Stock Market Woes

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The biggest single day point loss ever for the stock market came about yesterday, and the Dow lost almost 778 points. This after the House rejected the government's planned $700 billion bailout.

The losses yesterday knocked out about $1.2 trillion in market value, the first post-$1 trillion day ever, according to a drop in the Dow Jones Wilshire 5000, the broadest measure of the stock market.

The Dow Jones industrial average lost 777.68, surpassing the 684.81 loss on Sept. 17, 2001 - the first trading day after the September 11 attacks. However the 7% decline does not rank among the top 10 percentage declines.

The Standard & Poor's 500 index lost 8.8%, its 7th worst day ever on a percentage basis and the biggest one-day percentage drop since the crash of '87, when it lost 20.5%. The Nasdaq composite fell 9.1%, its third worst day on a percentage basis and also its worst decline since the crash of '87.

Stocks tumbled ahead of the vote and the selling quickened on fears that Congress would not be able come up with a fix for the almost frozen credit markets. The frozen markets mean banks are hoarding cash, making it difficult for businesses and individuals to get much-needed loans.

Stocks had fallen from the start on Monday morning. In addition to the expectations for the bailout, there was also news that troubled Wachovia had to sell its banking assets to Citigroup. A number of European banks also collapsed. But the possibility that the House wouldn't pass the bailout plan caused stock losses to quicken.

Although another version of the plan will likely go before Congress, investors are concerned that passing the bill could be a more longer process. On Monday afternoon Treasury Secretary Henry Paulson said markets around the world are under great stress and that a plan needs to be passed as soon as possible. Investors thought they would be debating whether the plan was good enough, he said, not whether the plan would even go through.
But the 'good enough' question remains in place.

One investment strategist said that new territory is being charted and there is no guarantee that it will be successful. Also that a number of institutions have not even been able to hang on through the negotiations which adds to the uncertainty. (referring to Washington Mutual and Wachovia).

Stocks are also very choppy and volatile as Wall Street moves to the end of the third quarter. Financial institutions and funds are expected to have their books settled before Wednesday, so there is a lot of last-minute scrambling, Gayle said.

Congress had supposedly reached a compromise on the $700 billion bank bailout plan on Sunday, but the House voted against the bill yesterday. The bill is based around Treasury Secretary Henry Paulson's initial plan to buy up bad mortgage debt from banks as a means of getting them to lend to each other again. However, Congressional lawmakers added provisions to protect taxpayers and enable them to benefit if the companies do as well.
It did not pass though, with lawmakers voting largely along party lines, with House Republicans mostly voting against it and House Democrats mostly voting for it.

Investors also remained afraid amid more bank turbulence - and banks continued to hoard cash. Meanwhile, the Federal Reserve and other central banks around the world announced steps Monday to make money available to troubled banks.

Citigroup is buying the company's bank assets in a $2.2 billion all-stock deal that will see the company hold onto its brokerage business and remain afloat, although in a smaller form.
The deal calls for Citigroup to soak-up perhaps $42 billion in losses and the Federal Deposit Insurance Corp. to be responsible beyond that. Citigroup will give the FDIC $12 billion in preferred stock and warrants in exchange.

Wachovia shares began trading in the afternoon, plunging 81%. Citigroup fell almost 12%.
Last week, JPMorgan Chase bought Washington Mutual after it suffered the largest failure ever of a U.S. bank. JPMorgan Chase shares fell 15% Monday.

On Monday, regional bank National City slumped 63% on worries that it might be next. Other regional banks dropped too. Bank of New York fell 27%, Fifth Third Bancorp fell 43% and Regions Financial fell 41%.
Big banks fell too, including Goldman Sachs, Merrill Lynch and Bank of America

Market breadth was negative. On the New York Stock Exchange, losers beat winners 19 to 1 on volume of 2.05 billion shares. On the Nasdaq, decliners topped advancers by over five to one on volume of 2.88 billion shares.

Businesses depend on the credit markets to allow them to function on a daily basis, and the absence of ready capital is threatening to stall the broader financial system.

Additionally, credit markets may have been more focused on Wachovia and the other distressed banks, than the bailout.
The Libor-OIS spread, one gauge that banks use to determine lending rates, rose to a record 2.2%.

Meanwhile, the TED spread hit a more than 26-year high of 3.58% before dipping back to 3.54%. The TED spread is the difference between what banks charge each other to borrow for three months and what the Treasury pays. When banks charge each other a higher premium than the U.S. government, that's a sign of fear.
The three-month Treasury bill, seen as the safest place to park money in the short term, fell to 0.34% from 0.83% late Friday. Earlier this month, the three-month bill fell to a 68-year low around 0% as panic gripped financial markets.

Long-term Treasury costs rose, lowering the yield on the benchmark 10-year note to 3.58% from 3.82% late Friday. Treasury prices and yields move in opposite directions.
Treasury prices have been rallying recently and yields tumbling as nervous stock market investors have looked for safer areas to move their cash.

Apple slumped almost 18% after RBC and Morgan Stanley analysts downgraded the stock to "neutral" from "buy" saying the consumer spending slowdown will hurt profits.

A variety of other big tech stocks slumped, including Intel, IBM, Hewlett-Packard, Qualcomm, Cisco Systems, Dell and Applied Materials. Among other movers, Circuit City slipped 21% after it told of a larger-than-expected quarterly loss and withdrew its fiscal 2009 outlook due to tepid sales.
All 30 Dow components ended lower and all lost at least 3%.