The S&P/TSX Composite Index, Toronto’s main stock index, extended losses on yesterday afternoon (it was positive for a minute in the morning), as the oil & gas sector sank on lower oil prices and as concern over the U.S. bad debt plan hit the heavily weighted financial services sector. The S&P/TSX composite index dropped 2.25% with the only bright spot being the price of gold advancing.
Stocks tumbled more than 4% in the United States yesterday as investors hammered bank shares (many banks are trading as if they are bankrupt with hardly any equity left to support their on-going operations) on concerns a reworked rescue plan to shore up the financial sector may not be enough. U.S. Treasury chief Timothy Geithner unveiled a new bank rescue plan that would put $2 trillion to work cleaning up bad assets and restoring credit (for more on this see my mid afternoon blog from yesterday).
Global stock markets had intensely anticipated Geithner’s ideas for a plan mixing private and public funding to stabilize the financial system but were disappointed over the scant details provided (investors like and need clarity in order to accept risk).
The Dow Jones industrial average ended down 4.6%, the biggest one day percentage drop since December 1, 2008. Bank stocks were particularly hard hit (dropping 14%) and U.S. government bonds and the U.S. dollar rose as investors scrambled for a safe investment and a way to reduce their risk (the risk aversion trade is back).
In a speech on television and in Capitol Hill, Geithner made his case for how the Obama administration plans to handle the roughly $350 billion left in a $700 billion financial bailout fund. Geithner said “the lack of public confidence in prior rescue efforts had made it all the more difficult to stop a dangerous dynamic in which a lack of credit undercuts the economy and leads to more weakness among banks, worsening the recession.” “This is very complicated to get it right,” he said in an interview on Bloomberg Television. “We are going to try to get it right before we give the details so that we don’t add further to uncertainty in these markets.”
He did not comment on whether the administration might have to ask Congress for more money to fix the banks, restore credit and counter recession. “We’re going to consult with the Congress carefully to try to make sure the world understands that the resources necessary to solve this will be available over time,” Geithner told CNBC, adding: “The important thing is that … we send a basic signal, working with the Congress, that we will do what’s necessary to fix this.”
Not a lot details and yet a press conference? This plan is not clear and it is reminiscent of previous plans that did not work. The Standard & Poor’s 500 Index was down 4.91% and the Nasdaq Composite Index was down 4.20%. Although the Dow posted its lowest close since December 1, 2008 it is still up 5.9% from the November 21, 2008 low. Year to date the Dow is down more than 10%.
The U.S. Federal Reserve “believes the extraordinary programs aimed at stabilizing credit and banking have improved market conditions and eased strains despite a drumbeat of negative economic news”, Fed Chairman Ben Bernanke said, “We have been encouraged by the responses to these programs.” Bernanke defended the Fed’s actions to lawmakers who worried that the U.S. central bank had overstepped with lending programs, which have flooded financial markets with money, in an effort to pull the financial sector out of the deepest crisis since the Great Depression.
“Going forward … it does not seem healthy to me in our democracy for the amount of power that is now lodged in the Federal Reserve with very few restrictions to continue,” Committee Chairman Barney Frank said. However, Frank, a Massachusetts Democrat, added “the Fed has used its authority responsibly in the crisis”.
U.S. lawmakers finalize the stimulus package of tax cuts and spending after the Senate passed its $838 billion version of a rescue plan to fight the deepening recession. The Senate voted 61-37 yesterday to approve its version of the plan. President Barack Obama wants the Democratic controlled Congress to deliver a package by this weekend so he can sign it into law. But he must keep together a narrow coalition that wants the price tag lowered to about $800 billion.
This morning we are likely to see additional head winds as a disappointing financial outlook from Research In Motion added to concerns about the impact of the recession on consumer and business spending.
There is a silver lining in all this – stock valuations are cheap and stocks appear to be very resilient in the wake of all this negative news.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
