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Stocks Recover, but Finish Lower

Buyers emerged in the last half hour of trading Friday on hopes that world leaders would agree to resolutions to stop the panic

U.S. stocks clawed their way back from another day of heavy losses Friday as the global financial panic continued to take its toll. In the last half hour of trading, investors were snapping up bargains, while others were hopeful that world leaders that are meeting this weekend would devise ways to alleviate the pain in the markets.

However, the extreme selling mood of the last week was hard to overcome and the Dow Jones Industrial average and S&P 500 index finished lower for the eighth session in a row.

Friday's trading day began with a horrifying drop in the Dow of over 700 points to a low of 7,882.51 amid a burgeoning crisis in the world financial system. Markets in Europe and Asia suffered deep losses, with Britain's benchmark index hitting a five-year low and German stocks plunging 12% at one point.

By the market close Friday, the blue-chip Dow Jones industrial average fell 128.00 points, or 1.49%, to 8,451.19. The broader S&P 500 index shed 10.70 points, or 1.18%, to 899.22. The tech-heavy Nasdaq composite index managed to finish higher by 4.39 points, or 0.27%, to 1,649.51.

"We’re really in a calamity right now, and we have to pull out all the stops to get this things resolved," says Gary Wolfer, chief economist with Univest Wealth Management & Trust. He is hoping for "some kind of concerted action" by world central banks and large governments over the weekend.

The VIX equity volatility index, the market's favored "fear gauge", spiked to a high of 76.94 Friday afternoon, before settling at 69.95.

The wild session follows Thursday's devastating rout in U.S. equities amid an escalation in panic-driven selling. A 679-point loss (-7.3%) in the Dow industrials sent that benchmark crashing below the 9,000 level on Thursday, to finish at 8,579.19, its the lowest level in five years.

Friday's declines bring the Dow's loss for 2008 to 36.3% -- worse than 1937's decline of 32.8%. The S&P 500 is now down 38.8% for 2008 -- also the worst drop since 1937. And the Nasdaq has lost nearly 37.8% this year. The markets still have a ways to go to beat the worst year of the Great Depression, 1931, when the Dow fell 52.7% and the S&P 500 plunged 47.1%.

The S&P 500's breathtaking 18.2% drop for the week was the second-worst ever. It was just behind the 18.6% decline for the week ending July 21, 1933, during the Great Depression.

Many fear-stricken investors are scared to jump back in. "There are a lot of good buys out there now, but who wants to buy them when the selling pressure is so heavy?" wonders William Rutherford, president of Rutherford Investment Management, who was selling shares on Friday. "We need some stability."

Bonds fell Friday as the overnight dollar Libor rate fell and amid ongoing speculation that the Treasury department will issue a lot of new supply in order to fund its efforts to stabilize the credit market. The 10-year note dropped 24/32 to 101-24/01/32 for a yield of 3.87%, while the 30-year bond sank 14/32 to 106-12/32 for a yield of 4.12%.

The dollar index was higher. Gold futures fell. Oil futures tumbled to $78.14, down $8.45 per barrel in Nymex trading.

Friday morning, President George W. Bush said his administration is taking steps to increase deposit insurance, expand loans to corporations, and inject funds into the banking system. Bush said the government's financial rescue plan was aggressive enough and big enough to work, but would take time to fully kick in. "We can solve this crisis and we will," he said in brief remarks from the White House Rose Garden.

Bush spoke as finance ministers and central bankers from the Group of Seven -- the United States, Japan, Britain, Germany, France Italy and Canada -- were gathering in Washington for a weekend meeting. G7 ministers are under pressure to produce coordinated program to cope with global financial crisis and a looming recession. An Associated Press report said the president noted that major Western countries were working together in an attempt to stabilize markets and end the spreading panic, including coordinated cuts in interest rates.

Friday afternoon, news reports said that G7 finance ministers and central bankers are apparently in a rift regarding the degree of unified commitment to help stave off further contraction in stocks. The markets are hopeful but skeptical of "harmonized" action. "While the potential for a unified response this weekend could see some short covering in equities into the weekend (Wall Street is open Monday, Treasuries are closed), many suspect the official communique will fail to deliver a potent response that might shore up banks," wrote Action Economics Friday afternoon.

Some member countries are reluctant to guarantee interbank loans, as has been done by Britain, Ireland, and Greece, while Italy says it won't sign a "weak" statement that does not address the gravity of the situation. French Finance Minister Lagarde doubts there will be a "harmonized response" given that solutions might be different for each country.

"Policy makers and central bankers will do what they do, flood the system with liquidity. When participants' angst shifts to confidence, the markets will calm down. But the selling will be exhausted before the outlook is clear," wrote Miller Tabak strategist Phil Roth in a note Friday morning.

Market pros were also watching the credit-default swap deal for Lehman Brothers Holdings bonds in what may be the biggest-ever payout in the $55 trillion market, according to Bloomberg News. Friday afternoon, dealers said the Lehman CDS auction will return 8.625 cents on the dollar, according to the auction administrators Creditex and Markit. That's below earlier estimates for the $400 billion toxic clean-up of the outstanding credit default swaps of the bankrupt investment bank. Initial estimates were for 9.75 cents on the buck this morning and well below the 12-13 cents originally mooted, says Action Economics. Conversely, payout of the insurance on those contracts will be 91.375% by AIG, JPMorgan, Goldman, Wachovia, and RBS, among others.

More than 350 banks and investors signed up to settle these CDS based on the auction price, including Newport Beach, California-based Pacific Investment Management Co., manager of the world's largest bond fund, Chicago-based hedge fund manager Citadel Investment Group LLC, and American International Group Inc., the New York-based insurer taken over by the government, according to the International Swaps and Derivatives Association in New York. For the next round of the auction to set the final price, dealers reported an open interest of $4.92 billion to sell bonds.

Jim Dunigan, chief investment officer at PNC Wealth Management in Philadelphia, thinks casualties could emerge this weekend as parties settle these Lehman CDS. "You might find people announcing they don't have the wherewithal to pay up and close their doors," Dunigan says. "I'd be surprised if we didn't see more [bank failures next week]" given the estimated size of the losses on the credit default swaps.

Over in Europe, markets sustained sharp losses Friday, but pulled back from the worst levels of the session. In London, the FTSE 100 index dropped 8.85% to 3,932.06. In France, the CAC 40 index tumbled 7.73% to 3,176.49. Germany's DAX index plunged 7.01% to 4,544.31.

Asian stock markets plunged Friday as investors, stunned by Wall Street's relentless downward spiral, rushed to sell. Tokyo's benchmark index the Nikkei dropped 881.06 points, or 9.6%, to 8276.43, its lowest level since May 2003. Since the start of this week, the benchmark index has lost 24% of its value. The index rebounded a bit from its intraday low of 8115.41 as traders became wary of creating new market positions ahead of a meeting of Group of Seven finance chiefs later Friday. Heavy selling in the cash market was triggered after the Osaka Securities Exchange halted trading in the futures market for 15 minutes. Market analysts are pessimistic about the near-term future of the market, suggesting the Nikkei may soon fall below 8000.

In Hong Kong, the Hang Seng Index plunged 1146.37 points, or 7.2%, to 14796.87 after falling by more than 9.5% at one point. It is the first time the benchmark index has fallen below the 15000 level since January, 2006.

The U.S. is weighing two dramatic steps to repair ailing financial markets, according to the Wall Street Journal: guaranteeing billions of dollars in bank debt and temporarily insuring all U.S. bank deposits. If the two moves come to fruition they would mark the government's most extensive intervention yet in the financial system, as officials ponder increasingly far-reaching measures to stem the sprawling crisis.

The Treasury Dept., having tried without success to unlock frozen credit markets, is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, the White House said on Thursday. Acknowledging that such steps would not seem to fit into President Bush's free-market philosophy, the president's chief spokeswoman, Dana Perino, said taking partial ownership of banks and other moves associated with the financial would not be "part of his natural instincts. But when presented with the evidence that the financial crisis about to hit the United States would affect every single American up and down the economic food chain, this president decided that it was important that the government take robust action.

"The turmoil in the markets and the coincidental bank holiday on Monday in the U.S., Canada and Japan is boosting speculation of further coordinated policy moves," wrote Brown Brothers Harriman analyst Marc Chandler in a note Friday.

Among stocks moving Friday, Morgan Stanley (MS) shares plunged 22% to 9.68, while Goldman Sachs (GS) finished down 12% to 88.80, Friday after Moody's placed Morgan Stanley's A1 rating on review for downgrade and Goldman Sachs' Aa3 rating on negative outlook. These moves reflect Moody's expectation that an extended downturn in global capital-market activity will reduce the firms' revenue and profit in 2009, and perhaps beyond. Morgan Stanley continues to wrestle with fears that Lehman's CDS auction could impact its balance sheet and a planned $9 billion capital injection in the firm by Misubishi UFJ Financial (MTU).

According to a Wall Street Journal report, Wells Fargo (WFC) won the battle for Wachovia (WB) as rival suitor Citigroup (C) walked away from compromise negotiations because of worries about the quality of some of Wachovia's assets. The move clears the way for Wells Fargo to proceed with the definitive agreement it reached with Wachovia last Friday. That deal, announced just four days after Citigroup thought it had won the battered Charlotte, N.C., bank, now is valued at about $11.38 billion. Wells Fargo has said it expects to complete the purchase by yearend. That would put one of the weakest U.S. banks under control of a much stronger player. And unlike Citigroup's original agreement, the Wells Fargo takeover doesn't involve government financial assistance.

Still unresolved are Citigroup's legal claims for as much as $60 billion in damages from Wachovia and Wells Fargo. Shares of the New York bank fell when its bid was torpedoed. In a statement Thursday, Citigroup said its shareholders "have been unjustly and illegally deprived of the opportunity the transaction created."

General Electric Co. (GE) posted third-quarter EPS of 43 cents, vs. 54 cents one year earlier, as a 33% decline in profit at its Capital Finance unit offset an 11% revenue rise. GE postyed 45 cents EPS from continuing operations. Wall Street was looking for 45 cents. The company said it's on track to meet its revised guidance (in September) for the full year, adjusted for dilution. GE said that access to the commercial paper market had opened up.

General Motors (GM) said bankruptcy was "not an option" after a steep rout in the shares late Thursday.

Late Thursday, Prudential Financial (PRU) forecast third-quarter after-tax adjusted operating income for its Financial Services Businesses of $275-$375 million (67-90 cents per share). Results reflect the estimated negative pre-tax impact of about $700 million. Prudential says its need to access the capital markets would be modest, if any.

Barclays plc (BCS) confirms it is considering a number of options, including capital raising, relating to the industry-wide commitment to increase Tier 1 Capital in the sector by an aggregate 25 billion pounds, as announced by the UK government.

Macy's (M) said that based on the potential for lower sales, it now expects $1.30-$1.50 fiscal 2009 EPS, excluding one-time costs and an impairment charge. Its previous guidance was for $1.70-$1.85. The company said third-quarter same-stores sales at Macy's fell by 5.8%. The company added that if weaker sales trends continue, same-store sales in fall season could be down by 3%-6%.

Due to deteriorating economic conditions, Centex (CTX) says it will suspend its regular quarterly cash dividend, consistent with its strategy of conserving capital and building liquidity during this difficult business environment.

Biogen Idec (BIIB) says its Phase II trial of baminercept in rheumatoid arthritis patients who have had an inadequate response to conventional therapy with a disease-modifying antirheumatic drug (DMARD) did not meet its primary endpoint or any of the pre-specified secondary endpoints. Biogen Idec has decided to discontinue development of the compound in rheumatoid arthritis.

In U.S. economic news Friday, the trade deficit narrowed to $59.1 billion in August from $61.3 billion in July, in line with market expectations. Exports fell $3.4 billion to $164.7 billion, while imports dropped $5.5 billion to $223.9 billion. The export decline was split between automotive parts (mostly to Canada and Mexico as North American production declines), which balances a similar decline in automotive imports. Imports of oil dropped sharply, by $6.1 billion, as prices plummeted. The non-petroleum deficit widened to $22.6 billion from $29.3 billion in July.

"Although the total was in line with expectations, the weak exports are a warning that a stronger dollar and weaker overseas economies will come back to hurt the U.S. economy," says S&P senior economist Beth Ann Bovino.

U.S. import prices plunged 3.0% in September while export prices fell 1.0%. Markets expected -2.5% and -0.4%, respectively. Petroleum import prices declined 9.0% last month, though they are still up a hefty 47% over last year. Excluding petroleum, import prices were down 0.9% but are up 6.5% over last year.

Import prices are up a solid 14.5% over last year, while export prices are up 6.8%. Agricultural exports edged down 0.3% in September, after plunging 9.6% in August. Agricultural exports are still up 19.5% year-over-year.

Ben Steverman and David Bogoslaw contributed to this article.

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