|Tuesday, January 8, 2008|
Hope Fades in the Market as it Rises at the Polls
WHILE THE ELECTORATE SEEMS EAGER for change, it's more of the same for the financial markets.
The stock market plunged anew Tuesday, but the carnage in the financial sector was nothing new. The new, new bad thing is that the housing foreclosure crisis has claimed a new victim, the phone company.
AT&T shares plunged 4.6% after its chief executive admitted to "softness" in its home-telephone and broadband Internet business resulting from consumers' failing to pay their bills. AT&T shares, one of 2007's bright spots, rising to around 42 from 34 last year, shed 1.87 to 39.16 on 72 million shares traded, three times the average daily volume.
With this component of the Dow Jones Industrial Average leading the retreat, the Dow plunged 238 points, to 12,589, or 1.9%. The Nasdaq Composite fell another 2.4% while the Standard & Poor's 500 broke through 1400, shedding 1.8%.
Having your phone shut off is about the last thing that will happen to a tapped-out consumer. The repo man will take away your car and the credit-card companies will cut you off first. But, if the bank forecloses on your house, then the phone bill goes unpaid.
But the bad news is by now old news for the biggest mortgage originator, Countrywide Financial, and ground-zero of the housing-finance disaster.
Countrywide was moved to deny market rumors that it was not about to file for bankruptcy protection, as its shares collapsed from just under $8 to around $6 by early afternoon. That denial got the stock back up to nearly $7 but shares plummeted to just about $5 near the close before ending at 5.47, down 2.17 or 28.4% for the session.
Bond insurers MBIA and Ambac Financial Group also plunged 20.7% and 16.7%, respectively, while E*Trade Financial shed 20.5%. As if it needs to be mentioned, all these financials set fresh 52-week lows.
But there was no specific news to account for this sort of carnage among the financials. Just the chatter about a Countrywide bankruptcy, vehemently denied, was enough to torpedo the stock price. After all, some of its debt obligations coming due in 2008 sell at significant discounts, indications of the market's skepticism that they will be paid in full and on time.
And there also was talk about a list of collateralized debt obligations being offered among dealers, an indication of yet another institution scrambling to liquidate derivatives under duress.
That very lack of hard news is the scary part of sudden, precipitous decline, such as the stock market experienced Tuesday afternoon.
From a technical standpoint, the market's action was particularly ominous.
Joan McCullough of East Shore Partners observes Tuesday was an outside day on the downside, a technical pattern wherein the S&P futures touched a higher high early in the session and then proceeded to collapse to a lower low. The March S&P contract sliced through the 1400 level with no resistance, to settle at 1397. That puts the nearby futures right on the edge of a breakdown on the charts, she says.
Obviously, the Federal Reserve is watching all this action, and hardly in a disinterested fashion. Could the renewed stress and strain in the financial system be anticipating more the confession of more grievous sins on the part of institutions?
If so, even more banks and brokerages whose solvency is not in question may have to go hat in hand to beseech the holders of vast wealth across the seas for capital infusions. At best, that would dilute current common holders, even as those investments bolster their balance sheets and help assure their future survival.
As for those institutions for whom the market believes the bell is about to toll, its skepticism about their future prospects seems well founded.
Countrywide, comments Egan-Jones Ratings, "is severely challenged and might falter if it does not receive an infusion of at least $4 billion in the next couple of weeks."
Among other things, Bank of America's vaunted $2 billion convertible preferred stake taken at the peak of last summer's crisis equals just 1% of Countrywide's assets, Egan-Jones observes. Countrywide will need more funding because of the 40% drop in its mortgage originations and a shift away from the profitable subprime business, it adds.
Countrywide has taken charges of only $1 billion against its assets of $209 billion, Egan-Jones continues. A 5% charge would total $11 billion, compared to equity of $15.2 billion, the firm notes. Delinquencies have risen to 5.94% in October from 3.97% a year earlier, it adds.
On the liability side, Countrywide's business model depends on availing itself of short-term interest rates below 3%. But Countrywide is now paying over 5% for money, either from federally insured deposits for its bank unit or from the Federal Home Loan Banks. So, the American taxpayer effectively is a co-signer on Countrywide's liabilities.
The stock market's scary decline, along with gold's sharp rally to nearly $880 an ounce, suggests investors are fleeing financial assets. Drug stocks and utilities, both paying generous dividends, are offering the equity market's last redoubts.
For investors, it seems audacious to hope now.