Emergency Rate Cut, U.S. Stocks Decline

123jump.com Staff
22 Jan, 2008
New York City

The preemptive move by the Fed to lower interest rate by 0.75% was welcomed by investors. Market recovered from the morning loss of 4.5% in Dow, S&P 500, and Nasdaq. Three averages closed between 1% and 2% lower. Investors are now looking for additional rate cut. Retailers and bond insurance companies rallied but base metals and energy companies declined. European markets rebounded 2% and South American markets jumped 4% or more.

[R]11:00PM Frankfurt, 5:00PM New York, 9:00AM next day Sydney[/R]

The Federal Reserve cut the interest rates by 75 basis points to 3.5%, largest cut in more than two decades. The surprise cut in an emergency session helped market to avert near collapse of 5% as other markets around the world witnessed in last two days of trading.

The Fed appears to be behind the curve in catching up with the need of the economy. While the Fed has taken an aggressive move with lowering of interest rate, future rate cuts are likely to have less impact on the economic growth. Low interest rates are only going to make dollar vulnerable against euro, pound, yen, and other Asian currencies. Financial markets recovered from their worst losses in the day, but fear of economic recession and talks of emerging weakness in job markets dominated trading desks.

Sentiments and rational behavior appear to rule market trading today. Lack of clear direction from the administration also contributed to the nervousness in the market. Investors are looking for more than monetary stimulus and are now looking for additional rate cuts in the next two months.

Sentimental markets appear to be in the grip of fear as major indexes in Asia are now trading between two and five-year lows. Nikkei 225 in Japan is now near 27-month low. Export sensitive stocks in Japan are reaching recent lows with Toyota Motor, Honda, Nissan, Sony, and Cannon, down between 15% and 30% from their recent peaks. Banks, brokerage companies and shipping companies have been the hardest in this on-going sell-off. Construction slowdown after the new building code has also hurt real estate companies.

Hong Kong fell 8.7% today after losing 5.5% on Monday. Banks, insurance, and properties companies were leading decliners. Bank of China is likely to report a larger than estimated loss related to sub-prime market. The surprise estimate of subprime related loss from Societe General, which has still not been reported, hurt the sentiment in China and Hong Kong. HSBC has been on the decline in Hong Kong trading on the worries that the bank may not have a handle on the depth of its sub-prime losses. Ping An Insurance fell 12% after it carried out a bond offering to accumulate capital and hunt for asset acquisition.

India has witnessed one of the worst two-day sell-off. The lack of liquidity and international investors selling in the global sell-off has created dramatic swings in the market. Sensex index dropped 5% after losing 7.5% on Monday. The market was halted after one minute of opening and fell quickly 12% in the morning trading before recovering to close down only 5%. The Reliance Power IPO has sucked capital from five million retail investors. Banks, auto companies, steelmakers, and brokerage companies traded sharply lower.

European markets in the late afternoon are trading lower as well and Germany has led the decline in the region. Germany fell another 5% at the opening. European markets regained most of the losses after the Federal Reserve cut the rate by 75 basis points to 3.5% but markets have remained on the edge.

North American Markets indexes

Dow Jones Industrial Average lost 128.11 or 1.06% to a close of 11,971.19, S&P 500 closed down 14.69 or 1.11% to 1,310.50, and Nasdaq Composite Index traded down 47.75 or 2.04% to a close of 2,292.27.

In Toronto TSX Composite closed up 508.76 or 4.19% to close at 12,640.89.

Of the 30 stocks in Dow Jones Industrial Average, 8 closed higher, 22 closed lower, and none was unchanged.

Home Depot led the gainers in the index with a rise of 7.3% followed by increases in Wal-Mart of 3.4%, in JP Morgan of 3.2%, in Caterpillar of 1.6%, and in AIG of 0.7%.

Merck led the decliners in the index with a fall of 3.7% followed by losses in Verizon of 3.22%, in Coca Cola of 3.2%, in Exxon Mobil of 3.1%, and in Microsoft of 3%.

Of the stocks in S&P 500, 194 closed higher, 303 fell, and 3 were unchanged.

One hundred and six stocks fell more than 3% and eighty seven stocks rose more than 3%.

Waters Corp led the decliners in the index with a fall of 20% followed by losses in precision Cast of 7.8%, in Motorola of 7.6%, in Sigma Aldrich of 6.7%, and in Bristol Meyers of 6.5%.

MBIA soared 46% and led the gainers in the index followed by increases in Ambac of 29%, in circuit City of 21%, in MGIC of 13.75%, and in Keycorp of 12.6%. Other retailers including Sears, Dillards, Coach, Lowe’s, RadioShack, Nordstrom, and Family Dollar rallied more than 8%.

South American Markets Indexes

In Latin Markets Mexico led the gainers in the region with a rise of 6.36% followed by increases in Colombia of 5.18%, in Chile of 4.93%, in Peru of 4.77%, and in Brazil of 4.45%.

Venezuela dropped 0.11%.

Asian Markets

In Tokyo Nikkei 225 Index closed lower 752.89 or 5.65% to 12,573.05, in Hong Kong Hang Seng index decreased 2061.23 or 8.65% closed to 21,757.63, in Australia ASX 200 index declined 393.60 or 7.05% to close 5,186.80.

In South Korea Kospi Index decreased 74.54 or 4.43% to close at 1,609.02, in Thailand SET index closed lower 24.99 or 3.26% to 741.54, and Indonesia JSE Index edged decreased 191.36 or 7.70% to 2,294.52. Sensex index in India decreased 875.40 or 4.97% to 16,729.94.


European Markets

In London FTSE 100 Index closed higher 161.90 or 2.90% to 5,740.10, in Paris CAC 40 Index increased 98.09 or 2.07% to close at 4,842.54 and in Frankfurt DAX index lower 20.72 or 0.31% to close at 6,769.47. In Zurich trading SMI increased 200.78 or 2.76% to close at 7,487.92.

Bond Yields decreased on 10-year U.S. bonds to 3.45% and 30-year bonds declined to 4.21%.

[R]Commodities, Metals, and Currencies[/R]

Crude oil fell $0.74 to close at $89.18 per barrel for a front month contract, natural gas decreased 35 cents to $7.64 per mBtu, and gasoline futures decreased 2.80 cents to close at 227.54 cents per gallon.

Gold increased $11.10 in New York trading to close at $892.80 per ounce, silver closed down 9 cents to $16.125 per ounce, and copper for front month delivery decreased 4.15 cents to 319.30 per pound and in London copper futures decreased $268.00 to $6,889.00.

Dollar edged higher against euro to $1.4628 and nearly unchanged against yen at 106.460.


[R]2:00PM New York – Wachovia bank suffered a severe profit decline on sub-prime losses and other consumer loan losses.[/R]

Wachovia Bank ((WB)) reported fourth quarter profit of $51 million or 3 cents per share compared to $2.32 billion or $1.20 per share.

Excluding after-tax net A G Edwards brokerage merger-related expenses of 5 cents per share in the fourth quarter of 2007 and 1 cent per share in the fourth quarter of 2006, earnings were $160 million, or 8 cents per share, in the fourth quarter of 2007 compared with $2.33 billion, or $1.21 per share, in the fourth quarter of 2006.

The merger of A G Edwards, Inc was completed on October 1, 2007.

Full year 2007 net income was $6.31 billion, down 19 percent from $7.79 billion in 2006, and earnings per share were down 30 percent from 2006 to $3.26. Excluding after-tax net merger-related expenses of 8 cents in 2007 and 7 cents in 2006, earnings in 2007 were $6.47 billion, or $3.34 per share, compared with $7.91 billion, or $4.70 per share, in 2006.

Wachovia took in the quarter a charge of $1.7 billion and credit losses of $1.5 billion.

Revenue in the quarter declined to $7.2 billion from $8.6 billion from a year ago.

The bank added to the provision for credit losses of $1.5 billion, which exceeded net charge-offs by $1.0 billion. The provision largely reflected the recent significant deterioration in the residential housing market and the related portions of the commercial real estate portfolio, including higher expected loss factors for the consumer real estate and auto loan portfolios, and for the commercial portfolios.

Net charge-offs were $461 million, or an annualized 0.41 percent of average net loans. Total nonperforming assets including loans held for sale were $5.2 billion, or 1.08 percent of loans, foreclosed properties and loans held for sale, largely reflecting increases in consumer due to the effects of the weakened housing industry.

Total assets under management, including the retail brokerage services, were $274.7 billion at December 31, 2007, decreased 1% from December 31, 2006, as the addition of $29.9 billion from acquisitions, net money market fund inflows of $9.3 billion and approximately $4.5 billion in market appreciation were offset by the $34.5 billion change in investment discretion of assets under management now solely managed by wealth management group and other net outflows of $13.3 billion primarily related to the loss of one institutional client with minimal revenue impact.

Total brokerage client assets grew 54 percent from year-end 2006 to $1.2 trillion, including $371.1 billion from A.G. Edwards.


Wachovia ((WB)) rose $1.00 to $31.80 in the early afternoon trading after the news.
[R]11:00AM New York – The U.S. stocks recover after opening sharply lower at the opening.[/R]

U.S. market averages dropped sharply in the first hour of trading. The Fed cut in emergency session ahead of its regular meeting by 75 basis points to 3.5%.

Dow Jones Industrial Average traded as low as 4% but recovered to 74 or 0.5% to 12,039.22. Nasdaq plunged nearly 100 but recovered to a loss of 24.96 to 2,314.52. S&P 500 lost 75 at the opening but recovered to a loss of 3.04 to 1,321.37.

Energy, banks, brokerages, and metals and mining companies were hit the hardest. In wild trading at the opening several companies stocks fell more than 10%. Google, Apple, Research in Motion, Bank of America, Wachovia Bank, JP Morgan were some of the leading decliners.

Bank of America reported fourth quarter profit of 5 cents compared to $1.16 per share on sharply higher losses in CDO and other riskier loans. In the fourth quarter the bank reported a profit of $268 million and compared to profit of $5.26 billion.

BofA in the fourth quarter wrote-down CDO related assets by $5.28 billion reflecting the impaired value of the underlying assets based on expected credit losses, the lack of demand in the marketplace and the impact of credit rating agency downgrades of the securities. The write-downs reduced trading profits by about $4.50 billion and other income by about $750 million.

For the year 2007 Bank of America earned $14.98 billion compared to $21.133 billion or earnings per share declined to $3.30 from $4.59 a year ago.

[R]9:00AM New York – The Federal Reserve cut rate by 75 basis points to 3.5%. Asian markets plunge for the second day.[/R]

The Federal Reserve cut interest rate by 75 basis points to 3.5% after global markets plunged for the second day in a row. The Fed moved in anticipation to halt the economy from sliding to recession may have a limited impact in the long term.

“Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully. Appreciable downside risks to growth remain”, The Fed added in the press release.

In a related action, the Board of Governors approved a 75-basis-point decrease in the discount rate to 4%.

Interest rate cuts are blunt financial instruments and the Fed is quickly running out of options. The Fed action, in an emergency session, focused on the risk to the economic growth and appears to have taken into account global market decline. The precipitous decline in Europe, Asia, and emerging markets prompted the Fed to take a quick action.

The real question now is what happens if the rate cuts do not work and the Fed runs out of the option.

Global markets were on the decline for the second day of this week. Asian markets fell sharply for the second day in a row as investors sold stocks on the fears of U.S. recession and volatility in the commodities prices.

In Tokyo Nikkei 225 Index closed lower 752.89 or 5.65% to 12,573.05, in Hong Kong Hang Seng index decreased 2061.23 or 8.65% closed to 21,757.63, in Australia ASX 200 index declined 393.60 or 7.05% to close 5,186.80.

In South Korea Kospi Index decreased 74.54 or 4.43% to close at 1,609.02, in Thailand SET index closed lower 24.99 or 3.26% to 741.54, and Indonesia JSE Index edged decreased 191.36 or 7.70% to 2,294.52. Sensex index in India decreased 875.40 or 4.97% to 16,729.94.

Sentimental markets appear to be in the grip of fear as major indexes in Asia are now trading between two and five-year lows. Nikkei 225 in Japan is now near 27-month low. Export sensitive stocks in Japan are reaching recent lows with Toyota Motor, Honda, Nissan, Sony, and Cannon, down between 15% and 30% from their recent peaks. Banks, brokerage companies and shipping companies have been the hardest in this on-going sell-off. Construction slowdown after the new building code has also hurt real estate companies.

Hong Kong fell 8.7% today after losing 5.5% on Monday. Banks, insurance, and properties companies were leading decliners. Bank of China is likely to report a larger than estimated loss related to sub-prime market. The surprise estimate of subprime related loss from Societe General, which has still not been reported, hurt the sentiment in China and Hong Kong. HSBC has been on the decline in Hong Kong trading on the worries that the bank may not have a handle on the depth of its sub-prime losses. Ping An Insurance fell 12% after it carried out a bond offering to accumulate capital and hunt for asset acquisition.

India has witnessed one of the worst two-day sell-off. The lack of liquidity and international investors selling in the global sell-off has created dramatic swings in the market. Sensex index dropped 5% after losing 7.5% on Monday. The market was halted after one minute of opening and fell quickly 12% in the morning trading before recovering to close down only 5%. The Reliance Power IPO has sucked capital from five million retail investors. Banks, auto companies, steelmakers, and brokerage companies traded sharply lower.

European markets in the late afternoon are trading lower as well and Germany has led the decline in the region. Germany fell another 5% at the opening. European markets regained most of the losses after the Federal Reserve cut the rate by 75 basis points to 3.5% but markets have remained on the edge.



[R]7:00AM New York, 5:30PM Mumbai – Stocks in Mumbai declined for the second day in a row and are now down 19% in one week of trading.[/R]

Sensex in Mumbai trading fell for the second day as worries related to the U.S. economy mounted. Margin calls on retail investors, lack of new buyers in the market, and selling from international investors pushed indexes lower.

Sensex dropped 4.97% or 875.41 to 16,729.94 after reaching a low of 15,332 or losing nearly 2,274. In the last seven trading sessions, Sensex has lost 19.7% or 4,097.

Of the thirty stocks in the Sensex index, 26 declined, and 4 gained.

CNX Nifty 50 has lost 22.9% or 1,457 in the last seven days and lost today 5.94% ot 309.50 to close at 4,899.30.

Mid cap and small cap indices have lost nearly 30% in the last seven trading days.

Stock trading turnover on National Stock Exchange fell 46% to 44,307 crore rupees and on Bombay Stocks Exchange dropped 26% to 6,846 crore rupees.

Finance Minister P. Chidambaram said that corporate profits are strong and our economy is different from the western world and there is no reason why economies of the west should overwhelm us. He left an impression at the gathering of reporters that investors should not be worried and India’s economy is healthy enough to withstand global slowdown.

Reliance Industries fell 7.6% to close at 2.350 rupees after dropping to 2,120 rupees and ONGC plunged 12% to 975 rupees.

ICICI Bank fell 4% to 1,130 rupees HDFC Bank declined 3% to 1,470 rupees.

Grasim Industries declined 6.1% to 2,840 rupees, ITC dropped 10% to 182 rupees but Bharti Airtel rose 3.2% to 855 rupees.

In Tokyo Nikkei 225 Index closed lower 752.89 or 5.65% to 12,573.05, in Hong Kong Hang Seng index decreased 2061.23 or 8.65% closed to 21,757.63, in Australia ASX 200 index declined 393.60 or 7.05% to close 5,186.80.

In South Korea Kospi Index decreased 74.54 or 4.43% to close at 1,609.02, in Thailand SET index closed lower 24.99 or 3.26% to 741.54, and Indonesia JSE Index edged decreased 191.36 or 7.70% to 2,294.52. Sensex index in India decreased 875.40 or 4.97% to 16,729.94.