bank run blog

In a story that illustrates just how jittery and fearful of announcements of major bankruptcies the US markets have become, an unfounded rumor about United Airlines trashed the company’s shares until trading was curbed this morning. One has to wonder, if UAL’s underlying fundamentals were not so shaky, could this rumor, based on the errant republication of a six-year-old news item, really have pushed shares down so quickly? The Associated Press is reporting :

“An old story about United Airlines’ 2002 bankruptcy filing resurfaced on a newspaper Web site on Monday, pummeling its shares before trading was halted.

United blamed the drop on the appearance of an old Chicago Tribune story on the Web site of the South Florida Sun Sentinel. Both are owned by Tribune Co.

United said the date on the story appearing on the Sun Sentinel Web site had been changed. The story was removed from the Sun Sentinel Web site by midday.”

MarketWatch reports that before trading was suspended, United shares dropped by more than 75% :

“Trade of UAL stock was halted at about 11:06 a.m. Eastern time after falling nearly 76% to $3 a share. Shares resumed trading at about 12:25 p.m. and were last down nearly 11% at $10.94.

Florida Sun-Sentinel’s deputy managing editor, Joe Schwerdt, said internal tracking records showed the story hadn’t been accessed for editing since 2003, according to the Chicago Tribune Web site. The story has since been removed from the Sentinel’s Web site.”

Associated Press : United blames false bankruptcy rumor on old story

MarketWatch : UAL plunges on recycled bankruptcy story

The continued exposure of large and medium-sized banks, and their apparent inability to rectify their positions even after consuming everything that the Fed can throw at them, has led to new downgrades in the sector today. CNN is reporting :

“Standard & Poor’s on Tuesday lowered its outlook on diversified banks and other diversified financial services companies to ‘Negative’ from ‘Neutral,’ warning that some may need to cut dividends and raise additional capital to cover mounting loan losses.

‘Credit quality is deteriorating rapidly, particularly for home equity and credit card loans,’ wrote equity analyst Stuart Plesser. ‘We believe that high gasoline prices coupled with rising unemployment levels and steadily falling home prices will lead to significantly higher charge-offs in 2008 versus last year.’

Though commercial loan growth has remained solid, Plesser is concerned that credit may deteriorate in this loan category as well.”

full story

After the drastic declines of the past few months, stocks are effectively trading below their levels of a decade ago. The “growth” of the financials era has been wiped out in less than a year, with most of the losses occurring in the last six weeks. An article in London’s Times reviewed the unpleasant shakeout :

“Since hitting that brief peak in mid-May, the Dow Jones is down about 14 per cent. The broader S&P 500 had fared a little better, off about 11 per cent. In Britain, the FTSE, moving more or less in lockstep, is off about 13 per cent.

The latest plunge has not only brought an end to happy optimism that all will be well. It has also confirmed that, as far as equities are concerned, the last decade really has been the lost decade.

Ten years ago the S&P 500 had surged to just under 1,200. After the latest swoon it stands barely above that level. If the index falls only another 50 points in the second half of this year, it will end 2008 lower than where it ended in 1998. If the effect of inflation is factored in, the real loss in equities is about 30 per cent.

For Britain, of course, this baleful achievement has already been recorded. The FTSE 100 was trading yesterday about 8 per cent below where it was at the end of June 1998. With inflation, the ten-year loss in the UK market is closer to 40 per cent.”

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After today’s extension of Thursday’s record losses, the Dow has entered bear market territory, with some Wall Street analysts predicting at least another ten percent drop in the coming months. This evening, the Wall Street Journal is reporting :

“Eight months after they peaked, stocks dropped to the threshold of a bear market, another signal of the mounting challenges that lie ahead for the economy, government and investors.

Friday’s 106.91-point drop left the Dow Jones Industrial Average at 11346.51, down 19.9% from its October record, after it had fallen as low as 11297.99 during the day. At the day’s low the Dow was down 20.2% from October. Investors typically consider a decline of 20% or more the mark of a bear market.”

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Next week, which will be only four trading days, could see a continuation of the slide, according to MarketWatch, which surveyed the data that will be published :

“Mounting concerns about consumers and the economy will bring oil prices and the June employment report, which will come out Thursday because of a holiday-shortened week, into sharp focus.

Also on Thursday, the European Central Bank is widely expected to raise interest rates, a move that would likely further pressure the dollar and might further lift commodities prices. A weaker U.S. currency tends to boost the price of dollar-denominated commodities, such as crude, as it makes them cheaper for holders of other currencies.”

full story

The Dow closed below 12,000 for the first time since March, with traders reacting to a week of continuous bad news from the financial sector. The Associated Press summarized the mood :

“Stocks capped a difficult week with steep losses Friday amid escalating worries about the financial and automotive sectors and a rebound in oil prices. The major indexes fell by more than 1 1/2 percent on the day, and the Dow Jones industrial average gave up more than 200 points to end at its lowest level in three months.

While investors have seen other triple-digit days in the past year since concerns about the economy began emerging, the Dow’s first finish under 12,000 since mid-March could deal Wall Street a psychological blow.”

But the US automotive industry is moribund, and Wall Street knows that, and oil has been volatile for months and actually ended the week down. So the sell-off was largely triggered by the financials, with the Merrill Lynch warning about “super-regional” banks just the latest bad news. According to MarketWatch :

“Friday capped a week of downgrades and other negative developments for banks and other financial institutions, noted Art Hogan, chief market strategist.

‘We had a plethora of brokers talking about them, from the money centers to the regionals, and none of them were positive,’ said Hogan.”

Associated Press : Stocks drop as credit woes continue, oil rises

MarketWatch : Stocks hit with weekly losses as oil up, financials hit

The jobs report released before the markets opened yesterday has more serious long-term implications for the US economy than the spike in oil prices. While the flight of institutional dollars to commodities has distorted those markets and created a series of unsustainable bubbles, increasing unemployment will be one of the fundamental causes of prolonged economic contraction. This morning the New York Times took stock of the markets :

“Investors’ recent hopes that the United States might yet skirt a recession sank swiftly in the face of gloomy indications that the economy is gripped by a slowdown and pressured by record fuel prices.

For tens of millions of Americans struggling to pay bills, the jobs report added an official stamp of authority to a dispiriting reality they already know: A deteriorating labor market is eliminating paychecks just as they are needed to compensate for the soaring cost of food and fuel, and as the fall in house prices hacks away at household wealth and access to credit.”

Of particular concern is the breadth of the unemployment figures, with job losses spreading to all sectors of the economy. CNN Money reports :

“The job losses in the payroll report were widespread, as the battered construction industry lost 34,000 jobs and manufacturers cut 26,000 jobs from the nation’s factories. But the service sector also saw job losses in many sectors, as retailers trimmed 27,000 jobs. The business and professional services categories took a 39,000 job hit.

‘The business and professional has to be a focus of concern. The job losses have broadened out,’ [Wachovia chief economist John] Silvia said. ‘Those are generally good-paying jobs. This is a clear sign the weakness is spreading beyond the construction and manufacturing.’”

New York Times : Job Losses and Oil Surge Spread Economic Gloom

CNN Money : Nation’s economic pain deepens

Independent : Surge in US jobless to 5.5 per cent prompts sharp falls on Wall St