Market Dispatches10/10/2008 8:35 PM ET
By Charley Blaine and Elizabeth Strott
The stock market finished its worst week ever with a dramatic rebound from even worse lows.
The Dow Jones industrials moved more than 1,000 points during the session -- from a low of nearly 700 points to a gain of more than 300 -- before falling back again. It was the first 1,000-point swing for the blue-chip index.
The blue chips closed down 128 points, or 1.5%, to 8,451. Twice during the day, the index fell under 8,000 for the first time since April 2003. Twice it bounced back. The Standard & Poor's 500 fell 11 points, or 1.2%, to 899. But the Nasdaq Composite Index gained 4 points, or 0.3%, to 1,650. A big engine in the Nasdaq's gain: a 9.1% gain to $96.80 in Apple (AAPL, news, msgs). The iPod maker had fallen as low as $85 at the open.
For the week, the Dow and S&P 500 were off 18.2%. It was the worst week for the Dow in its 112-year history and the worst week for the S&P 500 since the week of May 21, 1933. The Nasdaq's 15.3% loss was its worst since the week of April 10, 2000, as the dot-com bust broke.
The market turmoil was so great that crude oil tumbled in response, finishing Friday at $77.70, down 10.3% on the day and 17% on the week. The close was crude's lowest since September 2007.
"A psychiatrist is what is needed to help investors today," Tony Crescenzi, chief bond market strategist at Miller Tabak, told MarketWatch.com.
Did the rebound signal a bottom?
It's too early to say if Friday's rebound from the lows means stocks have seen a bottom. The Dow, S&P 500 and Nasdaq are all off more than 40% since peaks reached in October 2007 and have lost 27%, 30% and 30%, respectively, since Aug. 31.
The third-quarter earnings season kicks into high gear next week, and investors are bracing for lower profits and reduced profit estimates from companies. Among companies set to report: Intel (INTC, news, msgs), Johnson & Johnson (JNJ, news, msgs), JPMorgan Chase (JPM, news, msgs), Wells Fargo (WFC, news, msgs), Citigroup (C, news, msgs) and Google (GOOG, news, msgs).
Stock Charts (Year)
Dow Jones Industrial Avg.
S&P 500
If the reports are worse than expected, stocks could fall back.
But by far the largest problem remains the global credit crisis that has made banks in the United States and elsewhere unwilling to lend to each other. The crunch has threatened many businesses because they can't get short-term financing to fund daily operations. The crunch has also resulted in fewer customers getting approved for mortgages, car loans and credit cards.
In addition, many investors have lost confidence in markets, government solutions to fix the problems and corporate management skill.
"Things are still very stressed, and we don't know what's going to fix it, " Barry Moran, a currency trader with the Bank of Ireland in Dublin, told Bloomberg News.
The three-month London interbank offered rate, or Libor, rose to 4.82% Friday from 4.75% Thursday. It was the highest level all year and was up from 2.82% one month ago. Higher Libor rates indicate aversion to lending and to risk generally. The Libor typically follows central banks' interest rates.
The stock market plunge -- the Dow has fallen 22% so far in October -- has forced many hedge funds to liquidate stocks to meet margin calls. Another casualty: Chesapeake Energy CEO Aubrey McClendon was forced to sell "substantially all" of his company stock over the past three days to meet margin loan calls. Unless the cash gets freed up, experts say, the U.S. could face a very serious recession. Other countries may face bigger problems.
Finance officials from the major industrials were meeting this weekend in Washington, D.C., to discuss the situation. Late Friday, they agreed on common guidelines to address the world financial crisis, a move that opens the way for a series of government actions. But The Wall Street Journal said the agreement falls short of the joint plan that many investors had sought.
Among the guidelines, countries agreed to "use all available tools" to prevent systemically important financial institutions from failing, and to ensure that bank deposit insurance programs are solid; to ensure that banks can raise capital from government as well as private sources.
Many investors and traders were disappointed in the deal; they'd hoped for a dramatic G-7 accord, such as a concrete agreement to guarantee bank debt.
At the same time, Treasury Secretary Hank Paulson said the government will move ahead with plans to buy equity stakes in financial institutions. The administration received authority to make direct purchases of stock in the $700 billion rescue bill Congress recently passed.
Paulson said the program to purchase stock in financial institutions will be open to a broad array of institutions.
The administration received the authority to make direct purchases of stock in banks in the $700 billion measure Congress passed last week to rescue the nation's financial system.
The government hasn't had ownership positions in banks since the Great Depression.
A wild last hour of trading
The last hour of trading Friday had been billed as potentially crazy, and it delivered. There were reports that hedge funds are being forced to sell stocks to meet margin calls from brokers. The market is also being hit by redemptions by mutual funds.
Then, the rally took off, in part because many investors began to sense that a credit plan would emerge this weekend.
The biggest losses came from energy stocks, which were falling because of a sharp decline in crude oil. Crude in New York fell 10.3% to $77.70. That's the lowest close for crude since September 2007.
Losses for Dow components Chevron (CVX, news, msgs), down 9.6% to $57.83, and ExxonMobil (XOM, news, msgs), down 8.3% to $62.36, were worth about 93 points of the Dow's loss by themselves.
A widely watched measure of market fear, the CBOE Volatility Index ($VIX.X ($VIX.X) ), hit a record 75.92 Friday before dropping back to 69.95.
Twenty of the 30 Dow stocks were lower on the day along with 321 S&P 500 stocks and 61 Nasdaq-100 ($NDX.X) stocks. The Nasdaq-100, which tracks the largest Nasdaq stocks, was down 5 points, or 0.4% to 1,270. Apple's gain was worth 11 points for the index.
Energy prices -- New York close
Fri. Thur. Chg. Month chg. YTD chg.
Crude oil (NYMEX) (per barrel) $77.70 $86.59 -$8.89 -22.79% -19.05%
Natural gas (per million BTU) $6.5380 $6.8250 -$0.2870 -12.10% -12.63%
Unleaded gasoline (per gallon) $1.8070 $2.0273 -$0.2203 -27.27% -27.45%
Sellers of insurance on bonds issued by bankrupt investment house Lehman Bros. may face demands that they pay out more than 91 cents on the dollar to buyers of those insurance contracts.
That’s the upshot of an unusual auction process Friday that established the price for defaulted Lehman debt and, in turn, potential claims payouts on insurance protecting that debt, known as credit default swaps.
Certainly, some firms will take a hit because of the pricing, potentially amounting to billions of dollars in combined losses. In the Lehman auction, participants included most major financial firms from around the world. But it’s too early to tell which companies will be on the hook or for how much. Some of the sellers bought protection for themselves, for example.
In a best-case scenario, said Barry Silbert, chief executive of SecondMarket, a marketplace for trading illiquid assets, financial companies that sold default swap contracts would make their payouts in the coming weeks, have enough capital to cover all the positions, and take their losses and move on.
In a worst-case scenario, sellers of the swaps would not have the cash to make the payments and would have to liquidate their assets to cover their positions.
"The next two weeks will be very telling," Silbert added.
The auction had been watched closely as a gauge for valuing the problems faced by financial companies from the mortgage and housing collapse. And it was one reason why Goldman Sachs (GS, news, msgs) fell 12.4% to $88.80. For the week, Goldman Sachs was down 30.6%.
Moody’s also raised concerns about Goldman’s long-term credit rating on Thursday, lowering its outlook to negative.
Europe and Asia have an ugly day
The American market took its cue at the open from Europe and Asia.
London's FTSE 100 Index ($GB:UKX) fell 8.9%, Germany's Xetra DAX Index ($DE:DAX) was down 7%, and Europe's broader Dow Jones Stoxx600 Index lost 7.5%. Japan's Nikkei 225 Index ($N225) plunged 9.6% and Hong Kong's Hang Seng Index ($HSIX) closed down 7.2%.
Equity trading was halted in Austria, Russia, Indonesia, Ukraine and Iceland.
Investors are selling everything during the current financial panic, but when they realize the end of the world hasn't arrived, we might be in for a big rally. MSN Money's Jim Jubak thinks we'll have a clearer picture of the financial landscape by Oct. 23.
Short hits from the markets -- New York close
Fri. Thur. Chg. Month chg. YTD chg.
Treasurys
13-week Treasury bill 0.210% 0.580% -0.370 -76.67% -93.31%
5-year Treasury note yield 2.762% 2.823% -0.061 -7.50% -20.06%
10-year Treasury note yield 3.861% 3.834% 0.027 0.89% -4.31%
30-year Treasury bond yield 4.137% 4.120% 0.017 -3.90% -7.22%
Currencies
U.S. Dollar Index 82.850 81.365 1.485 4.40% 8.03%
British pound in dollars $1.7042 $1.7091 -0.0050 -4.40% -14.33%
Dollar in British pounds £0.5868 £0.5851 0.0017 4.60% 16.73%
Euro in dollars $1.3486 $1.3598 -0.0112 -4.36% -7.73%
Dollar in euros € 0.7415 € 0.7354 0.0061 4.55% 8.37%
Dollar in yen 99.50 99.59 -0.09 -6.16% -11.04%
Canadian dollar in U.S. dollars $0.841 $0.872 -$0.0306 -10.54% -15.26%
U.S. dollar in Canadian dollars $1.188 $1.147 $0.0417 11.72% 17.92%
Commodities
Fri. Thur. Chg. Month chg. YTD chg.
Gold $859.00 $886.50 -$27.50 -2.48% 2.51%
Copper $2.1445 $2.4060 -$0.26 -25.51% -29.48%
Silver $10.60 $11.875 -$1.28 -13.65% -28.95%
Corn $4.0825 $4.3825 -$0.30 -16.26% -10.37%
Crude oil (NYMEX) (per barrel)
$77.70 $86.59 -$8.89 -22.79% -19.05%
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