Markets & Finance

Stocks Drop after Global Rate Cut


The major indexes fell for the sixth straight session Wednesday after the Fed and other central banks announced a coordinated 50 basis-point interest rate cut

In one of the most volatile trading days in stock-market history, U.S. stocks finished lower Wednesday for the sixth straight session -- leaving the Dow Jones Industrial average and S&P 500 index with the worst yearly declines since 1937.

The coordinated 50 basis-point interest rate cuts announced by the Federal Reserve, the European Central Bank, the Bank of England, Bank of Canada, Swiss National Bank, and the Swedish Riksbank didn't do much to soothe investors. The moves were part of an effort to revive sliding economies and assist in rescue plans for the global banking crisis. Some economists are skeptical the moves will work.

Stocks swung up and down throughout the day, and were trading higher up until the last few minutes of the session. In the last hour of trading Wednesday, Treasury Secretary Henry Paulson said that all the financial market turmoil has seriously affected the economy, but he said the administration is moving quickly to begin the largest government rescue effort in history. Even with the program to buy bad assets from financial institutions, some banks will fail, he said. It would be several weeks before the program makes its first purchases of troubled assets, he said. Paulson also called for patience saying "the turmoil will not end quickly and significant challenges remain ahead."

Investors' reaction: Keep selling. So even after policymakers provided another shot of liquidity, the great stock market debacle ended its sixth day of losses.

By the end of trading Wednesday, the blue-chip Dow Jones industrial average lost 189.01 points, or 2.00%, to 9,258.10. The Dow is now down 30.2% for the year, making it the worst year since 1937's decline of 32.8%.

The broader S&P 500 index fell 11.29 points, or 1.13%, to 984.94. The index is now down 32.9% for 2008.

The tech-heavy Nasdaq composite index shed 14.55 points, or 0.83%, to 1,740.33, bringing its loss for the year to 34.4%.

If it's any consolation, the markets still have a ways to go to beat the worst year of the Great Depression, 1931, when the Dow fell 52.7% and the S&P 500 plunged 47.1%.

On the New York Stock Exchange, 25 stocks were lower in price for every seven that advanced. The ratio on the Nasdaq was 21-7 negative. Trading was active on Wednesday.

The market volatility had "floor traders shaking their heads," notes S&P MarketScope. The VIX volatility index, the market's favored fear gauge, climbed 7.2% to 57.53 on Wednesday.

Indeed, the fear and uncertainy are not going away, and there's very little hope for a turnaround. "The damage has been done," wrote Paul Kedrosky on his blog Infectious Greed on Wednesday. "The global banking system is a mess, like a patient that has been poked by too many interns and fed (no pun intended) too many experimental medicines."

"It's impossible to know any more whether it's the illness or the medicines that are hurting things here," Kedrosky wonders. "And even if we have jury-rigged a semi-functional banking system again, the rapid contraction of the real economy is set to feed back into the financial system, causing more credit problems. The effects will be vicious."

In other U.S. markets Wednesday, bonds tumbled, with the 10-year Treasury note falling 1 25/32 points at 102 10/32, sending its yield up to 3.717%. The 30-year bond was down 21/32 points at 107 16/32 to yield 4.06%.

The dollar index was lower, while gold rose $23.20 to $905.20 per ounce. Crude oil futures fell $1.42 to $88.64 after a government report showed a sharp rise in U.S. inventories.

Along with the rate cuts, Britain unveiled a three-part bank rescue plan, including $80 billion direct investment in financial institutions and deposit insurance. Other European central banks also agreed to guarantee deposits.

On Wednesday, European markets turned sharply lower after the rate-cut news. In London, the FTSE 100 index fell 5.2% to 4,366.69. In France, the CAC 40 index dropped 6.3% to 3,496.89. Germany's DAX index tumbled 5.9% to 5,013.62.

Asian markets finished with deep losses before the central bank announcement. Japan's Nikkei 225 fell 9.38% to 9,203.32. In Hong Kong, the Hang Seng index dropped 8.17% to 15,431.73. Shanghai stocks fell 3.04%.

The Fed's policy statement in conjunction with its 50 basis-point reduction in the Fed funds target rate to 1.50% reiterated Fed Chairman Ben Bernanke's comment Tuesday: "Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."

The Fed noted that inflation has been high, but it believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.

The Fed said: "The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability."

The Fed vote was a unanimous 10-0. The Fed simultaneously cut the discount rate by 50 basis points to 1.75%.

Some economists think the rate cuts won't help much. "The concerted rate cut announced by the major central banks is too little and too late to offset the damage done by the financial markets," wrote David Wyss, chief economist at Standard & Poor's in a note Wednesday afternoon. "Although it isn't official, a recession now seems unavoidable." He expects the recession to be "moderate" but says: "It will still be long, not hitting bottom until mid 2009."

Economic research firm Action Economics noted that the markets were "hoping this is the silver bullet to restore confidence and market order, especially as central bank officials, and especially the Fed, are running out of bullets."

Even more rate cuts could be coming. Mark Vitner at Wachovia Economics Group in Charlotte, N.C. said in a note Wednesday that he thinks the Fed will cut rates by another 50 basis points at its regularly scheduled FOMC meeting on Oct. 29. He says a final rate cut of 25 basis points in December or January also seems likely.

Financial stocks got hit again Wednesday after Philadelphia Fed President Charles Plosser said the Fed should not be seen as an omnipotent crisis fixer, and any such expectations risks undermining the central bank's effectiveness. Plosser, speaking after major central banks announced a coordinated interest rate cut aimed at stemming a world financial crisis, said monetary policy could go only so far. Plosser argued that willy-nilly interventions in the market without clearly defined boundaries are not likely to work, and could lead to much greater inflation down the line. He also said care would be needed in the debate over how much supervisory and regulatory responsibilities will ultimately lie with the Fed after the current crisis.

In economic news Wednesday, U.S. pending home sales rose 7.4% in August.

Across the pond, Britain offered to pump up to 50 billion pounds into its biggest retail banks to help them survive the worst international financial crisis since the 1930s. British Prime Minister Gordon Brown said the global financial market had ceased to function after bad debts stemming from a collapse in the U.S. housing market poisoned the system. "There is a failure of responsibility by many in the banking system," Brown told a news conference. "It has become a problem in the whole banking system, we have got to deal with it."

Among Wednesday's stocks in the news, Alcoa (AA) reported third-quarter earnings per share of 33 cents, vs. 63 cents one year earlier (including items) on a 5.3% sales decline. Alcoa said aluminum prices have fallen steeply and demand has softened further, while input costs remain high. It added that given the sharp decline in metal prices and increasingly soft demand in its key markets, the company is is stopping all non-critical capital projects, making targeted reductions to match market conditions, and adjusting its manufacturing capacity to meet demand. The company also suspended its stock buyback program.

MetLife (MET) sees third quarter operating EPS of 83-93 cents on about 16% higher premiums, fees and other revenues. Wall Street was looking for $1.44. For the third quarter, MetLife expects $490 million, net, in credit-related losses, including impairments. About $375 million, net, or 77%, of the credit-related impairments were related to major financial services credits such as Lehman Brothers, Washington Mutual, and AIG. Given the current volatility, MetLife withdrew its 2008 EPS guidance. The company plans to offer 75 million shares.

Wal-Mart (WMT) posted 2.4% higher September same-store sales without fuel, 2.8% higher with fuel, and 5.8% higher total company sales. It expects U.S. same-store sales growth for October to be between 1% and 2%. The company maintains its third-quarter EPS from continuing operations guidance of 73-76 cents.

Bank of America (BAC) announced that its offering of $10 billion, or 455 million shares, of common stock, was priced at $22 per share.

LDK Solar (LDK) raised its $486-$496 million third-quarter revenue guidance to $530-$540 million.

YRC Worldwide (YRCW) reaffirmed that it expects to have positive free cash flow in both the 2008 third and fourth quarters with a significant debt reduction for the year. It also expects to remain in full compliance with all terms of its credit agreement, including the leverage ratio.

Yum! Brands (YUM) posted third quarter EPS of 58 cents, vs. 50 cents (before special items) on 10% worldwide system sales growth. The company confirmed its 2008 EPS growth forecast of 12% to $1.89, excluding special items.


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