U.S. Stocks Tumble on Banking Concern; Fannie, Freddie Retreat
Tuesday, July 15th, 2008 | 
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Posted by John under: Perplexity,Root of All Evil
July 15 (Bloomberg) — The U.S. bear market deepened, thrusting the Standard & Poor’s 500 Index to its lowest level since 2005, as investors lost confidence in a government attempt to rescue Fannie Mae and Freddie Mac and analysts predicted bank losses will worsen.
Perplexity
“…upon the earth distress of nations, with perplexity…”
—Luke 21:25
Root of All Evil
“For the love of money is the root of all evi:…..”
—1 Timothy 6:10a
Shares also tumbled across Europe and Asia and the dollar sank to a record low against the euro. Citigroup Inc., the biggest U.S. bank, plunged to the lowest level since former Chairman and Chief Executive Officer Sanford Weill created the company through a merger in October 1998. Fannie Mae and Freddie Mac, the largest U.S. mortgage-finance companies, declined more than 20 percent each.
“This is a systemic financial crisis, there is no end to it,” Nouriel Roubini, professor of economics and international business at New York University, told Bloomberg Television. “It’s a vicious circle between a contracting economy and greater credit and financial losses feeding on the economy.”
The S&P 500 lost 20.63 points, or 1.7 percent, to 1,207.67 at 10:28 a.m. in New York. The Dow Jones Industrial Average retreated 158.52, or 1.4 percent, to 10,896.67. The Nasdaq Composite Index decreased 28.35, or 1.3 percent, to 2,184.52. Ten stocks fell for each that rose on the New York Stock Exchange.
Federal Reserve Chairman Ben S. Bernanke added to concern that the economy is worsening, telling Congress that inflation risks have “intensified” amid the threat of “significant downside” to growth. Nine of 10 industries in the S&P 500 retreated, extending the index’s slump from an October record to 23 percent.
The MSCI World Index and Europe’s Dow Jones Stoxx 600 Index plunged the most since March.
Freddie, Fannie
Citigroup, which lost almost half its market value this year, declined $1 to $14.22 today. The New York-based bank has booked more than $40 billion of credit losses and writedowns since the subprime mortgage market collapsed last year, more than any other financial institution.
Freddie Mac lost $2.11, or 30 percent, to $5. Fannie Mae retreated $2.23, or 23 percent, to $7.50.
While Freddie Mac and Fannie Mae’s shares have tumbled this year, Vanguard Group and Federated Investors Inc. said they will continue to buy the short-term debt of the companies. The cost to protect debt of Fannie Mae and Freddie Mac from default fell to the lowest in two months yesterday.
The division between bonds and stocks shows that while investors are confident Treasury Secretary Henry Paulson won’t permit the collapse of the two companies, shareholders are at greater risk because the government-sponsored companies may require new equity after already raising $20 billion in the past year to cover losses.
Hedge fund manager William Ackman said he is betting the largest U.S. mortgage-finance companies will keep slumping and proposed a reorganization that would wipe out shareholders.
`Behind the Curve’
“The Fed and Treasury have been behind the curve for over a year now, and the market is telling them they’re still behind the curve,” said Richard Campagna, portfolio manager at Provident Investment Counsel in Pasadena, California, which manages $3 billion. “It’s a colossal problem.”
Wachovia, the biggest of the 10 worst performing U.S. banks this year, fell $1.64 to $8.20. The Financial Select Sector SPDR Fund, an exchange-traded fund tracking banks, securities firms and insurers, slipped 71 cents to $17.01.
Wachovia’s earnings outlook has “dramatically diminished,” Whitney wrote in a report today. Mortgage-related assets are still priced too high on U.S. banks’ balance sheets, she added. Wachovia in particular “simply cannot cut costs fast enough to mitigate capital erosion.”
13-Year Low
Banks in the S&P 500 fell to the lowest since June 1995 and extended their retreat from a February 2007 record to 70 percent.
Stocks also retreated today after retail sales in the U.S. rose less than forecast in June, a sign the boost from the government’s tax rebates meant to stimulate the economy may already be fading. Prices paid to U.S. producers climbed 1.8 percent in June, the biggest gain since November, as surging fuel costs underscored risks of inflation.
More than $13 trillion has been wiped off the value of global equities since October as $416 billion in credit-related losses prolonged the global economy’s slump and rising commodity prices stoke inflation. Among the 23 industrialized nations in the MSCI World Index, only Canada has averted a bear market.
Financials Lead Plunge
Financial, telephone and consumer shares led the S&P 500′s 18 ercent retreat this year even as the Fed slashed its benchmark interest rate seven times since September to bolster debt markets and make borrowing cheaper. Bernanke said last month that the risks of a “substantial downturn” had diminished, and committed to “strongly resist” any jump in inflation expectations.
The S&P 500 trades for less than 20 times the reported earnings of companies in the index, while the MSCI World trades for less than 14 times, according to data compiled by Bloomberg.
Last week, the S&P 500 was the most expensive relative to the MSCI World, excluding the U.S., on a price-to-earnings basis since 2001, Bloomberg data show.
American International Group Inc. fell 10 percent to $20.22 today for the biggest drop in the Dow average. Wachovia downgraded the world’s largest insurer to “market perform” from “outperform.” AIG may post as much as $7 billion in losses on credit-default swaps in the second quarter after about $20 billion in losses on the contracts over two quarters, analyst John Hall said in a report.
General Motors Corp. fell 50 cents to $8.88. The largest U.S. automaker suspended its stock dividend, cut salaried payrolls by 20 percent and proposed selling assets to raise at least $15 billion in the next 18 months. GM, unprofitable the past three years, is trading at the lowest levels since the 1950s amid a collapse in U.S. sales.
State Street Corp. posted one of only six gains among the 89 financial stocks in the S&P 500, adding 1.8 percent to $56.68. The world’s biggest money manager for institutions said second- quarter earnings rose 50 percent as lower interest rates made investing client deposits more lucrative.