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| MoneyWednesday, October 1, 2008 3:02 PM CDT |
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Stocks little changed after snapback rally
UPDATED 2:55 p.m. NEW YORK -- Financial markets uneasily awaited a Senate vote on the government’s banking sector bailout Wednesday, with stock prices fluctuating and credit markets still extremely tight. The Dow Jones industrials, down more than 200 points in early trading, recovered to show a moderate decline. After stocks suffered a steep drop Monday and rebounded part-way Tuesday, investors were reluctant to make major moves before a Senate vote late Wednesday on a revised version of the plan defeated by the House. The new proposal includes tax breaks for businesses and the middle class and increases deposit insurance. A disappointing economic report also weighed on the market. In its assessment of the manufacturing sector in September, the Institute for Supply Management revealed a troubling drop in new orders. The group’s overall index of manufacturing activity fell to 43.5 in September from 49.9 in August. Wall Street had expected a reading of 49.5, according to economists polled by Thomson/IFR. “We’re now seeing in those numbers that we’re getting a contraction in economic activity,” said Jim Dunigan, managing executive of investments at PNC Wealth Management. At this point in the credit crisis, weak economic numbers are coming as no surprise to Wall Street — but September’s numbers are expected to be particularly bleak because of the seizing up of the credit markets that occurred during the month. The reports are further reminders of how much pain is being felt in the economy, and the data are likely to motivate more investors to pull money out of stocks. The greatest concern on the Street remains the stagnant credit markets. “We’ve taken the credit markets for granted much like you do the electricity coming on every day but in this particular case the power grid is down,” said Dunigan. “If we don’t have a functioning credit market banks aren’t lending to each other — credit is dried up. That ultimately affects economic activity.” Nervousness about debt has made banks hesitant to extend loans; banks have preferred to hold onto their cash. But some analysts and policymakers are worried that drop in lending will curtail economic growth. And the fear paralyzing the credit markets is making it more difficult and expensive for some companies to fund their day-to-day operations, putting basics like payroll at risk. The London Interbank Offered Rate, or Libor, on overnight dollar loans dropped to 3.79 percent on Wednesday from Tuesday’s record 6.88 percent. Libor measures how much banks are charging one another to borrow. Many consumer lending rates, including about half of all U.S. adjustable-rate mortgages, are tied to Libor. But overnight Libor remains well above the target Fed funds rate of 2 percent, showing that banks are still tending to hoard their cash rather than lend it. Demand for the safety of government debt increased Wednesday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.71 percent from 3.83 percent late Tuesday. The yield on the 3-month T-bill, the safest type of investment, fell to 0.83 percent from 0.88 percent late Tuesday. The decline in yields indicates that investors are willing to accept even modest returns to protect their money. Midafternoon trading Financial markets likely will remain nervous until voting on Capitol Hill is complete. In midafternoon trading, the Dow fell 55.27, or 0.51 percent, to 10,795.39. The blue chip index fell 778 points Monday, its steepest drop in years, after lawmakers rejected the bailout plan, then rallied 485 points Tuesday on hopes party leaders would find the votes to pass the measure. Broader stock indicators were narrowly lower. The Standard & Poor’s 500 index fell 4.04, or 0.42 percent, to 1,159.80, and the Nasdaq composite index fell 27.03, or 1.30 percent, to 2,064.85. Light, sweet crude fell $2.18 to $98.46 a barrel on the New York Mercantile Exchange after the government reported a surprise increase in U.S. crude supplies. The dollar was mixed against other major currencies, while gold prices rose. Charles Widger, chief executive of Brinker Capital, said the bailout would help restore faith in the U.S. financial system. Champions of the plan say it is necessary to absorb the soured mortgage and other bad debt from banks’ books as a way to restore faith in the credit markets, while detractors said the plan was too costly and risky. “It will help to restore confidence and confidence is the No. 1 issue now,” he said. The Commerce Department reported that construction activity remained unchanged in August even though spending for residential projects saw its first increase in 17 months, a welcome upturn amid the housing downturn. Wall Street had expected construction activity to decline 0.5 percent. “You’ve got to believe that after this major disruption in the financing of the economy — the absence of cash for working capital — that it’s going to slow economic activity and that therefore we’re going to be in a recessionary environment,” Widger said. In corporate news, Warren Buffett’s Berkshire Hathaway Inc. unveiled a plan to buy $3 billion worth of General Electric Co. preferred shares, even as the diversified conglomerate is preparing to sell at least $12 billion worth of common stock to the public. The company’s stock fell 81 cents to $24.69 after the announcement was made. Berkshire also received warrants to buy $3 billion worth of common shares at $22.25 each over five years. GE said that the Berkshire funds will boost its capital position and permit it to make opportunistic investments if they arise. Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 432.3 million shares. The Russell 2000 index of smaller companies fell 7.15, or 1.05 percent, to 672.43. Overseas, Japan’s Nikkei stock average rose 0.96 percent. Britain’s FTSE 100 rose 1.17 percent, Germany’s DAX index fell 0.42 percent, and France’s CAC-40 fell 0.56 percent. 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