It's the banks, stupid

Investors doubt Obama's assurance that nationalisation isn't on the cards

By ANDREW MARKS
NEW YORK CORRESPONDENT

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Stock collapse: For the past week, the Dow lost more than 6 per cent, its worst week since October of last year

ON Wall Street, the myriad of plans coming out of Washington in the past week to address the crumbling economy and frozen credit markets has made little impression in the face of the relentless and overwhelming recession and financial strains sweeping through the country and the world.

Amid the gloom, US President Barack Obama's assurances that the government will not allow the financial system to fail is seemingly falling on deaf ears.

Passage of the US$787 billion stimulus bill, a US$275 billion plan to keep nine million American homes in the beleaguered housing market from foreclosure, and the prospect of US$1 trillion in low-cost loans and guarantees for investors buying securitised mortgages were ignored by frustrated investors who have only one thing on their minds right now - the fate of the nation's major banks, and the potential for a wipe-out of their shareholder value.

That happens to be the one thing that the Obama administration has not concretely addressed.

'It can't be any more simple. Until we get clarity - and at this point I mean crystal-clear - on what the government is going to do about the banks, this market is dead in the water,' said James Dempsey, a money manager at Gardner Wealth Advisors.

All signs pointed to a patient in critical condition in the stock markets last week, as the Dow Jones Industrial Average and the broader S&P 500 index plunged through key resistance levels and hit multi-year lows, barely pausing at those new lows before churning lower to establish a new trading range.

'Breaking through the technical trading range of the November 20th lows on the Dow and the S&P 500 was an important psychological break for stock market investors, too,' said Jim O'Donaghue, co-chief equities trader at S.J. Cowens.

'There was a feeling on the Street that as long as we held around 8,000 or even a little below, we'd stay in this trading range that had been in place since November. Now, that's out the window, and the market is again looking for a bottom, with 7,000 clearly in view,' he said.

Wall Street simply no longer trusts the administration's words. President Obama's recent assurance that nationalisation is not on the table for the banks was met with cynicism.

'Would I be buying the equity in Citi and Bank of America or other banks here? I mean, it's very cheap, but the problem is the banks will survive, but not the equity,' said Steve Auth, CIO of global equities at Federated Investors,

Until a solution is laid out for the banks, investors are likely to continue to sell off all shares, not just the financial sector, many traders and portfolio managers said.

Major non-financial companies, from Alcoa and General Electric to Boeing, Kraft and Berkshire Hathaway, all sank to at least eight-year or more lows on Friday.

'And rightfully so, because how can you buy into the equity markets now when the fate of the most fundamental engine of the financial system is broken and no one knows how the chief mechanics in Washington are going to repair it?' asked Mr Dempsey.

On Friday, that psychology was clearly in play as stocks avoided a major sell-off that at one point had blue chips falling to lowest intraday levels since October 1997. Investors ultimately sold the Dow down 100 points, or 1.34 per cent, to a new, six-year low of 7,365.67, and dragged the S&P 500 down by 8.89 points, or 1.14 per cent, to 770.05, a level unseen since 2001. The Nasdaq Composite, held up better than the other two major indexes on Friday, retreating 1.59 points, or 0.11 per cent, to 1441.23.

For the week, the Dow lost more than 6 per cent, its worst week since October of last year, and the S&P 500 swooned nearly 7 per cent, while the Nasdaq lost a little more than 6 per cent. Stocks appear set for another rocky week as the debate about whether Washington will nationalise some banks and how it get those toxic assets off lenders balance sheets pervades the market.

Some market strategists suggested a bottom will be found in the coming days, as investor fears and frustration bubble over into a full-fledged capitulation, or if Treasury Secretary Timothy Geithner, whose once-sterling reputation on Wall Street sinks like a rock with every day that passes without a detailed bank rescue plan, finally lays out exactly how the Obama administration intends to proceed with healing the financial system.

In the meantime, Wall Street can chew over the last of the record-breakingly awful fourth-quarter earnings season, a full slate of economic data and two days of Congressional testimony from Federal Reserve chairman Ben Bernanke.

With all but 58 of the S&P 500 reporting, the fourth quarter is on track for a 42.1 per cent earnings contraction, the lowest ever recorded by Thomson Reuters. The first quarter isn't looking much better, with the ratio of negative-to-positive company forecasts jumping to 5.9 to one, compared with historical average of two to one, according John Butters at Thomson Reuters.

Dow component Home Depot is the highlight of the 51 companies reporting this week, which also includes Dell, Macy's HJ Heinz, Flour Corp, Gap, and El Paso Energy. On the economic front, the December S&P/Case-Shiller Home Price Index and consumer confidence survey for February are due out tomorrow, though investors will be focused on Mr Bernanke's semiannual report on monetary policy and the state of the economy to the Senate Banking Committee.

On Wednesday, it's existing home sales figures for January, followed by new home sales date on Thursday, along with data on durable goods orders for January and weekly jobless claims. Friday brings a second estimate of gross domestic production in the fourth quarter, a February manufacturing survey from the Chicago region, and another consumer confidence survey, this time by the University of Michigan.