Fear of financial sector sends stocks lower

July 15, 2008 by · Leave a Comment
Filed under: Industry News 

Note: This bear market  is all about uncertainty in the market.  With the massive amount of off-balance sheet items, investors do not know how many liabilities the bank and other financial services companies have hidden waiting to be disclosed.  Citi Bank announced it had $1.1 trillion of such assets in which many were most likely valued under the “Mark to Market” form of accounting.

The problem lies when there is either no real value in the underlying asset to justify its current valuation or if there is no market for that financial instrument.  In that case it would have little or no real value.   The best thing the banks can do in this situation is to disclose their hidden gems quickly before the bear really get going and send the financial sector into a pit that will take a decade or more to get out of.

Release:

Stocks recouped some steep early losses Tuesday as oil dropped by more than $8 a barrel, but fears of escalating instability in the financial sector kept the Dow Jones industrial average down more than 100 points.

The market had opened sharply lower on investors’ increasing uneasiness about the instability of the financial sector, which continues to see heavy losses related from the mortgage criss. Sobering comments from Federal Reserve Chairman Ben Bernanke, who told Congress the U.S. economy is faced with “numerous difficulties,” took stocks down further, with the Dow Jones industrials tumbling more than 200 points.

Bernanke’s comments come only days after the Fed and the Treasury said they would lend financial support to mortgage financiers Fannie Mae and Freddie Mac if necessary. Angst about the government-chartered companies has sent Wall Street reeling in recent weeks, as companies together hold or guarantee more than $5 trillion in mortgages – nearly half the nation’s total.

Fannie and Freddie shares tumbled again Tuesday, along with most other financial stocks.

As oil retreated from its near-record levels, stocks came back somewhat. If oil prices remain stable, the market is hoping that consumers will feel a little more comfortable about spending, and in turn help the economy. A barrel of light, sweet crude dropped $8.75 at $136.43 on the New York Mercantile Exchange, after President Bush called on Congress to lift a ban on offshore drilling.

Still, the shaky financial sector appeared to be dominating trading. In addition to Fannie and Freddie, investors are nervous after a run on IndyMac Bancorp Inc. that led to the California lender’s takeover by the government Friday. IndyMac became the largest regulated thrift to fail.

“People are very worried about additional bank failures, and I think there will be additional bank failures,” said Dan Alpert, managing director at the investment bank Westwood Capital.

In late morning trading, the Dow fell 114.72, or 1.04, to 10,940.47.

Broader stock indicators also sank. The Standard & Poor’s 500 index fell 11.64, or 0.95 percent, to 1,216.66, and the Nasdaq composite index fell 7.03, or 0.32 percent, to 2,205.84.

Treasury prices rose as investors sought the safety of government-issued securities. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.81 percent from 3.86 percent late Monday.

The price of oil is one of the major reasons the Dow is trading at nearly two-year lows.

The Labor Department said Tuesday that core inflation at the wholesale level, which excludes energy and food prices, ticked up by just 0.2 percent, but that overall wholesale prices jumped by a larger-than-expected 1.8 percent – the biggest gain since November. For the past 12 months, wholesale prices including food and energy showed an increase of 9.2 percent, the largest increase since June 1981.

U.S. consumers have been monitoring their budgets more carefully in the face of higher energy prices, falling home values and an uncertain jobs climate. The Commerce Department reported Tuesday that retail sales edged up by 0.1 percent – a weaker amount than the 0.4 percent increase analysts expected in June. Total sales were dampened especially by plummeting sales at car dealerships.

Wachovia Corp. fell $1.19, or 12 percent, to $8.65, after Oppenheimer Co. analyst Meredith Whitney downgraded Wachovia, citing a “very real scenario” of declining assets and rising losses.

Fannie Mae fell 2.55, or 26 percent, to $7.18, and Freddie Mac fell $2.28, or 32 percent, to $4.83.

Treasury Secretary Henry Paulson “has made it amply clear that in any kind of bailout, he’s going to ascribe very little value to these companies,” Alpert said.

In corporate news, General Motors Corp. announced plans to lay off salaried workers, reduce truck production, suspend its dividend and borrow $2 billion to $3 billion as it adjusts to a declining U.S. market. GM shares rose 15 cents to $9.53.

Johnson & Johnson said its second-quarter earnings rose 8 percent as sales increased for consumer health items and surgical and diabetes products. The health care company’s earnings before a charge for an acquisition totaled $1.18 per share. Analysts, on average, expected the company would earn $1.12 a share before items. Johnson & Johnson shares rose $1.42, or 2 percent, to $67.84.

The Russell 2000 index of smaller companies fell 5.21, or 0.78 percent, to 659.29.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 689.4 million shares.

Overseas, Japan’s Nikkei stock average fell 1.96 percent. In afternoon trading, Britain’s FTSE 100 fell 2.15 percent, Germany’s DAX index fell 1.77 percent, and France’s CAC-40 fell 1.54 percent.

Source: AP

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