- The Washington Times - Monday, March 2, 2009

UPDATED:

Wall Street got smacked by the bailout of another financial giant and profit losses by a major European bank, sending shivers through investors who sold off and pushed the Dow Jones Industrial Average below 6,800 on Monday for the first time since 1997.

Two of the three major indexes declined by more than 4 percent, the Nasdaq nearly hit that mark, and the broader Standard & Poor’s 500 barely held its critical level of 700. Blue chip industrials, banks and high-tech stocks all declined.

At the close, the Dow plunged 299.64, or 4.24 percent, to 6,763.29. The tech-heavy Nasdaq plummeted 54.99, or 3.99 percent, to 1,322.85. The S&P 500 tumbled 34.27, or 4.66 percent, to 700.82.

The Dow last closed below 6,800 in April 1997, CNBC said — before the dot-com bubble.

The battering of the markets followed the government’s restructuring of a bailout agreement with American International Group Inc., providing access to another $30 billion to the insurance giant after the company declared a loss of $61.7 billion in the final three months of 2008, the biggest quarterly loss in U.S. corporate history.

The federal government already had given $150 billion to AIG, which closed unchanged at 42 cents a share.

Further, HSBC PLC, Europe’s biggest bank in terms of market value, reported a 70 percent profit decline for last year and said it will cut 6,100 jobs in the United States. It said it will avoid seeking government help by trying to raise $17.7 billion in new stock issues. Shares of HSBC fell 19 percent.

“Surprises will be on the downside in terms of the deterioration of the financial system,” Kevin Feltes, assistant director of the Jerome Levy Forecasting Center in Mount Kisco, N.Y., told The Washington Times.

In the banking industry, “the extent of the losses on loans and continued weakness in earnings are unappreciated by analysts” because they don’t fully grasp the extent of the economic downturn, he said. “We’ve labeled this period a ‘contained depression.’”

Mr. Feltes predicted that the unemployment rate, currently at 7.6 percent, will hit 10 percent this year and possibly 11 percent or 12 percent by next year, “depending on whether the government will come up with more stimulus” packages to try to turn around the economy.

There was little doubt that both the renewed AIG bailout and the HSBC profit decline shook investors following a decline in the markets Friday over more bad news about the economy.

“I don’t see much to turn it around in the immediate future,” Rick Schottenfeld of the Schottenfeld Group of New York told CNBC, referring to the markets. “It’s very difficult to get any kind of meaningful rally.”

What’s needed, he said, “is some sort of sense where the government’s stimulus package is going to go.”

Congress authorized spending $787 billion for an Obama administration plan to save or create 3.5 million jobs over the next two years to stimulate the economy, in part by rebuilding roads, bridges and schools.

A dim light of hope for improvement in the economy showed through the gloom of the financial sector with a report from the Commerce Department showing that consumer spending rose 0.6 percent in January after having fallen for six straight months. Economists had expected a 0.4 percent increase.

The hike came because of purchases of food and nondurable goods, though durables such as appliances and other items that last more than three years posted a mere rise of 0.1 percent.

At the same time, Commerce said that personal incomes rose 0.4 percent in January, in part because of the cost-of-living increases for those receiving Social Security benefits.

Concerns about the U.S. financial industry coupled with a government report Friday that the gross domestic product contracted by an annualized rate of 6.2 percent in the fourth quarter of last year sent Wall Street market indexes to their lowest point in 12 years and roiled stock markets overseas.

The shrinkage in the GDP, which reflects the output of all goods and services, was far worse than economists had expected and marked the biggest quarterly decline in a generation.

Overseas markets fared badly, with Britain’s Financial Times Stock Exchange index down more than 4 percent, Germany’s DAX off nearly 3 percent and France’s CAC 40 dropping 3.4 percent. Japan’s Nikkei 225 stock average tumbled 3.8 percent, and Hong Kong’s Hang Seng fell 3.9 percent.

The unexpected drop in the GDP in combination with the woes of the U.S. financial industry, including the U.S. absorption of 36 percent of banking giant Citigroup, dampened hopes for the first quarter of this year or that the economic downturn would begin to turn around in the summer, as the Federal Reserve has predicted.


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