Bailout Passed!... So What?

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(Chart courtecy of Yahoo Finance)

The New York Times
October 4, 2008

Bailout Bill Fails to Reassure Investors
By MICHAEL M. GRYNBAUM

Wall Street finally got what it had been demanding all week, a financial rescue package, but by the time the gavel fell in Washington on Friday, investors had turned their attention to other problems in the economy.

On Monday, the House of Representatives rejected a $700 billion bailout plan for the nation’s financial system, causing the Dow Jones industrial average to fall 777 points. On Friday, after round-the-clock negotiations, the House passed the plan, sending the Dow down 157 points.

It was a disappointing end to a cantankerous session. The Dow gained nearly 300 points in the morning in anticipation the bill would go through; when it passed, those gains were erased. But the afternoon swoon was less a judgment on the merits of the bailout than proof of a broader truth about the market: investors are always looking ahead.

“We’re dealing with the next situation,” said Howard Silverblatt, the senior index analyst at Standard & Poor’s.

Investors were already pivoting their focus to growing evidence that the nation is embroiled in a recession. A report on Friday from the Labor Department said the economy lost 159,000 jobs in September, far more than economists had expected. Other reports this week revealed sudden collapses in the manufacturing sector. Some economists also are predicting the economy will contract in the months ahead.

Those developments did not bode well for the corporate earnings that investors watch closely, creating a dour outlook that helped send stocks lower late in the day.

The Standard & Poor’s 500-stock index lost 15.05 points, or 1.35 percent, to close at 1,099.23, ending under 1,100 for the first time in four years — a fitting end to the index’s fourth-worst week in half a century.

The Dow Jones industrial average declined 157.47 points, or 1.5 percent, to 10,325.38. The Nasdaq composite index fell 29.33 points, or 1.45 percent, to 1,947.39.

“Investors still have to face some significant challenges in the broad economy that can’t be magically removed by a group of our Congressional leaders,” said Marc D. Stern, the chief investment officer at Bessemer Trust. “Investors have to confront a series of unknowns in the weeks ahead that can be disconcerting.”

Also weighing on investors were the strains on the flow of credit, which the bailout bill was intended to relieve.

Analysts said it might take several days before the effect of the bill’s approval could be seen on the credit markets. On Friday afternoon, the signals were mixed: high-yield bonds and junk bonds eased slightly, but Treasury bills moved against expectations, becoming more expensive as investors remained nervous about emerging from the safety of government notes.

It was too soon to tell whether interest rates that banks charge each other for overnight loans — a crucial measure of the flow of credit to businesses and consumers — would fall.

Investors and analysts interviewed Friday said they were glad to see the bailout package approved, but they warned that credit would not immediately loosen.

“It is not a panacea,” said Douglas M. Peta, a market strategist at J.& W. Seligman. “Credit is the lifeblood of the economy. Until the short-term funding markets start behaving regularly, and until banks are willing to play their role in the system, the direction in stocks is going to be down.”

Mr. Peta said Friday’s stock sell-off “was a rational response when the credit markets are almost practically not functioning.”

A few other factors may have been at play. On Friday morning, Wells Fargo, the San Francisco-based bank, said it had made a $15.1 billion bid for the Wachovia Corporation, scuttling a rival deal with Citigroup that had been struck under government pressure. The move helped raise confidence among investors that companies were still willing to take on major acquisitions amid the current crisis. Still, financial stocks as a group ended lower for the day.

The sell-off after the vote on Capitol Hill may have been the result of investors’ tendency to buy on expectations — in this case, that the House would ultimately pass the bill — and sell when the event actually occurs.

And Mr. Stern, of Bessemer Trust, noted that Fridays were becoming popular days for investors to sell their stock holdings. “There are two more days that used to be called the weekend, and now are simply two more business days, where important news may develop,” Mr. Stern said, referring to recent developments — the government takeover of Fannie Mae and Freddie Mac; the bankruptcy of Lehman Brothers; the sale of Merrill Lynch to Bank of America — all of which have occurred on the weekend.

“There’s no way to trade on that news until Monday. Therefore you need to position your portfolio on Friday to be ready for what happens over the weekend.”

Mr. Stern chuckled. “In 2008, you have to stay close to your BlackBerry on the weekend.”

The benchmark 10-year Treasury bill rose 6/32, to 103 8/32. The yield, which moves in the opposite direction from the price, fell to 3.6 percent, from 3.63 percent late Thursday. Oil prices fell 9 cents, to settle at $93.88 a barrel.

In Europe, the markets closed ahead of the House vote. The major indexes all rose after stocks on Wall Street advanced. The FTSE 100 index in Britain ended up 2.3 percent, the CAC-40 in Paris rose 3 percent, and the DAX in Frankfurt gained 2.4 percent.

(story from: nytimes.com)

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