Small caps plunge 5% on failure of bailout bill
Small caps have plunged late afternoon after the bailout bill failed to pass in the House overshadowing the Federal Deposit Insurance Corp.’s brokered deal for Citigroup (NYSE:C) to purchase Wachovia’s (NYSE:WB) banking operations.
At 2:07 p.m. ET the Russell 2000 (NYSE:IWM) was down 5%, or 36, to 668.
The House of Representatives failed to pass the $700 bailout bill, shocking markets and sending the S&P to its lowest level since 1997. After the bill failed, a motion was made for reconsideration of the bill; however attempts to revive it failed. Uncertainty looms around what comes next.
"Right now the market is extremely disappointed,” Andy Busch, global foreign exchange strategist of BMO Capital Markets, said. “It’s a huge embarrassment to both the Democratic and Republican leadership in the U.S. House. This bill shouldn’t have been brought to the floor if they couldn’t have passed it in its current form. I firmly believe that this was the gun to everyone’s head that they needed to see what was out there for the people who voted against it. I believe they will bring back this bill in another form and vote on it again. It’s dead for now…but I think it’s pretty clear they want to get something done because of the disastrous affect it’s had.”
In an attempt to battle the burgeoning credit crisis globally, the Federal Reserve along with the central banks of other countries said they will work together to inject cash into the global financial system to provide relief for debilitated banks. The U.S. central bank has also received authority to pay interest on reserves held by the Fed.
“This should encourage banks to leave funds at the bank while they receive 2%,” Busch said in an email. “This will allow the Fed to expand its balance sheet without forcing Fed Funds to zero. This means they can potentially pump up the liquidity by massive amounts to assist with the credit crunch.”
In the latest chapter of the credit crisis, Citigroup will act as Wachovia’s white knight under the direction of the FDIC and acquire its banking operations. Under the terms of the deal, Citigroup will assume $42 billion in losses and provide the FDIC with $12 billion in preferred stock and warrants, while the FDIC will absorb the remaining losses. The deal also contains a provision that protects Wachovia debtholders. To finance the deal, Citigroup said it will offer $10 billion in stock and cut its quarterly dividend by half to $0.16 per share. The sale follows the Charlotte, N.C.-based bank’s negotiations over the weekend with Wells Fargo and Spain’s Banco Santander.
In other financial news, Japan's Mitsubishi UFJ Financial Group said it will take a 21% stake in Morgan Stanley (NYSE:MS).
Overseas, from Asia to Europe world markets swooned, as the credit crisis has begun picking up steam in Europe. Mortgage lender Bradford & Bingley became the second bank to be bailed out by Britain’s government over the weekend. Meanwhile, on Sunday The Netherlands, Belgium and Luxembourg collectively invested $16.37 billion into Belgium’s largest retail bank, Fortis NV, to thwart a run on the bank and after shares plunged last week. The three governments stepped in after negotiations for either France’s BNP Paribas SA or financial firm ING Group NV to takeover Fortis unraveled.
In economic news, consumer spending for the month of August was the weakest in six months, as effects from the economic stimulus package dissipated. Consumption clocked in flat in for the month, and lower than the 0.2% increase economists had projected. On a somewhat rosier note, personal income for August rose 0.5%, more than the forecast for an increase of 0.2%. This compares with a decrease of 0.6% in July. This week is filled with economic data, most of which will likely paint a dreary economic picture. On the docket is consumer confidence, September auto sales, factory orders and the employment report.
Crude oil has plummeted more than $10 a barrel, breaking the $100 mark to fall to $96, as concerns surrounding slower economic growth globally swirled through the oil market. The dollar is mixed against the yen and the euro and gold is up $26 per troy ounce. The credit markets remain locked up and investors are demanding no return on treasuries in return for a safe haven for their cash. Investors poured into short-term treasuries following the bailout bill's failure.
In broader industry groups, full line insurance, banks and specialty REITs are among the few groups gaining ground, while renewable energy equipment, nonferrous metals and platinum and precious metals are leading the market lower.
In small caps, egg producer Cal-Maine Foods, Inc. (Nasdaq:CALM) posted lower earnings for its first quarter of fiscal 2009, as the egg producer’s operating revenues were dragged lower by substantially higher feed costs. Shares tumbled 20% midday.
Shares of WuXi PharmaTech (NYSE:WX) have tumbled some 17% after the pharmaceutical, biotechnology and medical device research and development outsourcing company said that a joint venture with Covance Inc. has unraveled.
Circuit City (NYSE:CC) posted a worse-than-forecasted loss for the second quarter, as the consumer electronics retailer grappled with a significant decline in traffic waning sales, a weak macroeconomic environment, greater competition and a weakened brand position. The store also withdrew its fiscal 2009 outlook. Shares fell 9%.
Brazilian food exporter Sadia S.A. (NYSE:SDA) hit a new 52-week low this morning after an analyst at Citigroup downgraded Sadia to “sell” from “buy.”
Littlefuse Inc. (Nasdaq:LFUS) fell 10% midday after the circuit protection products manufacturer lowered its third-quarter guidance, as automotive sales dropped off “sharply” in the quarter.
Virtual Radiologic Corp. (Nasdaq:VRAD) lost more than a quarter of its value this morning after the company announced it expects to report lower-than-expected revenue and earnings per share for 2008.
