Stock Market Update
16:25 ET Dow -449.36 at 10609.66, Nasdaq -109.05 at 2098.85, S&P -57.20 at 1156.39
[BRIEFING.COM] Stocks tumbled nearly 5% for the second day this week after the government extended AIG (AIG 2.06, -1.69) an $85 billion emergency loan in a move that did little to ease credit market turmoil.
The major indices ended on a sour note at session lows. All ten of the economic sectors posted a loss, with financials (-8.9%) falling the most. Weakness was widespread, the best performing sector, energy, posted a loss of 2.4%.
To prevent an AIG bankruptcy filing, the Federal Reserve agreed to provide an $85 billion two-year loan in exchange for a 79.9% stake in the insurance giant. The Fed said a disorderly failure of AIG could add to already significant levels of financial market fragility. The loan does not come cheap; AIG has to pay the three-month Libor rate (currently at 3.06%) plus 8.5%.
The bailout did little to stop the turmoil in the credit markets. The TED spread --the difference between the three-month Treasury bill and the three-month Libor -- spiked to 3.02%, marking its highest level on record. The higher spread indicates increased fears of credit risk and reluctance of banks to lend to each other. In a flight to safety, investors flocked to the three-month Treasury bill, sending its yield to only 0.04%, down sharply from last Friday's yield of 1.47%.
In an attempt to quell some fears, Morgan Stanley (MS 21.17, -7.53) announced its third quarter earnings last night instead of the previously scheduled release of this morning. The company earned $1.32 per share, which blew past expectations by $0.54. Despite the earnings beat, the stock dropped 24% as Morgan Stanley's credit default swap -- which is the cost to protect debt -- rose to 728 basis points yesterday. By comparison, Lehman Brothers' (LEH 0.14, -0.16) swap traded at 707 basis points before it filed bankruptcy. Morgan’s CEO said the decline was unwarranted and blamed short-sellers, which did little to calm fears.
The government made other moves in addition to the AIG bailout. The Treasury is setting up a temporary financing program at the Fed's request. The program will auction Treasury bills to raise cash for the Fed's use. The initiative aims to help the Fed manage its balance sheet following its efforts to enhance its liquidity facilities over the previous few quarters.
The SEC took several actions to tighten rules regarding the short-selling of stocks. Short-sellers will now have to deliver securities by the close of business on the settlement date. The SEC eliminated an option market-maker exception for the close-out agreement. In addition, short-sellers who deceive market participants are now committing a fraud.
The uncertainty over the financial markets and concern that the Fed is getting funding from the Treasury sparked a rally in hard assets, as investors look to preserve wealth. Oil spiked 5.9% to $96.52 per barrel, gold rallied 11.0% and commodities as a whole gained 3.2%.
Conversely, the dollar fell 1.2%, losing 1.4% against the euro and 1.9% against the pound.
In corporate news outside the financial world, flash memory maker SanDisk (SNDK 20.93, +5.89) rejected a $26 per share offer from Korean conglomerate Samsung, despite the offer representing a 93% premium over SNDK's closing price on Sept. 4, the day before media reported the possible takeover. SanDisk, which traded at $55.98 in October 2007, said the offer undervalues the firm.
Nortel (NT 2.64, -2.66) gave a preliminary third quarter view of $2.3 billion in revenue, which falls short of the $2.7 billion consensus. Nortel, which provides networking solutions, expects customers to cut back on spending.
Software developer Adobe Systems (ADBE 36.41, -1.73) reported third quarter earnings that topped Wall Street's forecast, helped by sales of Adobe Acrobat.
General Mills (GIS 69.88, +1.33) easily beat estimates thanks to a strong 14% year-over-year increase in sales.
Economic news did not help sentiment, with the number of new housing starts declining 6.5% to 895,000, which is the lowest rate since January 1991. Economists expected that there would be 950,000 starts. Building permits fell 8.9% to 854,000, compared to the median economist estimate of 928,000. On the positive side, fewer building permits will presumably clear some of the excess inventory of homes for sale. Single-family starts declined just 1.9% from the prior month.
The S&P 500 is down 7.6% week-to date, putting it on pace for the largest one week percent decline in more than six years.
..Nasdaq 100 -5.3%. ..S&P Midcap 400 -4.4%. ..Russell 2000 -4.8%. ..NYSE Adv/Dec 217/2984. ..NASDAQ Adv/Dec 428/2452.
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