Wall Street Tumbles on Auto Bailout Worries
December 11, 2008 - 7:17 PMWall Street's anxiety about Detroit automakers welled up Thursday, sending stocks sharply lower in an afternoon sell-off as investors grew fearful that a bill to rescue the companies wouldn't make it through the Senate.
The pullback follows mostly moderate moves in stocks since mid-November and is a fresh reminder of investors' fears about the economy.
Prospects for the $14 billion in loans to cash-starved General Motors Corp. and Chrysler LLC dimmed Thursday afternoon as opposition from both parties mounted. At the close of trading, the bill was stalled in the Senate, though negotiations were continuing, according to congressional staffers.
Lawmakers opposed to the plan argued that any government support should require significant cuts in wages and benefits for autoworkers. The House approved the plan late Wednesday on a vote of 237-170 to infuse money within days to the two struggling automakers. Ford Motor Co. has said it does not need aid.
The heads of the three automakers said that even one of the companies going into bankruptcy would slam an already battered economy with thousands of job losses. The government reported a surprise jump in weekly unemployment claims Thursday, nearly a week after it said the nation's unemployment rose to a 15-year high in November.
Wall Street has been betting Washington would extend a lifeline to the automakers and even recovered early Thursday from a sell-off at the opening bell that followed the unemployment report and a surprise increase in the nation's trade deficit. But the worries about the carmakers overtook a market that managed to trade flat for much of the session.
"What we had was a little bit of a jumping of the gun, overreaction to the auto-rescue bill," said Jon Nadler, senior analyst at Kitco Bullion Dealers Montreal. "The Dow tried to put a good face on things, but at the end of the day, reality set in."
The Dow Jones industrial average fell 196.33, or 2.24 percent, to 8,565.09. The decline left the blue chips with a 0.81 percent loss for the week going into Friday's session.
The broader Standard & Poor's 500 index fell 25.65, or 2.85 percent, to 873.59, and the Nasdaq composite index fell 57.60, or 3.68 percent, to 1,507.88.
The Russell 2000 index of smaller companies tumbled 25.19, or 5.3 percent, to 451.21 as investors looked for the safety of larger companies expected to fare better in a weak economy.
Declining issues on the New York Stock Exchange outnumbered advancers by more than 3 to 1, while trading volume came to a moderate 1.47 billion shares. Lighter trading can exacerbate the market's swings.
"What's going to happen in the Senate is really weighing on the market in a big way," said Robert Froehlich, chief investment strategist for DWS Investments. He contends that a failure of the auto bailout would trigger a reaction similar to what occurred when the government's financial sector rescue plan didn't make it out of Congress on the first try. The Dow tumbled 777 points on Sept. 29 as the plan failed an initial House vote.
Even with Thursday's pullback, stock trading has been generally more orderly since the S&P 500 and the Dow hit multiyear lows on Nov. 20. The Dow remains up 13.4 percent since then, while the S&P 500 is up 16.1 percent. Even some big moves in stocks in recent weeks don't compare with the enormous swings in September and October.
One measure of unease in the market is still elevated but well off its highs. The Chicago Board Options Exchange Volatility Index, known as the VIX, is at 56. Ordinarily what's known as Wall Street's fear gauge might be in the 20s and 30s but it had near 90 in October.
Ed Hyland, global investment specialist for J.P. Morgan's Private Bank, said investors are hoping the government's medicine, from interest rate cuts to financial infusions in banks, will eventually help lift the economy but that it remain unclear how long a recovery might take.
"There is still a high degree of uncertainty out there," he said. "All you have to do is look at the Treasury market to get a gauge of how much fear there is in the overall investment community."
In Treasurys, the yield on the three-month T-bill stood at 0.02 percent, unchanged from late Wednesday. The modest yield still indicates a high degree of investor unease. The yield on the benchmark 10-year Treasury note, which also moves opposite its price, fell to 2.63 percent from 2.69 percent late Wednesday.
The one-month T-bill's yield was at 0.01 percent, down from 0.04 percent late Wednesday. It was auctioned on Tuesday with a yield of zero percent, a sign that institutional and foreign investors were so eager to preserve principal they were willing to forgo interest.
The dollar was mostly lower against most other major currencies, while gold rose.
Oil prices surged 10 percent as the dollar weakened and as investors hoped for a significant OPEC production cut next week to boost the market. Light, sweet crude jumped $4.46 to settle at $47.98 a barrel on the New York Mercantile Exchange.
Chevron Corp. rose $1.02, or 1.3 percent, to $79.46 following the jump in oil, while Hess Corp. advanced $3.02, or 6.8 percent, to $47.71.
Automakers declined as investors worried about the prospects for a bailout. GM fell 48 cents, or 10.4 percent, to $4.12, while Ford fell 35 cents, or 10.8 percent, to $2.90. Chrysler isn't publicly traded.
Financials fell amid worries about their balance sheets. US Bancorp warned it is earmarking more than $1 billion in the fourth quarter for bad loans. US Bancorp fell $2.82, or 10.2 percent, to $24.85. JPMorgan Chase & Co. fell $3.58, or 10.7 percent, to $29.94, while Wells Fargo & Co. declined $3.29, or 11.3 percent, to $25.90. of Wall Street's projections.
Overseas, Japan's Nikkei 225 added 0.70 percent. Britain's FTSE-100 rose 0.49 percent, Germany's DAX fell 0.78 percent, and France's CAC-40 lost 0.43 percent.
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