed another 51,000 jobs and construction 35,000. The service sector lost 82,000 jobs, with retail down 40,000, leisure and hospitality 17,000, and employment services 34,300. The average workweek slipped 0.1 hour to 33.6 hours, while average hourly earnings rose 3 cents (0.2%).
"Overall, a weaker report than expected, increasing the chance of a Fed rate cut at the end of the month and further confirming that the economy is in recession," wrote S&P senior economist Beth Ann Bovino in a note Friday.
"The pace of deterioration in labor market conditions appears to be accelerating as the economy rapidly loses momentum," wrote Morgan Stanley economist David Greenlaw in a note Friday. "As a result, we believe that the Fed will announce an intermeeting 50 basis point cut in the official fed funds target rate at some point in the coming days."
Two Federal Reserve district bank presidents signaled they're not prepared to back an interest-rate cut even after the biggest disruption to the U.S. financial industry in seven decades, according to Bloomberg dispatch. "Lowering the rate right now maybe isn't the right response" because of an "inflation problem," St. Louis Fed President James Bullard said late yesterday. Thomas Hoenig, his Kansas City counterpart, said in "there is very strong stimulus in the economy" already.
September's U.S. ISM nonmanufacturing index fell to 50.2, near the 50.6 reading in August, just over the 50.0 that markets had expected. The new orders index rose to 50.8 from 49.7. The employment index showed further contraction in the labor market, falling to 44.2 from 45.4. The new export orders index climbed to 50.5 from 44.5, and above the 50 neutral point, indicating growth. Prices paid fell to 70.0 from 72.9, and well below the year high of 84.5 in June.
The Federal Reserve said financial institutions had a record $409.5 billion in loans outstanding from the central bank's discount window as of Wednesday, up from $262.3 billion a week earlier. Average daily borrowing jumped to $367.8 billion over the week, from $187.8 billion in the prior week. The Fed's lending has increased as already tight credit markets come under more pressure.
Standard & Poor's said Friday that 138 of the approximately 7,000 publicly owned companies that report dividend information to its Dividend Record decreased their dividend during the third quarter of 2008, representing a 557% increase from the 21 issues that decreased their dividend during the third quarter of 2007. Reported dividend increases fell 21.2% to 346 from 439 reported in the third quarter of 2007.
"It was the worst September for dividends since we started keeping dividend records in 1956," said S&P senior index analyst Howard Silverblatt.
French Prime Minister Francois Fillon said the world stood on the "edge of the abyss", gripped by a global financial crisis now threatening industry, trade, and jobs worldwide. Reuters said Fillon's words echoed a growing sense of alarm sweeping EU capitals ahead of an expected U.S. Congressional vote on Friday on a $700 billion bailout plan for the financial industry. Approval is far from certain.
The UK became the latest European Union country to alter its deposit guarantee arrangements, raising amount insured to 50,000 pounds from 35,000 pounds starting from next Tuesday. Obviously aimed at relieving pressure to follow the Irish and Greeks to implement a full guarantee on deposits.
European stock indexes climbed Friday ahead of the U.S. bailout vote. In London, the FTSE 100 index gained 2.26% to 4,980.25. In Paris, the CAC 40 index added 2.96% to 4,080.75. Germany's DAX index rose 2.41% to 5,797.03.
Asian stock markets finished lower Friday. Japan's Nikkei 225 index fell 1.94% to 10,938.14> In Hong Kong, the Hang Seng index shed 2.9% to 17,682.40.
In other U.S. markets Friday, the 10-year Treasury note edged up 03/32 to 103-08/32 for a yield of 3.61%. The 30-year bond rallied 29/32 to 106-29/32 for a yield of 4.10%.
The dollar index was lower at 80.48.
December gold futures were lower at $832.50.
November West Texas Intermediate crude oil futures were higher at $93.53.
Among other stocks in the news Friday, Family Dollar Stores (FDO) posted better-than-expected fourth quarter EPS of 38 cents, vs. 26 cents one year earlier, on a 5.6% same-store sales rise and an 8.2% total sales rise. Wall Street was looking for 34 cents. The company sees first-quarter same-store sales to increase 2%-4% and EPS of 38 cents to 42 cents. It sees fiscal 2009 same-store sales up 1%-3%, and ESP of $1.58-$1.78.
Global Payments (GPN) posted first quarter EPS of 71 cents, vs. 54 cents, on a 30% revenue rise. The company raised its fiscal 2009 revenue guidance to $1.64 billion-$1.68 billion, and its EPS guidance to $2.37-$2.45, excluding the impact of restructuring and other charges, as well as the impact of future acquisitions.
Ace Ltd. (ACE) said it estimates net after-tax losses in the third quarter from catastrophes, including Hurricanes Gustav and Ike, will amount to about $315 million, including reinstatement premiums.
General Growth Properties (GGP) announced the appointment of Edmund Hoyt as CFO on interim basis, succeeding Bernard Freibaum, who is no longer employed by the company. GGP says all continuing executives of GGP have informed the company that they have repaid in full all previously existing margin loans and thus there will be no further sales of company stock by those executives to satisfy margin calls. GGP suspended its dividend.
Sprint Nextel (S) has received interest from a Latin American carrier and several private-equity firms for its Nextel unit, but a potential deal faces hurdles, according to a Wall Street Journal report.