Markets became shaky again yesterday after central banks stopped pumping money into the system for the first time in nearly a week, Wal-Mart warned of economic difficulties for consumers, and some lower-rated businesses said they were having trouble rolling over their debts.
The Dow Jones Industrial Average fell 207 points to 13,029 as investors worried that increasing turmoil and bankruptcies caused by companies and consumers losing access to credit would drag down the weakened economy.
“U.S. consumers continue to be under difficult pressure economically,” Wal-Mart Chief Executive Officer H. Lee Scott said as shares of the world’s largest retailer plunged 5 percent on declining prospects for the company. “It is no secret that many customers are running out of money toward the end of the month.”
The European Central Bank provided one last injection of $10.5 billion into world money markets yesterday and declared that conditions were normalizing. But its words failed to soothe European or U.S. markets, where major stock indexes swooned and posted losses of 1.5 percent to 2 percent. The Federal Reserve went a second day without adding to more than $300 billion in central bank liquidity injections since Thursday.
Yesterday’s market downturn was spurred by a request by Sentinel Management Group to freeze redemptions from a $1.5 billion investment fund in a filing to the Commodity Futures Trading Commission. It was the latest in a string of fund freezes that have roiled investors and provoked a rush to exit investments that pose similar risks of freezing up.
The funds most at risk are lower-rated mortgage bonds and corporate debt securities that have been structured into complicated derivatives by investment banks in a “slicing and dicing” process that has grown suspect because it was the way now-notorious subprime mortgages were marketed to savvy buyers.
Businesses without investment-grade ratings are bearing the brunt of the latest credit freeze. Ratings company DBRS said yesterday that 17 Canadian asset-backed commercial paper issuers failed to sell their short-term debt and are seeking backup financing from banks.
Dan Adler, U.S. government bond strategist at RBS Greenwich Capital, said that while top-rated corporations are having little trouble selling their short-term debt, the lower-tier commercial paper market “continues to be under stress” and the development poses a threat to corporate insolvency as well as the broader economy.
“The Fed’s recent actions may have had only a temporary impact” on averting a crunch, he said.
Robert Teh, acting director of the World Trade Organization’s economics division, said the Fed and European bank were conscious of the threat to the U.S. and global economies when they intervened, despite statements from the Fed last week saying it had concerns only about “liquidity” and it sees only a minor threat to economic growth coming out of the turmoil in the credit markets.
William H. Gross, managing director of the Pimco bond funds, said the credit freeze is far from over as bond buyers are suffering from a bad case of “indigestion” after consuming too many loosely structured, low-grade leveraged transactions that have gone sour.
Their disillusionment with highly structured derivative securities particularly grew after the major ratings agencies announced last month that they are downgrading billions of dollars of mortgage securities structured as “commercial debt obligations” (CDO) and “commercial loan obligations” (CLO), he said.
“Could the same thing happen to leveraged structures with pure corporate credit backing?” he asked. “If Moody’s and Standard & Poor”s have done such a lousy job of rating subprime structures, how can the market have confidence that they”re not repeating the same structural, formulaic, mistake with [corporate] CLOs and CDOs?”
While companies attempting to secure loans in the commercial-paper market are having trouble, most small Main Street businesses still have adequate access to credit from neighborhood bank-loan officers, according to a survey last month by the National Federation of Independent Business.
“Credit to support reasonable business activities remains readily available for small firms,” said NFIB chief economist William Dunkelberg, who said 5 percent of businesses surveyed had trouble getting loans. “Unlike the highly publicized mortgage and private-equity mess, there were no indications of credit stress in July, even in construction.”
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