bank run blog

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.”

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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

In the aftermath of Friday’s slide, coverage of the stock markets is focusing on the psychology of market movements. The Los Angeles Times reports :

“Illustrating the stock market’s deep confusion about the economy, bad news about oil prices and jobs sent the Dow Jones industrials tumbling almost 400 points Friday, a day after the index rallied strongly on optimism about jobs and consumer spending.

The sharp reversal reflects a pattern of uncertainty that is leading investors to react frantically to each day’s helping of news.”

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BusinessWeek was left wondering if Friday represented a significant shift in sentiment :

“The big question: Is this a temporary mood swing for a nervous market? If so, fear may dissipate, and the market has a chance to quickly bounce back when better news headlines come along next week.

Or, did something fundamental change on June 6, a day when oil prices spiked $11 per barrel and a jobs report showed the unemployment rate jumping from 5% to 5.5%, the largest rise in 22 years?

Many market observers believe it is the latter: The stock market is catching on to a new, scary reality.”

full story

Unusually for a Friday, the stock market suffered major losses that continued right through the end of the trading week. Bloomberg surveyed the damage :

“U.S. stocks tumbled, sparking the Dow Jones Industrial Average’s worst sell-off in 15 months, after a jump in the unemployment rate and a $10-a-barrel rise in oil heightened concern the economy will sink into a recession.

General Electric Co. and AT&T Inc. led the retreat that erased the market’s gain for the week after the Labor Department said the jobless rate grew to 5.5 percent in May from 5 percent in April, the biggest increase since 1986. JPMorgan Chase & Co. led the Standard & Poor’s 500 Financials Index to the lowest level in five years on renewed speculation consumer defaults will worsen. J.C. Penney Co., General Motors Corp. and Continental Airlines Inc. dropped as crude climbed to a record.”

The Daily Telegraph story highlighted the extraordinary tensions in the commodities markets during frantic action that drove oil up $11 a barrel on the day :

“On a dramatic day for equities and commodities, the New York Mercantile Exchange doubled daily price limits after heating oil contracts broke through original limits, leading to a short suspension of trading in some contracts.”

The Associated Press raised the short term likelihood of stagflation :

“’I think the biggest concern right now is oil and it’s potential for a stagflationary environment,’ said Bill Knapp, investment strategist for MainStay Investments, a division of New York Life Investment Management. Stagflation occurs when stalling growth accompanies rising prices.”

It will be interesting to monitor the reaction to today’s activity in the Asian and European markets on Sunday night and early Monday morning.

Bloomberg : U.S. Stocks Plunge as Unemployment Tops Forecast, Oil Surges

Daily Telegraph : Oil price pushed to new records as US economy plunges further

Associated Press : Stocks fall sharply on surge in oil, jobs data

After apparently stabilizing on reports of diminished consumption and adequate supplies, oil and oil futures rocketed up this morning, pounding US stocks and sending the normally conservative Friday traders into a panicky sell-off. According to Bloomberg News :

“Crude oil surged more than $10 a barrel to a record as the dollar weakened after the U.S. unemployment rate grew the most in two decades and Morgan Stanley said prices may reach $150 within a month.”

Some market analysts see oil going up even more sharply in the near term. CNN Money is reporting :

“The argument echoes that made by Goldman Sachs analyst Argun Murti, who has said it is increasingly likely oil prices could spike as high as $200 before enough demand is knocked out to rebalance the market.

U.S. lawmakers and regulators, unconvinced supply and demand fundamentals fully explain the oil price spike, are looking into oil markets for signs of manipulation and undue influence from speculators.”

Bloomberg : Oil Rises to Record on Weakening Dollar, Morgan Stanley Outlook

CNN Money : Morgan Stanley Analyst Sees Oil Driven To $150 By July 4

The Wall Street Journal has a piece today regarding a new trend of workers (mainly middleclass workers) tapping their 401(k) retirement investment accounts to meet crises that have cropped up, and also, to simply make ends meet.

The Journal reports that those who are drawing down their retirement savings also may be reacting to the volatility in the stock market. Giving examples of what the paper referred to as “jittery” 401(k) investors, the Journal profiles several workers who have lost confidence in the market, some of whom have simply stopped investing in the stock market all together.

The “worrisome” trend (as the Journal characterizes it) has led to a situation where, “at the end of last year, 18% of workers had loans outstanding from their (retirement investment) plans, up from 11% in 2006.” The Journal opines that the large number of 401(k) loans;

“may be a sign that cash-strapped consumers are raiding their nest eggs to stay afloat, no longer able to tap their houses for cash and up against their credit card limits.”

The Journal also reported dramatic up-swings in so called “hardship withdrawals” from employee retirement investment accounts and that “some employers are starting to see workers reducing allocations of pretax income to their accounts.”

Of course, the Journal is keen to advise its readers that, in spite of the intense volatility in the stock market and the overall declines since the middle of last year, the volitility should not be a seen as a signet of danger by middleclass workers who want to be able to afford to retire before they expire; quoting a seller of stock market risk to 401(k) owners, the Journal tells its readers that these are really “the best times to contribute new money (for investment in the markets) because you’re taking advantage of a sale.”

See article:
Wall Street Journal: Raiding the 401(k) Nest Egg

Facing what can only be described as an institutional run on the US banking system, president Bush met with his top economic advisers this morning, issuing a reassuring statement that the administration is “on top of the situation”. According to a report by the Associated Press :

“President Bush, trying to calm turmoil in financial markets, said Monday that his administration is ‘on top of the situation’ in dealing with the slumping economy.

‘One thing is for certain, we’re in challenging times,’ the president said after meeting with Treasury Secretary Henry Paulson and other senior economic advisers. ‘But another thing is for certain: We’ve taken strong, decisive action.’

The president commended the Federal Reserve for its urgent actions over the weekend. He praised Paulson for working with the Fed and showing ‘the country and the world that the United States is on top of the situation.’

Bush spoke on a day of turmoil and plunging prices on global financial markets. Oil prices hit a record in Asian trading, U.S stock index futures fell sharply and the dollar hit record lows.”

The president wore a green tie to mark St. Patrick’s Day.

Associated Press : Bush: US is on top of financial crisis

Interestingly, MarketWatch, a Dow Jones publication, ran this short informational piece this morning, just minutes after the market opened substantially lower :

Circuit breaker rules for the NYSE

LONDON (MarketWatch) — The New York Stock Exchange imposes trading halts in the event of extreme market volatility.

The so-called circuit breaker rules first went into effect following the 1987 market crash.

The rules call for trading halts of differing lengths in the event of declines of 10%, 20%, and 30% in the Dow Jones Industrial Average based on the average closing value of the average over the month immediately prior to the start of the current quarter.

For the current quarter the rules call for a 60-minute halt in trading in the event of a 1,350 point decline in the Dow Jones Industrial Average reached before 2 p.m.; a 30-minute halt in the event of a 1,350 point decline reached between 2 p.m. and 2:30 p.m., and no halt in trading in the event of a 1,350 decline reached after 2:30 p.m.

The timing of the halts changes in the event of a larger decline.

The rules call for a 120-minute halt in trading in the event of a 2,700 point decline in the Dow Jones Industrial Average reached before 1 p.m.; a 60-minute halt in the event of a 2,700 point decline reached between 1 p.m. and 2 p.m.; and market closure in the event of a 2,700 point decline reached after 2 p.m.

A decline of 4,000 points in the Dow industrials at any point during the day would trigger closure of the market for the remainder of the day.