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| Weekly Wrap Up |
The net point change for the major indices this week over last doesn’t even begin to tell the story of the historic week for Wall Street. In what can only be described as a panic, stocks of the Dow Jones Industrial Average stumbled, tripped, and fell a total of 563.27 points in the first three days of trading before regaining 321.7 points on Thursday and Friday. The NASDAQ and S&P 500 fared poorly as well, with major losses early in the week and some attempts at recovery as the week went on. The reason for the chaos? Anxious investors waiting with baited breath as Congress debated a $700 billion bailout plan meant to rescue the nation’s devastated financial sector. After last week’s fall of Lehman Brothers (LEH: Charts, News, Offers), and Bank of America’s (BAC: Charts, News, Offers) purchase of Merrill Lynch (MER: Charts, News, Offers), shares of financial institutions continued to be sold off by wary investors. Hoping to inspire some confidence in the sector, infamous investor Warren Buffett pumped $5 billion in Goldman Sachs (GS: Charts, News, Offers), but investors weren’t completely won over. Thursday brought about a change of heart though as Congress got closer to ironing out the details of the massive bailout, as a bipartisan agreement in principle was announced. The rally continued on Friday amid the double whammy of Congressional discord about the price tag of the bailout plan and the news that federal regulators seized Washington Mutual (WM: Charts, News, Offers) and sold it to JPMorgan Chase (JPM: Charts, News, Offers) for $1.9 billion. The demise of WaMu marks the largest bank failure in history. Investors will be closely watching the financial sector this week as well as keeping an eye on Congress to find out how safe their money is and how much of their tax dollars will go to rescuing these fallen institutions. More Market News
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| Economic News |
A record decline in U.S. home prices in August attracted more buyers in some areas and led to a sizable decline in the number of unsold homes on the market, the National Association of Realtors said Wednesday. The median price fell 9.5 percent to $203,100, the largest price decline on records dating to 1999. As prices fall, buyers are taking advantage of steep discounts, especially in hard-hit markets like California, Nevada and Florida. "Time and price are the real cures for the housing market slump," said Mike Larson, an analyst at Weiss Research. The inventory of unsold homes fell 7 percent to 4.3 million, down from the all-time record of 4.6 million in July. That’s a 10.4-month supply at the current sales pace. The decline, however, merits only "a small round of applause" because around 5 months of inventory is a more typical level, wrote Global Insight economist Patrick Newport. (Source: MSNBC) Full Story
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Just when it looked like relief was on its way, lending seized up again Friday. With the Treasury's $700 billion financial industry bailout proposal in jeopardy, and with Thursday night's collapse of an agreement and subsequent JPMorgan Chase takeover of Washington Mutual - the largest bank failure in the nation's history - credit markets have again stalled. "Things have frozen over again," said Steve Van Order, chief fixed income strategist with Calvert Funds. "Banks are nervous about lending to each other, and the commercial paper market has come to a standstill." Market gauges of lending showed higher prices for loans between banks. When lending tightens in this way, businesses and consumers have to pay more for loans, such as mortgages, or can't get them at all. (Source: CNN Money) Full Story
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Even if congressional leaders can close a deal on the bank rescue, the real debate is just beginning. The key questions about the plan are not the ones that Congress debated: how much it would cost and whether it would impose symbolic pay caps for bosses whose wealth has already been hammered. Rather, the key question lies in the execution of the bailout. Start with the sobering fact that even a $700 billion rescue fund would be small relative to financial markets. Private lenders (not counting Fannie Mae (FNM: Charts, News, Offers) and Freddie Mac (FRE: Charts, News, Offers) own $6.5 trillion of mortgage-related loans plus $2.5 trillion in consumer loans and yet more trillions in corporate loans. By themselves, federally insured deposit-taking banks hold loans totaling $14 trillion. (Source: Washington Post) Full Story
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| Business News |
As the debate over a $700 billion bank bailout rages on in Washington, one of the nation's largest banks -- Washington Mutual Inc. (WM: Charts, News, Offers) -- has collapsed under the weight of its enormous bad bets on the mortgage market. The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion. Seattle-based WaMu, which was founded in 1889, is the largest bank to fail by far in the country's history. Its $307 billion in assets eclipse those of Continental Illinois National Bank, which failed in 1984 with $40 billion in assets; adjusted for 2008 dollars, its assets totaled $67.7 billion. IndyMac, seized in July, had $32 billion in assets. One positive is that the sale of WaMu's assets to JPMorgan Chase prevents the thrift's collapse from depleting the FDIC's insurance fund. But that detail is likely to give only marginal solace to Americans facing tighter lending and watching their stock portfolios plunge in the wake of the nation's most momentous financial crisis since the Great Depression. (Source: Yahoo! Finance) Full Story
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U.S. housing problems aren't nearing an end. The latest home builder to fall short is KB Home, whose third-quarter earnings failed to meet Wall Street's already-low expectations. KB Home (KBH: Charts, News, Offers) cut its selling, general and administrative expenses by 32.4% to $133.2 million from $197.1 million on job cuts and consolidation efforts, but it didn't do the trick. And so far, KB has trimmed its workforce by two-fifths this year, with nearly half of that, or 18%, from the third quarter alone. "Market fundamentals appear unlikely to improve significantly in the near term, as foreclosures continue to rise, housing inventory overhang remains at historically high levels and mortgages have become more difficult to obtain," said Jeffrey Mezger, KB's chief executive. (Source: Forbes.com) Full Story
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Goldman Sachs Group Inc. (GS: Charts, News, Offers) said it will get a $5 billion investment from billionaire Warren Buffett's company, marking one of the biggest expressions of confidence in the financial system since the credit crisis intensified early this month. The deal is the latest in a series of dramatic events that have reshaped American finance this month, from the federal takeover of Fannie Mae and Freddie Mac to the bankruptcy filing of Lehman Brothers Holdings Inc. to the bailout of American International Group Inc. and steps by Goldman and Morgan Stanley to become commercial banks. The move by Mr. Buffett's Berkshire Hathaway Inc. (BRK.A: Charts, News, Offers) capped a day of bruising hearings in Congress over the fate of the Treasury Department's plan to buy $700 billion in distressed assets from financial institutions, in a bid to shore up the banking system. The plan is still expected to pass, though coming under increasing fire. (Source: Wall Street Journal) Full Story
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| Technology Focus |
Shares of software giant Oracle (ORCL: Charts, News, Offers) rose Thursday on news that the company would begin selling hardware. The Redwood Shores, Calif. company and Hewlett-Packard (HPQ: Charts, News, Offers) said late Wednesday they would immediately begin selling a line of game-changing storage equipment. "I'm here to announce Oracle's first ever hardware product," CEO Larry Ellison said Wednesday before a packed crowd at the company's annual user conference here. Shares of Oracle were recently up 74 cents, or 3.7%, to $20.69. HP was up 49 cents, or 1%, to $47.27. "As far as the financial implications, it is too early to assume any revenue contribution for Q2 from the HP Oracle Database Machine," President and CFO Safra Catz said Thursday at Oracle's annual financial analyst meeting. The equipment contains new software subject to license contracts and maintenance contracts, as well as its database server software. (Source: TheStreet) Full Story
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Microsoft (MSFT: Charts, News, Offers) announced Monday that it was planning to buy back an additional $40 billion worth of shares and fellow tech giant HP (HPQ: Charts, News, Offers) followed with a proposal to repurchase $8 billion worth of stock. Microsoft said its board of directors approved the $40 billion buyback plan, after having just completed its previous $40 billion stock repurchase program. Also, Microsoft hiked its quarterly dividend by 18% to 13 cents per share, which translates into a 2-cent-per-share increase over the prior quarter. Based on this increased quarterly payout, Microsoft's stock now has a dividend yield of about 2.1%. (Source: CNN Money) Full Story
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Apple Inc. (AAPL: Charts, News, Offers) tends to prove unstoppable even when other computer makers falter. In the most recent quarter, shipments of Macs surged 41%. That's nearly three times the 15% global growth rate for PCs in general. But in the current quarter, as markets slide, banks go belly-up, and consumer confidence plunges, even the Apple growth engine may hit speed bumps, say some analysts who are revisiting their estimates just a month before Apple is due to report quarterly earnings for the period that ends Sept. 30. Concerns, including slumping demand for laptops and a strengthening dollar, helped drive down Apple's shares more than 29%, to 126.84, on Sept. 23 from 179.32 on Aug. 14. One of the bright spots of Apple's last several quarters has been its MacBook and MacBook Pro lines of notebooks, which in the quarter ended June 28 accounted for more than $2.2 billion, or almost 30% of sales. (Source: BusinessWeek) Full Story
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| Your Money |
How directly will small business lending be affected by the ongoing financial crisis and forthcoming bailout? The evidence is mixed. Treasury Secretary Henry Paulson told Congress that the $700 billion plan was needed "in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families' financial well-being, the viability of businesses both small and large, and the very health of our economy." Business owners with bad credit, unproven ventures, or companies tied to troubled industries such as housing have had a particularly hard time borrowing, but many banks still want to lend to established firms with good credit and collateral. There's no question some companies are having credit cut off. In Ohio, banks are refusing to renew lines of credit and calling in loans made to decades-old family businesses that are current on payments, according to Dayton bankruptcy and workout attorney John Rieser. (Source: BusinessWeek) Full Story
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Here's a question for investors who hold their cash in the big retail money-market mutual funds: Will you refuse to keep your money there unless it signs up for the new government insurance plan? Or do you trust it bare? The U.S. Treasury plans to present details this week on a program to maintain confidence in money funds. It will insure you against loss, provided that your fund joins the plan and pays the premiums. Most of the large money funds that cater to individuals already insure you against loss, using their own resources. Now they'll have to decide whether they want to pay for a layer of government protection, too. If they do, they could either absorb that extra cost or pass it along to investors in the form of slightly reduced returns. Money funds are designed to act like bank accounts. (Source: Bloomberg) Full Story
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Capitalism is a delicate balance between production and finance. Today, our seemingly guaranteed living standard is threatened, much like it has been in previous recessions or, some would say, the Depression. Finance has run amok because of oversecuritization, poor regulation and the excessively exuberant spirits of investors; the delicate balance has once again been disrupted; production, and with it jobs and our national standard of living, is declining. If this were a textbook recession, policy prescriptions would recommend two aspirin and bed rest -- a healthy dose of interest rate cuts and a fiscal package that mildly expanded the deficit. That, of course, has been the attempted remedy over the past 12 months. But recent events have made it apparent that this downturn differs from recessions past. Today's housing bubble, unlike that of the stock market's before it, was financed with excessive and poorly regulated mortgage debt, and as housing prices began to tumble from the peak, the delinquencies and foreclosures have led to a downward spiral of debt liquidation that in turn led to even lower prices and more foreclosures. (Source: Washington Post) Full Story
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