Daily Market Outlook: Sharp Losses Expected

by: Frederic Ruffy

Stocks are set to open with sharp losses Monday as the problems in the financial industry reach a crescendo. Less than an hour before the opening bell on Wall Street, stock index futures indicate that the Dow Jones Industrial Average could fall more than 300 points in early trading. The NASDAQ is indicated 40 or 50 points lower.

Wall Street was rattled over the weekend after Lehman Brothers (LEH) filed for bankruptcy and Merrill Lynch (MER) was forced into a merger with Bank of America (NYSE:BAC). Shares of both investment banks have been hammered in recent weeks on worries that mounting financial strains was making it difficult for these two firms to survive in their existing forms.

Unable to find buyers for all or part of its business, Lehman filed for bankruptcy protection. Merrill was forced into the arms of BofA.

American International Group (NYSE:AIG) announced a major restructuring amid ongoing worries about its exposure to derivative securities. Shares are down 34 percent nevertheless.

Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS), the last two investment banks standing, shares fell 9 percent and 11 percent respectively.

Washington Mutual (NYSE:WM), another source of investor angst of late, is down 18.3 percent.

Taken together, the news was enough to send global equity markets reeling. While many markets in Asia are closed Monday, major averages in Europe were trading down 4 and 5 percent before the start of trading in the US, with France’s CAC Index leading the day with a 5.1 percent drop.

Bonds soared and the dollar took a hit. The benchmark ten-year Treasury bond is trading up 1 28/32nd, bringing its yield to 3.52 percent and its lowest levels since mid-April

The buck fell 2.15 to 105.75 on the yen. The euro, however, has given up its early gains on the buck and is trading down to 1.4135.

Crude oil was slammed lower, down $5.38 to $95.80 a barrel. Gold, with help from the falling buck and safe haven buying, rose $11.90 to $775.90 an ounce.

In economic news, the NY Empire Index fell to -7.4 in September, compared to 2.8 the month before. Economists were expecting the gauge of regional manufacturing activity to fall to 1.0.

Data on industrial production due out at 9:15 Eastern Time. Economists expect the report to show industrial production falling .3 percent in August and a capacity utilization rate of 79.6 percent.

In the options market, trading remained active Friday, with approximately 9.1 million calls and 8.6 million puts traded across the US exchanges. The major averages traded mixed and the CBOE Volatility Index edged higher. The Dow fell 11.7 points and the NASDAQ added 3 on Friday. The VIX, which hit a high of 30.51 in mid-July, rose 1.25 points to 25.66.

Merrill Lynch (MER) saw active trading, with 518,000 puts and 243,000 calls traded on the day. Washington Mutual (WM), Lehman (LEH) and AIG (AIG) saw brisk trading as well.

General Electric (NYSE:GE) saw 9 times its normal trading volume, with 418,000 puts and 314,000 calls trading on the day.

Frontier Oil (NYSE:FTO) saw a second day of consecutive call buying. Hologic (NASDAQ:HOLX) calls were also being bought Thursday and Friday. Bullish flow was seen in Valueclick (VCLK) and Marriott (NYSE:MAR) on unsubstantiated takeover chatter. Volumes also rose in BJ Services (BJS), F5 Networks (NASDAQ:FFIV), and Hershey’s (NYSE:HSY).