Wall Street took a jump off a cliff on Friday and now investors are looking to see where it lands. Stocks were sharply lower in afternoon trading, though above the dire levels indicated by premarket futures activity that came in the wake of sharp declines overeas.
Investors are increasingly worried that a worldwide recession will crimp corporate earnings as the effects of the U.S. subprime housing crisis. “We had a global economy before which allowed us growth and you’re seeing the flip side,” said Doug Roberts, Channel Capital Research.com’s chief investment strategist . “There’s a global linkage so when one market goes down its forced liquidation cascades into other markets and hits ours as well.” (See “Panic Grips Investor Psyche In Asia” and “Europe: Sell, Sell, Sell.”)
Roberts said that when the global markets decline, hedge funds and private-equity funds are forced to liquidate their holdings. “That’s the cycle we’re in,” he said. “The traders are closing their positions because they don’t want to hold their positions over night since they don’t know which way the market is going.”
The major indexes hit their lowest points at the beginning of the day, with losses greater than 6.0%, but then recouped some of the losses. In afternoon trading the Dow Jones industrial average tumbled 4.9%, or 422.61 points, to 8,268.64. The S&P 500 sank 4.9%, or 44.42 points, to 863.69, and the Nasdaq lost 4.0%, or 64.25, to 1,539.66.
Four hundred and twenty three stocks In afternoon trading on New York Stock Exchange, 423 stocks advanced while 2,667 declined. Nothing hit a new 52-week high, but 792 issues sank to new lows.
If there’s any good news to be gleaned, it is that the coordinated government efforts in the Pacific region to stabilize the world financial system have slowed the bloodletting. (See “An Emergency Fund For Asian Nations Seeded With $80B.”) The London interbank offered rate fell to 3.52% from 3.54% on Thursday signaling some confidence in the banking industry. But the worst may be yet to come. Although the Libor has been falling in recent days, the decline was small on Friday.
Also, even if banks are willing to consider lending to each other, money is still flowing towards risk-averse investments. The three-month U.S. Treasury bill, regarded as one of the safest assets around, yielded 0.72%, down from 0.94% late Thursday. But cash flowed out of the longer-term end of the market, with the benchmark 10-year Treasury note yielding 3.62%, up from 3.54% late on Thursday. The increasing gap between short- and long-term Treasuries could be a sign that investors are worried about inflation as the U.S. government sells bonds to finance its financial bailouts. (See “Treasuries In Turmoil.” )
There has also been talk of a Federal Reserve interest-rate cut, but Roberts doesn’t think it will be sufficient to turn the stock market around: “A Fed rate cut would give relief to some borrowers, but they have to continue other measures, such as more credit assistance, to solve a problem like this.”
There was a silver lining in existing U.S. home sales on Friday, with September results showiong the largest increase in more than five years, although the sales gain came as prices continued to fall. Investors hoped this meant a bottom is near.
The National Association of Realtors said Friday that sales of existing homes rose by 5.5% in September from the level in August. The median sales price dropped to $191,600, down by 9.0% from the prior year. Inventories of unsold existing homes dropped by 1.6% in September to 4.27 million units.
Meanwhile, PNC Financial Services Group (nyse: PNC – news – people ) said it would buy National City (nyse: NCC – news – people ) in a $5.6 billion deal supported by the federal government. This is the first deal since U.S. officials revealed that they would allow banks to use federal capital injections to acquire weaker rivals.
PNC said it expects $20.0 billion of writedowns from National City’s loans.
Electronics maker Sony (nyse: SNE – news – people ) warned its profit would fall, sending its shares sharply lower in Japan overnight. In Germany, Daimler’s stock fell after the automaker reported reduced third-quarter earnings and dismissed its 2008 profit and revenue forecast.
General Motors (nyse: GM – news – people ) plunged 14.4%, or 88 cents, to $5.22 in afternoon trading, as speculation spread that its talks to buy Chrysler’s auto operations from Cerberus Capital Management in a deal that would also involve a transfer of ownership of General Motors’ part-owned financing arm GMAC (nyse: GJM – news – people ), intensified. Cerberus, the private equity firm that controls Chrysler and just over half of GMAC, also remains in talks with other parties, including Nissan Motor (nasdaq: NSANY – news – people ).
JPMorgan Chase (nyse: JPM – news – people ) took a hit, falling 6.3%, or $2.39, to $35.49, as the financial sector got pummeled.
Light, sweet crude fell $4.18 to $63.66 on the New York Mercantile Exchange. The sell-off came despite the Organization of Petroleum Exporting Countries’ announcement that it will cut production by 1.5 million barrels a day. As long as the oil-exporting cartel sticks to conservative cuts in a bid to affect medium-term sentiment, crude could stay within the $60.00 to $70.00 trading band heading into 2009. (See “ OPEC Cut Could Still Work.”)
The tech stocks took a hit, while airlines got a boost from falling oil prices. (See “ Tech Tumbles While Airlines Get An Oil Boost.”)
Investors fled into the yen, which seems like a stable safe haven, but a similar move into the dollar, a currency that was on a steep downward trajectory this time last year, is a little more surprising. (See “ Flight To The Dollar And The Yen.”) The dollar was up 1.9% against the euro, with the European currency buying $1.2719. The pound was down 2.5% against the dollar on Friday afternoon in London, breaching the $1.60 barrier for the first time in five years. It bought $1.5883, down from $1.6284 on Thursday
The industrials were some of the biggest losers on Friday afternoon. Equipment-maker Bucyrus (nasdaq: BUCY – news – people ) sank 13.4%, or $2.82, to $18.25, while Ingersoll-Rand (nyse: IR – news – people ) lost 6.3%, or $1.14, to $17.00 and ITT (nyse: ITT – news – people ) slid 9.4%, or $3.90, to $37.47, after reporting disappointing earnings.
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