Published February 25, 2009

Wall Street feeds on economy's fears

Stocks touch 12-year lows on Monday as anxiety deepens

By ANDREW MARKS
NEW YORK CORRESPONDENT

	Email this article
	Print article
	Feedback

THE growing anxiety over the US economy and doubt over the government's ability to stanch the bleeding sent the major US stock market indexes to levels unseen since the last century on Monday.

As the selling mood that led to a 6 per cent slump last week tightened its grip on Monday, the broad- based S&P 500 sank to a twelve-year low.

Despite a modest rally in banking shares, the blue-chip Dow Jones Industrials lost a whopping 250.89 points, or 3.4 per cent, to 7,114.78. The S&P was off 26.72 points, or 3.5 per cent, at 743.33.

After Monday's closing bell, the S&P 500 was down 17.7 per cent for the year, and off 52.1 per cent from the October 2007 record peak, but still above the intraday low of 741.02 it struck last November.

Stocks appeared set for a bounce yesterday as bargain-hunters tested the buying waters, sending the S&P 500 up 9.45 points, or 1.27 per cent, to 752.78 in the opening minutes of trading. The Dow climbed 71 points, or 0.9 per cent, to 7,186.15 as trading opened.

But stock market strategists doubt the rally will endure to reverse for long the twelve years' worth of wealth building that's been wiped out in the past fifteen months.

'Twelve years is a stark number, especially when you consider how far up the stock market has risen since then,' observed Larry Adam, chief investment strategist at Deutsche Bank Wealth Management. 'But even worse is the fact that the stock market has fallen so far and so hard and there's still no sense that we've put in a meaningful bottom here,' he said.

By 11am yesterday, the Dow was at 7,204.07, up 89.29 points while the S&P rose 11.09 points to 754.42. The Nasdaq Composite gained 22.77 to 1,410.49.

On Monday, reports that the US Treasury Department is preparing another big round of capital injection for Citigroup and is planning to convert its preferred shares in the bank to common equity boosted the beleaguered bank and the financial sector.

Such a move could bring the government's stake in Citigroup, currently at US$45 billion, up to 40 per cent, but would only dilute current common shareholders instead of wiping them out completely, analysts said.

Bank shareholders were also reassured by an announcement from the Treasury Department, Federal Deposit Insurance Corp, and Federal Reserve that explicit nationalisation of the banking system isn't in the government's plans.

For the rest of the stock market, however, the news of the day only served to provoke more anxiety over the deepening slump enveloping the world's economies.

Only eight weeks ago most Wall Street economists were forecasting an end to the deep recession within the next nine months. Nowadays, one must search far and wide to find an economist willing to say that the economy will start showing signs of life by the end of this year.

'The thinking has shifted - it's had to shift - to reflect the worsening dynamics of the fundamentals underlying the economy,' said Merrill Lynch's David Rosenberg.

'The depth and breadth of the problems facing the economy continue to accelerate. It's fair to say that on Wall Street we're playing catch-up just as much as in Washington, DC.'

The deepening gloom over the economy was reflected in big losses in major technology companies, which had been holding up better than the rest of the market. IBM, Microsoft, Intel and Hewlett-Packard all slumped between four and six per cent on Monday.

Investors see no end in sight for the increasingly severe global recession, which can only mean that already fragile companies will deteriorate further, depressing their earnings even more, and imperiled businesses are unlikely to survive regardless of how much money the government pumps in.

Investors need look only as far as the biggest recipient of government bailout cash, insurance giant American International Group, as a case in point.

Despite a US$150 billion commitment from the Treasury Department, AIG continues to sink into insolvency, and reports surfaced late Monday that the insurer is now negotiating with the government for tens of billions of dollars in additional assistance as losses have mounted.