By Jeff Kearns
Nov. 20 (Bloomberg) -- Treasury Secretary Henry Paulson’s shifting approach to rescuing banks helped send U.S. financial shares to their lowest level in 13 years and credit default risk to a record high, and left investors worried more pain is coming.
Citigroup Inc. tumbled 23 percent yesterday and JPMorgan Chase & Co. dropped 11 percent after Paulson abandoned his plan to use the Troubled Asset Relief Program to buy mortgage assets from banks and government data showed the recession deepening. The rate banks charge each other for three-month loans in dollars rose almost 2 percent from a week ago, while the cost of using swaps to protect against company defaults climbed to a high.
Financial markets, already battered this year as banks worldwide lost almost $1 trillion on subprime-related securities and the government juggled plans for unfreezing credit markets, may keep tumbling until the Bush administration agrees on an economic strategy and sticks to it, investors said.
“Changing the terms of the TARP as suddenly as he did undermined investor confidence,” said Richard Schlanger, a bond fund manager in Boston at Pioneer Investments, which oversees $44 billion. “It’s a frightening situation.”
Paulson’s about-face came a week after he said the Treasury will spend the rest of a $700 billion bailout package on bank stocks and to ease strains in the markets for car and student loans. The Treasury chief said Nov. 18 in testimony to the House Financial Services Committee that capital injections and a “modest” contribution to a Federal Reserve program for consumer finance are the best ways to use the bailout money. Earlier in the week, he said markets may be under stress for “months.”
Lowest Since 2003
Standard & Poor’s 500 Index futures expiring in December decreased 1.1 percent to 803.30 as of 2:20 p.m. in Tokyo. The index plunged to the lowest since March 2003 yesterday.
Investors erased more than $33 trillion from global stock markets this year as the U.S., Europe and Japan slipped into recession. Government reports yesterday showed U.S. consumer prices plunged 1 percent last month, the most since at least 1947, and construction began on the fewest homes ever.
“The market is looking for results,” said Steve Rodosky, the head of Treasuries and derivatives at Pacific Investment Management Co. in Newport Beach, California, the world’s biggest bond manager. “Much of what Paulson and other policy makers have done has been necessary, but the market hasn’t perceived it as sufficient.”
The S&P 500 and Dow Jones Industrial Average dropped to their lowest levels in five years yesterday. The S&P 500 fell to 806.58, extending its annual retreat to 45 percent. Citigroup, the fifth-largest U.S. bank by market value, lost $1.96 to $6.40, while JPMorgan, the biggest, slumped $3.67 to $28.47. Both lenders are based in New York.
Avoiding Bargains
The market’s plunge has made investors reluctant to look for bargains. S&P 500 companies traded for 13.5 times “normalized” earnings at the end of October, the lowest since the 1980s, according to a report distributed this week by Minneapolis-based investment firm Leuthold Group LLC. The firm’s figure is calculated using the average of five years of profit.
The cost of using credit swaps to protect corporate bonds and loans from default rose to a record in the U.S. yesterday. The Markit CDX North America Investment-Grade index jumped 22 basis points to 247 basis points. Interest rates on U.S. commercial paper rose to the highest in almost two weeks, according to yields offered by companies and compiled by Bloomberg.
Europe and Japan slipped into a recession last quarter, according to data released in the past week. The German economy, Europe’s largest, is suffering the worst slump in 12 years.
More Rate Cuts
Fed policy makers forecast last month that the U.S. economy will contract through the middle of 2009, with some officials prepared to cut interest rates further in response, according to a record of the group’s meeting.
Two-year Treasury note yields touched the lowest level since 2003 yesterday as traders sought the relative safety of government debt. The difference between payouts on 10-year Treasury Inflation Protected Securities and regular notes, which reflects the outlook for consumer prices, dropped to 38 basis points, near the narrowest since Bloomberg began tracking the data in 1998.
“The market is looking for certainty and this hasn’t helped,” said Andrew Richman, who oversees $10 billion in fixed- income assets as a strategist in West Palm Beach, Florida, for SunTrust Bank’s personal asset management division. “We’re just putting our fingers in the dikes trying to stop the leaks.”
The S&P 500 could drop another 13 percent to 15 percent to less than 700 points, Andrew Burkly, a technical analyst at New York-based Brown Brothers Harriman & Co., wrote in a note to clients yesterday.
“The best course of action for investors is to postpone any new purchases and await evidence that prices have fallen enough to stimulate sustained buying,” Burkly wrote. “We are skeptical that we have seen the low.”
To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net.
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