U.S. stocks finished lower Tuesday following Monday's historic rally. Traders weighed details of the Bush administration's $250 billion bank rescue plan that "dents the foundations of capitalism," according to S&P MarketScope..
Market pros cheered the latest plan by the U.S. government to buy shares in many U.S. banks, which rallied on the news. The Dow Jones Industrial average climbed nearly 407 points in the first hour of trading. "I think the actions taken by the U.S. government and foreign governments are a step in the right direction and should begin to restore confidence in the financial markets," says Peter Cardillo, chief market economist for Avalon Partners in New York.
But the euphoria faded by the afternoon. Many investors are worried about how badly the credit crisis could hurt the economy. "The market is going to begin to face reality -- earnings season is beginning and will reveal a worse economy," Cardillo says. Tuesday's decline in stocks, he says, is "basically a reality check."
By the close Tuesday, the Dow Jones industrial average was down 76.62 points, or 0.82%, to 9,310.99. The S&P 500 index fell 5.34 points, or 0.53%, to 998.01. The Nasdaq composite index dropped 65.24 points, or 3.54%, to 1,779.01, with notable declines in technology and semiconductor names.
On the New York Stock Exchange, 17 stocks were higher in price for every 15 that fell. The ratio on the Nasdaq was 19-9 negative.
Bonds were lower after the U.S. market reopened after the long holiday weekend, sending yields higher as global markets face a huge amount of new government-debt issuance for bailout plans. The 10-year note slid 49/32 to 99-16/32 for a yield of 3.06%, while the 30-year bond plunged 79/32 to 103-28/32 for a yield of 4.27%.
There has been massive unwinding of safe haven bets on expectations the U.S. will follow the G7's rescue plan and announce it will buy interest in nine major banks, guarantee bank debt, and insure non-interest bearing accounts.
The dollar index was down. Gold futures fell to $840.80, while battered crude oil futures were down $1.63 to $79.56 a barrel.
While Tuesday's economic data calendar was quiet, Wednesday brings a blitz of reports: September retail sales and producer price index, the October Empire State index, August Business Inventories, and the Fed's Beige Book report on economic conditions.
President Bush, in an address Tuesday morning, announced more details of the U.S. bank rescue plan, with the government investing $250 billion in nine major banks. Global markets were higher as banks in other countries shed light on similar actions. Bush said the U.S. will follow the G-7's rescue plan, taking "unprecedented, substantial" steps in order to preserve, not "take over" the free market. As expected, the U.S. government will take part in the coordinated rescue plan with new measures, including using part of the $700 billion Troubled Asset Relief Plan to help banks and insure new bank debt. The President also noted these measures will be temporary.
Among the firms getting funding: JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC) were to receive $25 billion apiece; Wells Fargo (WFC) was to get between $20 billion and $25 billion; Goldman Sachs (GS) and Morgan Stanley (MS) were down for $10 billion each, and the Bank of New York (BK) and State Street (STT) were slated for $2 billion to $3 billion apiece.
U.S. bank stocks soared on the government plan to inject $250 billion into the battered sector. The non-voting preferred stock investments, limited to $25 billion per lender, come as regulators worldwide scramble to unfreeze a financial system paralyzed by worries over capital, liquidity and a darkening economic outlook, according to Reuters. Treasury Secretary Paulson said nine "healthy institutions" had already agreed to accept capital injections.
"In recent weeks, the American people have felt the effects of a frozen financial system," Paulson said at a news conference. "Today's actions are not what we ever wanted to do, but today's actions are what we must do to restore confidence to our financial system." Funds will come from the $700 billion bailout package that President George W. Bush signed into law earlier this month.
Beyond the "Big 9", shares of other industry players benefited from the news and from analyst upgrades. Among the banks stocks trading higher Tuesday: BB&T (BBT), KeyCorp (KEY), M&T Bank (MTB), Regions Financial (RF), SunTrust (STI), and US Bancorp (USB).
Among the losers in Tuesday's session were semiconductor stocks. Intel (INTC) shares fell 6% before the chip giant reported earnings after the market close. It said third-quarter net income rose 12% on improved margins and reduced expenses, but the company said it was hard to predict the effect of the financial crisis on demand in the fourth quarter.
Also, a Friedman Billings analyst says it has fresh production channel checks from three of the top four chip foundries and sees broad cuts to fourth quarter forecasts vs. prior checks and likely foundry shipment declines in the fourth quarter nearly across the board. It believes fourth quarter EPS Street estimates are at risk for Advanced Micro Devices (AMD), Broadcom (BRCM), Fairchild Semiconductor (FCS), and Linear Technology (LLTC).