Wall Street Breakfast: Must-Know News

• Not for the faint of heart. U.S. stock indices plunged more than 8% intraday in a whirlwind session that saw them close down a milder 3-4%. At its low, the Dow was down 10% from Friday at about 2:00 PM, not long after the government's $700B bailout became law. Investors continue to worry about whether the bailout will succeed in thawing frozen credit markets - the lifeblood of U.S. business. Global markets fared no better: Asian markets fell to multiyear lows while European averages saw their worst percentage drop in 20 years. In Russia, trading was halted after its index plummeted 19.1%.
• Quietly, Fed drops rates. Using its new-found power to pay interest on bank reserves, the Fed effectively lowered the overnight lending rate by 0.75% to 1.25%. At the same time, it doubled the cash funding its short-term bank-lending facility to $900B. Economists said the 0.75% spread came as a surprise. The Fed says it will adjust the target vs. effective spread "based on experience and in response to evolving market conditions."
• Fed may foray into unsecured debt. In an effort to address tensions in the commercial paper market, the Fed is considering making an unprecedented move into unsecured lending, WSJ reports. When the Fed rolled out measures to loosen up the asset-backed commercial paper (ABCP) market in September, some debt brokers complained the move could kill demand for the unsecured paper relied on by foreign banks and companies. Yesterday, Pimco's Bill Gross called on the Fed to start buying commercial paper, coupled with a drop in its target rate to just 1%.
• BofA coughs up dismal Q3. Shares of Bank of America (BAC) fell 10% in extended trading Monday after it preannounced weaker-than-expected earnings, halved its dividend to $0.32, and initiated a common stock issue of at least $10B. "The recession is going to be a little deeper than we thought," CEO Ken Lewis said on a conference call. "It's going to take some more time and some more pain." Profit fell 68% to $1.18B. EPS of $0.15 was a mere quarter of the $0.61 analyst consensus. "We don't look real smart today, given what's happened," Lewis said, "But all in all we just thought it was prudent to get out there sooner rather than later."
• Future uncertain for U.K. banks. With an eye to replenishing depleted capital from mortgage-related losses, the U.K. government may invest as much as $79B in its banking system, as the U.K.'s three biggest banks - Barclays (BCS), Royal Bank of Scotland (RBS) and Lloyds TSB (LYG) - say they will each need up to $26B of government money to strengthen their balance sheets. Barclays categorically denies it requested funds. The U.K. government is also considering a plan to partially nationalize banks on a voluntary basis, but says at this stage it is a contingency plan only. Share of the trio plunged in overseas trading: RBS -34.5%. LYG -18.5%. BCS -13.3%.
• Abu Dhabi resuscitates AMD with $8.4B. Shares of Intel (INTC) rival Advanced Micro Devices (AMD) are up 9.7% premarket after it announced an $8.4B investment from the Abu Dhabi government along with plans to spin off its manufacturing plants. Abu Dhabi will pay AMD $700M for a stake in a new company which will own two AMD German plants and build another in New York. The spinoff will assume $1.2B of AMD's debt. It will receive up to $6B from Abu Dhabi for factory expansion and another $1.4B in operating capital. Abu Dhabi is also spending $314M to double its stake in AMD to 19%. The move is likely to calm investors, who feared the chipmaker was on the brink of bankruptcy.
• Wells Fargo, Citi put gloves down. Wells Fargo (WFC), Citigroup (C) and their joint takeover target Wachovia (WB) agreed to a two-day standstill in their legal dispute - setting the stage for a potential settlement. FDIC chief Sheila Blair said the Fed moved to broker the truce after realizing legal wranglings could derail the process; she says the banks and regulators are now working together to find a mutually-beneficial solution.
• EU lacks unity on crisis response. Continued discussions amongst EU leaders failed to produce an agreement on how best to respond to the financial crisis gripping the Eurozone. France and Italy's suggestion of a U.S.-style bailout fund received little support, and yesterday's meeting of EU finance ministers culminated in nothing more than a reiteration by national leaders of the need to protect bank deposits. An EU commissioner called for "a clear, coordinated, European approach," as Germany's Merkel stressed "each member country must tackle its own problems." Across Europe, countries continued to act unilaterally to prop up struggling domestic banks.
• Asia-Pacific tries for credit thaw. The central banks of Japan and Australia injected over $11B into money markets to loosen up credit. Bank of Japan added $9.8B to the market as the three-month interbank rate stayed at 0.87%, the highest this year. The Reserve Bank of Australia added $1.3B, and lowered its borrowing rate by 1%, twice as much as economists expected. Short-term interbank lending rates have continued to rise despite previous capital injections, and recent stock market drops have contributed to over $2T in lost value since the credit crisis began. Economist Adam Carr, describing the state of financial markets, said "we've been living in a dreamland and that dream has ended."
• Hard to find funds. Overnight Libor - the rate banks charge each other - soared 157 basis points to 3.94. The corresponding rate for euros, Euribor, climbed 22 BPs to 4.27%. "There's still a massive lack of confidence in this market and the more we talk about it, the more it becomes a self- fulfilling prophecy," money-market trader Jan Misch said. The seizure in global credit markets is deepening as investors worry attempts to revive lending between financial institutions won't work, resulting in more bank failures.
• MUFG to offer U.S. I-banking. U.S. regulators granted Mitsubishi UFJ (MTU) the status of a financial holding company. This will allow Japan's largest bank to offer full investment banking services and equity underwriting in the U.S. The move is part of Mitsubishi UFJ's plan to expand its presence in the U.S. and to position itself to take advantage of future consolidations in the U.S. banking market.
• Short-term softness, 2009 turnaround, NABE says. "Business economists have become more negative on the economic outlook for the next several quarters as a result of the tightness in credit markets and weakness in consumer spending, expecting growth to stall in the fourth quarter," NABE said Monday in its Outlook. "If financial conditions fail to improve quickly, near-term economic prospects could deteriorate markedly. Still, the NABE panel expects that lower oil prices, a bottoming out in home prices, and a better functioning of financial markets should enable the economy to resume trend-like growth by the second half of 2009." Two out of three economists believe we're already in recession, or will be there before year end. It says deteriorating near-term growth prospects should to lead to more job losses and higher unemployment.

Earnings: Tuesday Before Open

• F5 Networks (FFIV): Sees FQ4 revenue of $171.3M vs. $173.2M consensus due to a sharp slowdown in Europe. [PR]

Today's Markets

• Asia drifted lower Tuesday. Nikkei -3.03% to 10,156. Shanghai -0.73% to 2,158. BSE Sensex -0.58% to 11,733. Hang Seng closed.
• Shaking off initial jitters, Europe is higher at midday. London +0.9%. Paris +1.6%. Frankfurt +1.3%.
• Overnight futures trading has been extremely volatile. Stock futures climbed, then plunged, then climbed again. Dow +0.74% to 10,038. S&P +1.09%. Nasdaq +1.21%.
• Crude +3.26% to $90.73. Gold +2.25% to $885.70.

Tuesday's Economic Calendar

• 7:45 ICSC Retail Store Sales
  8:55 Redbook
  11:00 Fed's Gary Stern speaks on repercussions of the financial shock
  12:30 PM Fed's Bernanke speaks at NABE conference
  2:00 PM FOMC Minutes
  3:00 PM Consumer Credit
  5:00 PM ABC Consumer Confidence Index
• Notable earnings before Tuesday's open: SWY
• Notable earnings after Tuesday's close: YUM

Seeking Alpha editor Rachael Granby contributed to this post.

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Comments

[captainjohann:]

sIR,
Can you explain how the crude prices are connected to the US bailout plan? They follow the bailout package with production and consumption remianing same. thanks

2008 Oct 07 08:58 AM

[axelrod608:]

The premise behind the Fed pumping all this money into the banks is just plain silly. The recipient banks are using it to take the place of their losses, not to spur new "investment". And they're not lending it to other banks for one simple reason - they know full well that other banks are still holding massive amounts of toxic paper and are, essentially, insolvent. They'd be nuts to lend to a company that may not be able to pay them back - which is how we got here in the first place.

The underlying problem is that financial institutions that are allowed to carry off-the-books assets/liabilities cannot prove their solvency. So what in the world difference is it going to make pumping a bunch of money into financial institutions that are about as transparent as a brick wall ? Nobody in their right mind is going to lend to them.

And no investor using his/her own money is going to buy the stock. Sure, the hedge funds will, but their managers get paid and bonuses whether they make or lose money.

Pumping Fed funds into opaque financials is dumb. I guess that's why the government is doing it.

2008 Oct 07 09:43 AM

[John Lounsbury:]

captainjohann - - -

Oil prices are not directly related to the bailout package. Oil has been dropping, partly because current demand is reduced, and partly because the market is forward looking to a recession, possibly worldwide, that will have significant length and depth. Demand will remain depressed into the bottom of any worldwide recession.

2008 Oct 07 10:08 AM

[John Lounsbury:]

captainjohann - - -

You correctly point out that supply and demand for oil have not changed much in the past few months. The emphasis is on the word much. Several months ago the oil markets were priced for a continuation of the uptrend in consumption that has characterized the past few years. That uptrend has slowed, possibly leveled out temporarily, and this could last for some time, depending on the nature of the anticipated recession.

Oil has come down because a growth premium was priced in at $140. All the wat through the rapid rise in oil many experts were saying that the current supply and demand warranted only $50 to $80 a barrel, depending on which expert you listened to. Now that anticpated rapid consumption growth is being taken out of the pricing assumptions of traders (for the time being), oil should come down closer to that $50 - $80 range. If past patterns are repeated, oil may well dip below $50 because overcorrection often occurs.

2008 Oct 07 10:18 AM

[Poor Jim:]

Two thangs, as we say in Texas..

1.Hey, fellow journalists, you're late! We're not getting into a recession In the United States; we've been in one for close to a year now. And thanks to those brave representatives who voted against the first "bailout bill" we have already started the Second Great Depression.

2. Bank of America CEO Ken Lewis lost a lot of crediibility yesterday when he cut the BAC dividend 50%. Only a month or so ago, while he was speaking to and taking questions from a group of senior citizens in California, he said that he could see no reason now or in the future for a dividend cut. Now, it looks like he was fuld of sh-t.

2008 Oct 07 11:14 AM

[Shaggieman:]

Great points Axelrod, as usual. Your discussion made me think why not use Fed funds to make some failed institution whole again and set the greed mindset flowing again? Take LEH for instance; resurrecting them might do it and besides I think they were to big to have failed and we're now paying the price for it.

2008 Oct 07 11:46 AM

[bbowen7:]

Too much of the discussion is about financial engineering. The reality:
1. Two thirds of the US economy is consumer spending.
2. Consumers (e.g. taxpayers; e.g voters; e.g. you and me) have been overspending for years, and have way too much personal debt and not enough savings.
3. A major enabler has been the housing bubble and loose financing which, partly through home equity loans, has allowed people to have that extra SUV. That's over.
4. As the Baby Boomers edge along toward retirement, they have miniscule (and becoming more so) savings. They have to conserve.

So, what could save us?
1. A better distribution of wealth that puts more buying power in the middle class;
2. Foreign growth (Asia) that will support US exports - and purchase of US assets.
3. A lot of personal and national belt tightening.

Pogo had it right. We have met the enemy, and it is us.

2008 Oct 07 12:13 PM

[axelrod608:]

SF points out that 2/3 of the US economy is consumer spending. And much of that 2/3 is DEBT spending, not from income. If you realistically think of debt as pre-spent income, one needs to have a debt returement plan to keep even. Alas many ( most ?) Americans don't.

Not only do they not have savings to use to deal with economic problems, they also have debt levels that they cannot reduce at current income. We have become an "upside-down" society. And the folks who think that reinflating the credit bubble wil bring the economy back again don't realize that the economy was dysfunctional.

You could pump any anount of new potential credit into the system and who's going to use it ? The already overextended ?

You want the credit markets to come back the way they were ? Be careful what you wish for, You might get it. And regret it.

2008 Oct 07 12:53 PM

[axelrod608:]

Newsflash - the Fed said today it will start buying "commercial paper" - loans with NO collateral. The beginning of the end of the dollar. These people wouldn't get to $1,000 on "Are you smarter than a fifth grader".

2008 Oct 07 12:56 PM

[BerkeleyBob:]

Thought it interesting that some pundits see oil between $50 and $80, link between oil & NG seems frayed. True, some nat gas producers are slowing down extraction, true PBR has a major oil field find which will ultimately increase supply, but I personally doubt the pundit's crystal balls. Decrease in US dependence on foreign oil, much of it coming from unfriendly nations, is going to be painful and not come overnight, but I strongly doubt we will see oil at $50 or even $80 and remain long PBR, WMB, EWZ and CHK with gradual add to these positions with what is left of my money.

2008 Oct 07 02:32 PM