Investors anxiously awaited the Senate's vote on the financial rescue plan. Buffett made a $3 billion investment in General Electric
U.S. stocks finished lower Wednesday, though well above session lows as investors nervously awaited the Senate vote Wednesday night on the U.S. financial rescue plan. Trading was choppy, with stock prices fluctuating sharply intraday while the credit markets remained extremely tight.
But traders and lawmakers weren't the only ones having a busy Wednesday. Billionaire investor Warren Buffett seized the spotlight with a $3 billion investment in conglomerate General Electric (GE), which has been sandbagged by problems at its financial-services unit.
Bonds and gold were higher amid an investor flight to safety. The dollar index was also higher. Crude oil futures fell.
On Wednesday, the blue-chip Dow Jones industrial average finished lower by 19.59 points, or 0.18%, at 10,831.07. The broader S&P 500 index fell 3.68 points, or 0.32%, to 1,161.06. The tech-heavy Nasdaq composite index shed 22.48 points, or 1.07%, to 2,069.40.
On the New York Stock Exchange, 16 stocks fell in price for every 15 that advanced. The ratio on the Nasdaq was 19-10 negative.
Bank of America (BAC), Merrill Lynch (MER) and other selected financials posted gains despite weakness in the broader market. Airline stocks were also outperforming the broader market, aided by lower energy prices.
There are some early arguments the economy is headed into a severe recession regardless of whether Congress passes a financial rescue plan. The Senate is set to vote Wednesday night on the revised Treasury plan the House defeated Monday.
Buffett will take a stake in GE, which will be offering $12 billion in common stock to the public and selling $3 billion to the billionaire's Berkshire Hathaway (BRKA) in a private perpetual preferred placement. Buffett will get a 10% dividend and 10% of his investment is callable in three years at a 10% premium. He will also get warrants to the tune of $3 billion in common stocks at a $22.25 strike price. GE shares sank after a price and outlook downgrade from Deutsche Bank analysts Wednesday morning.
In a subsequent CNBC interview, Buffett said that if the Treasury gave him a 1% participation rate in the financial bailout on their funding terms and time horizon, he would take it.
There is increased optimism that the plan will be passed later this week, according to comments from various Congressmen. Senate minority leader McConnell earlier predicted victory of the plan in the Senate tonight.
The U.S. FDIC would be allowed unlimited borrowing power temporarily from the Treasury under the Senate bailout plan being considered, according to a Wall Street Journal bulletin, as part of a "larger government deposit coverage that would extend until the end of next year."
CNBC also reported that the Treasury has requested a $100 billion extension to borrow. These headlines were confirmed by the White House on Reuters. This follows Senator Schumer's earlier optimism that the Senate bill will pass tonight.
Congressional leaders were also considering changing an accounting rule known as "mark to market" that some lawmakers blame for the financial system's volatility, according to the Wall Street Journal. The legislation would back up the SEC, which Tuesday gave companies more leeway to figure out the value of assets for which there are no buyers.
The "mark-to-market" proposal has been met with some criticism on Wall Street. "In our view, the accounting is not the problem: it is reflecting an economic reality that asset values are falling. The real problem was overexposure to certain assets, poor risk management, misunderstood mispriced risks, and lots of leverage. We would prefer the financial statements reflect real economic volatility rather than a false sense of stability," wrote Credit Suisse analyst David Zion in a note Wednesday.
The move to increase deposit-insurance limits, which the White House has raised with industry players, received a boost Tuesday when presidential candidates Sens. John McCain and Barack Obama endorsed the idea. Both candidates planned to return to Washington Wednesday for the possible Senate vote. Sheila Bair, chairwoman of the FDIC, which oversees the program, said she would support temporarily raising the coverage.
Other possible additions to the rescue package: jobless benefits and homeowner tax breaks.
President Bush on signed into law Tuesday a mammoth spending bill to keep the government running until early March, 2009 that includes a $25 billion loan package for troubled automakers. The action came after the Senate over the weekend gave final congressional approval to the more than $630 billion spending bill that was was needed to finance defense, education, farm, health, foreign aid and other government programs after the current fiscal year expired on Sept. 30, according to a Reuters dispatch. The spending legislation allows a ban on offshore drilling to expire on Sept. 30. Democrats had hoped to extend the ban, but did not have the votes to overcome strong opposition from Republicans. Bush said the measures to lift the ban on offshore drilling "will allow us to reduce our dependence on foreign oil."
The bill sets aside $7.5 billion in taxpayer funds needed to guarantee $25 billion in low-interest loans to help General Motors (GM), Ford Motor (F), and Chrysler produce more fuel-efficient cars and trucks. U.S. automakers have said the taxpayer-backed loan package would give them access to capital at a time when credit markets are shut and they are being driven to invest in new technologies to meet tough new federal fuel economy standards.
Relief for the U.S. auto industry can't come too soon. Ford reported a September sales decline much worse than expected at 34% year-over-year. GM reported a far smaller sales decline of 16%. There was surprising weakness at other manufactureres: Toyota (-32%), Nissan (-37%), Honda (-24%), and Hyundai (-25%).
Investors regarded more gloomy economic news Wednesday. The U.S. ISM manufacturing index fell to 43.5 in September, from 49.9 the month before and well below the 49.8 expected by markets. New orders plunged to 38.8 from 48.3, while employment fell to 41.8 from 49.7 in August. New export orders edged down to 52.0 versus 57.0 previously. Prices paid declined to 53.5 from 77.0 in August, well below the 91.5 reading in June.
"The data are worse than expected and will add to recession fears in the market," wrote S&P senior economist Beth Ann Bovino Wednesday.
Construction spending was virtually unchanged in August, according to the Census Bureau. Markets had expected a 0.4% drop.
ADP estimates that nonfarm private payroll employment fell 8,000 in September. ADP estimates that manufacturing lost another 48,000 jobs, in line with consensus, and that other goods-producing jobs fell 24,000. These losses were offset by a gain of 64,000 service jobs.
In Europe, which is having its own financial-sector difficulites, markets were abuzz Wednesday with talk of a coordinated €300 billion bailout plan. But French Economic Minister Lagarde said "there is no such thing".
Bloomberg reports European Central Bank President Jean- Claude Trichet said U.S. lawmakers must pass a $700 billion rescue package for "for the sake of the U.S. and for the sake of global finance. I am confident, but of course it is the decision of the U.S. Congress." Trichet said a pan-European approach to the banking crisis was unlikely, saying "we are not a fully-fledged federation with a federal budget." "Each country has to mobilize its own efforts," Trichet said.
European markets finished mixed Wednesday. In London, the FTSE 100 index rose 1.17% to 4,959.59. In Paris, the CAC 40 index added 0.56% to 4,054.54. Germany's DAX index dropped 0.42% to 5,806.33.
Japan's Nikkei 225 finished higher by 0.96% at 11,368.26. Markets in Hong Kong and Shanghai were closed for a holiday.
In afternoon trading Wednesday, the 10-year Treasury note was higher at at 102-13/32 for a yield of 3.710%, while the 30-year bond was higher at 105-12/32 for a yield of 4.185%. London sources cited by S&P MarketScope said the overnight Libor rate, which surged to 9% yesterday, was indicated in the 4% area, which cold make it easier for central banks to borrow from one another.
The dollar index was up 0.19 to 79.50.
November West Texas Intermediate crude oil futures were off $1.81 to $98.83 per barrel Wednesday after the Energy Dept. reported that crude oil inventories rose 4.3 million barrels to 294.5 million barrels in the week ended Sept. 26, putting stocks in the lower half of the average range for this time of year.
December gold futures were higher at $892.10 per ounce.
Among Wednesday's stocks in the news, Johnson & Johnson's (JNJ) Cordis Corp. says a U.S. district court in Delaware entered final judgment of $1.2 billion to Cordis on patents infringed by Medtronic (MDT) and Boston Scientific (BSX). Cordis says the cases involve the original palmaz balloon expandable stent patent. Medtronic was ordered to pay about $521 miilion, and Boston Scientific about $703 million. Merrill Lynch reportedly downgraded BSX to underperform.
Maurice R. "Hank" Greenberg, the former chief executive officer of American (AIG), has asked the company's CEO for the chance to bid on any assets the insurer plans to sell.
Deutsche Bank cut its EPS estimates and price target on General Electric GE), saying the adjustments largely reflect deterioration at GE Capital, driven by tighter credit markets, asset shrinkage and debt pay-down.
Diebold (DBD) raised its 2008 non-GAAP EPS guidance to $2.40-$2.45 from $2.25-$2.30, citing earlier-than-expected progress from its cost-reduction initiatives, improved profitability from its Brazilian voting and lottery businesses, continued demand for its solutions in global financial markets, and a lower anticipated effective tax rate.
Fitch Ratings says it has placed the AA- long-term and F1+ short-term Issuer Default Ratings (IDRs) of Northern Trust Corp. (NTRS) on Rating Watch Negative. Fitch also revised its Rating Outlook on Northern Trust Co. to Negative from Stable.
In 3,500 stores across U.S., Wal-Mart (WMT) reduced prices on some of the most popular toys. Also, over the next 10 days it will fast track the opening of Christmas shops in stores nationwide.