Today’s Inauguration Day performance of Wall Street was the worst in the history of the Dow Jones Index, while JPMorgan analysts said the overall slump was the deepest since 1900.
The New York Times said the sell-off on Wall Street adhered to a history of Inauguration Day losses. Of 13 regular inaugurations that have fallen on trading days since 1941, the S&P has finished lower on 9, according to Howard Silverblatt, senior index analyst at Standard & Poor’s.
The Obama Administration came under immediate pressure to make a once and for all bailout and clean up attempt to fix the tottering US financial system. Wall Street fell as the inauguration ceremony started and fell all day to be down more than 4% and 5%.
The S&P 500 Financials sub-index lost 16.7% in value as Citigroup fell 11% to $US2.80, its lowest level since the 1998 merger that created the company. The slumping banking sector drove the overall market down, with the S&P 500 off 5.3% and the Dow losing more than 4% to end under the 8,000 point mark.
The plunge by the financial sector to a 14-year low, left the S&P 500 just 7% away from that 11-year low hit mid November which has so far marked the nadir of the rout and the start of the now truncated Santa rally.
The index is down 11% in the first 12 trading days of this year, topping 2008’s gloomy start which saw a fall of just over 9% in the same time. That optimism that the $US825 billion spending package proposed by the Democrats, would soften the impact of the slump has gone.
Worried investors have returned to the Us dollar, pushing it higher against all currencies: it has risen more than 5% against the Aussie this week which was trading well under 65 US cents this morning and its just over $US1.28 to the euro. That’s a sure sign of the rising fragility and lack of confidence in banking systems around the world, including paradoxically, America’s.
A Goldman Sachs strategist forecast that US companies would see a much bigger drop in 2008 and 2009 earnings than the market had so far factored into share prices.
State Street, the world’s largest custodian bank, lost nearly 60% per cent of its market value after it said higher-than-expected unrealised losses on investments had resulted in a 71% drop in 4th quarter earnings: fellow US bank, Bank of New York Mellon, which is in the same business, rushed forward its 4th quarter results per cent fall in fourth-quarter profits.
Bank of America, rescued for a second time late last week by the government saw its shares plunge another 29% at one stage as the ‘shorts’ had a field day. They ended down 17% on the day.
Our market is in line for another toweling as well after Tuesday’s 3%-plus drop: the futures market said the local exchange would cop a similar pounding today as the Santa Claus rally turned into another January rout for the second year in a row.
As Barack Obama drove down the streets of Washington towards the White House, walking twice in the open, before returning to his armoured vehicle, the S&P 500 extended its retreat since Election Day to about 20%.
The new president and his advisers would do well to read this column in The New York Times from Novel prize winning economist Paul Krugman on the dangers of rescuing so-called ‘zombie banks’ on Wall Street. Financial institutions are stuffed so full of poorly performing or toxic assets, says Krugman, that they are for all intents and purposes dead. Their market value is miniscule compared to the size of their balance sheets.
Without naming names, he was talking about Citigroup, Bank of America and a host of other once-proud names on Wall Street.
Bloomberg reported a prominent US economist as saying that the US banking system is “insolvent”.
Nouriel Roubini, the New York University Professor who forecast current subprime mortgage induced and banking disasters, told a conference that US financial losses from the credit crisis may reach $US3.6 trillion.
“If that’s true, it means the US banking system is effectively insolvent because it starts with a capital of $1.4 trillion,” Roubini said at a conference in Dubai today. “This is a systemic banking crisis”.
In Germany, Hypo Real Estate (HRE), that country’s biggest banking base case got another multi-billion euro injection of state aid to try and key it alive.
Hypo will receive an additional 12 billion euros ($US15.5 billion) in financial aid after receiving an extension on the previously guaranteed 30 billion euros of government aid earlier this month. That was an increase of 50% on the original 20 billion euros in aid first offered in November.
That 42 billion euros of aid is worth more than $A80 billion.
HRE is Germany’s second biggest mortgage lender and it almost collapsed in early October in the wake of the Lehman Brothers failure. HRE’s Dublin banking subsidiary and fund manager, Depfa, is said to have been responsible for much of the parent’s problems.
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