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Futures pull back after Senate bailout plan vote

Wednesday October 1, 11:22 pm ET
By Tim Paradis, AP Business Writer
Wall Street reacts cautiously, futures pull back, after Senate approves bailout plan

NEW YORK (AP) -- Financial markets reacted cautiously to the Senate's passage of the banking bailout plan late Wednesday, with stock index futures falling and indicating a drop when trading resumed Thursday. There was no discernible change in the credit markets after the vote.

Investors may be taking a wait-and-see approach until the House votes on the plan on Friday. It was the House's defeat of the plan Monday that sent the Dow plunging 778 points. But the caution may also be due to the fact that passage of the plan wouldn't immediately erase the problems in the financial system, including credit markets that are currently stagnant.

Wednesday night, Dow Jones industrial average futures were down 85, or 0.78 percent, at 10,802. The Standard & Poor's 500 index futures were down 9.8, or 0.84 percent, at 1,158.60, and Nasdaq 100 futures were down 17.75, or 1.1 percent, at 1,561.00.

In Japan, the Nikkei index was down 0.99 percent.

Caution was also apparent in Wednesday's trading, which saw the Dow Jones industrials falling about 20 points after being down more than 200 earlier. The close was vastly different from the massive swings in the blue chips the first two sessions of the week.

Wall Street's focus has been on credit markets that seem to be barely moving, and in turn, posing a threat to economic growth.

"We've taken the credit markets for granted much like you do the electricity coming on every day but in this particular case the power grid is down," said Jim Dunigan, managing executive of investments at PNC Wealth Management. "If we don't have a functioning credit market banks aren't lending to each other -- credit is dried up. That ultimately affects economic activity."

Nervousness about debt has made banks hesitant to extend loans; banks have preferred to hold onto their cash. But some analysts and policymakers are worried that drop in lending will curtail economic growth. And the fear paralyzing the credit markets is making it more difficult and expensive for some companies to fund their day-to-day operations, putting basics like payroll at risk.

Anglo-Swiss mining giant Xstrata PLC said Wednesday it was dropping a $10 billion bid for rival Lonmin PLC because of uncertainty about access to credit. And industrial products maker Actuant Corp. lowered its sales outlook because of the credit market distruption.

The London Interbank Offered Rate, or Libor, on overnight dollar loans dropped to 3.79 percent on Wednesday from Tuesday's record 6.88 percent. Libor measures how much banks are charging one another to borrow. Many consumer lending rates, including about half of all U.S. adjustable-rate mortgages, are tied to Libor.

But overnight Libor remains well above the target Fed funds rate of 2 percent, showing that banks are still tending to hoard their cash rather than lend it.

Demand for the safety of government debt increased Wednesday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.74 percent from 3.83 percent late Tuesday. The yield on the 3-month T-bill, the safest type of investment, fell to 0.79 percent from 0.88 percent late Tuesday -- and it remained there after the Senate vote. The decline in yields indicates that investors are willing to accept even modest returns to protect their money.

Financial markets likely will remain nervous until voting on Capitol Hill is complete with the House's turn on Friday. The Dow fell 19.59, or 0.18 percent, Wednesday to 10,831.07. The blue chip index fell 778 points Monday, its steepest drop in years, after lawmakers rejected the bailout plan, then rallied 485 points Tuesday on hopes party leaders would find the votes to pass the measure.

Broader stock indicators were narrowly lower. The Standard & Poor's 500 index fell 5.30, or 0.45 percent, to 1,161.06, and the Nasdaq composite index fell 22.48, or 1.07 percent, to 2,069.40.

Light, sweet crude fell $2.11 to settle at $98.53 a barrel on the New York Mercantile Exchange after the government reported a surprise increase in U.S. crude supplies. The dollar was mixed against other major currencies, while gold prices rose.

Charles Widger, chief executive of Brinker Capital, said the bailout would help restore faith in the U.S. financial system. Champions of the plan say it is necessary to absorb the soured mortgage and other bad debt from banks' books as a way to restore faith in the credit markets, while detractors said the plan was too costly and risky.

"It will help to restore confidence and confidence is the No. 1 issue now," he said.

"You've got to believe that after this major disruption in the financing of the economy -- the absence of cash for working capital -- that it's going to slow economic activity and that therefore we're going to be in a recessionary environment," Widger said.

In corporate news, Warren Buffett's Berkshire Hathaway Inc. unveiled a plan to buy $3 billion worth of General Electric Co. preferred shares, even as the diversified conglomerate is preparing to sell at least $12 billion worth of common stock to the public. The company's stock closed unchanged at $9.45.

Berkshire also received warrants to buy $3 billion worth of common shares at $22.25 each over five years. GE said the Berkshire funds will boost its capital position and permit it to make opportunistic investments if they arise.

Meanwhile, sales of U.S. and foreign automakers tumbled last month amid economic worries, tighter credit, and high gasoline prices. Ford Motor Co., Toyota Motor Corp. and Chrysler LLC all posted drops of more than 30 percent in September.

Ford fell 65 cents, or 12.5 percent, to $4.55; and Toyota dropped $1.90, or 2.2 percent, to $83.90.

Declining issues outnumbered advancers by about 5 to 4 on the New York Stock Exchange, where consolidated volume came to 5.59 billion shares from 5.84 billion on Tuesday.

The Russell 2000 index of smaller companies fell 7.99, or 1.18 percent, to 671.59.

Overseas, Japan's Nikkei stock average rose 0.96 percent. Britain's FTSE 100 rose 1.17 percent, Germany's DAX index fell 0.42 percent, and France's CAC-40 fell 0.56 percent.

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

http://biz.yahoo.com/ap/081001/wall_street.html