Market News

Wall Street was pinning its hopes on the government's $700 billion financial system rescue plan. But the fervently wished-for bailout was rejected Monday by the House of Representatives in a stunning turn of events, and investors reacted with a vengeance. Major U.S. stock indexes plummeted Monday in one of their worst sessions ever.

The ugliness was widespread, with major indexes posting their worst percentage declines since the 1987 stock market crash. The Dow Jones Industrial average tumbled almost 7%, the S&P 500 sank 8.8%, and the Nasdaq (NASDAQ: news) plunged a jaw-dropping 9.1%. The Dow suffered its largest point drop in history.

On Monday, the blue-chip Dow Jones industrial average fell 777.68 points, or 6.98%, to 10,365.45. The broader S&P 500 index dropped 106.62 points, or 8.79%, to 1,106.39. The tech-heavy Nasdaq composite (NASDAQ: news) index tumbled 199.61 points, or 9.14%, to 1,983.73. According to Bloomberg News, $1.2 trillion was knocked off the value of American securities.

Activity in the broader market was overwhelmingly negative. On the New York Stock Exchange, 31 stocks fell in price for every one that gained. The ratio on the Nasdaq was 25-4 negative.

Bonds soared amid the chaos in equities. The dollar index climbed. Crude oil futures sank, while gold futures rose.

The House defeated the bailout measure, which had been crafted by the White House and legislative leaders over the weekend, by a vote of 226-207. The news, which took many investors by surprise, drove the Dow down over 700 points during the session as disappointed investors fled to the safety of Treasury bonds and gold. Other major indexes followed suit and posted outsized losses.

The rescue plan, as agreed to by lawmakers and the White House over the weekend, would use taxpayer money -- $350 billion initially, and up to $700 billion with Congressional approval -- to buy mostly soured mortgage-backed securities from Wall Street firms and banks. By taking these securities off the banks' hands, the bailout plan seeks to restore confidence in the financial system and ensure that banks can still carry on their fundamental role of handling payments and offering credit to the masses.

House members were expected to head back to the negotiating table, though it appeared unlikely that there would be a second vote Monday. Regardless of the outcome, the world appears headed for a recession with the global banking system in convulsions, says S&P MarketScope.

"Today Congress managed to snatch defeat from the jaws of victory and shareholders voted with their feet ... as we moved toward the close of trading volume increased and there was an air of desperation," says Michael Farr, president of investment firm Farr, Miller & Washington LLC in Washington D.C. "The rule is that markets top on irrational exuberance and bottom on fear and panic. The problem is, those emotions can last for a while."

Beyond the "short term noise" of the bailout drama, Farr notes that economic fundamentals are in decline. "Consumer spending is contracting, energy and food prices remain high for the consumer. Unemployment is rising and other developed markets around the world are beginning their decline which removes them from the list of really good customers of our goods and services."

"The Dow is down about 4,000 points from its high almost a year ago - that by anyone's definition is a bear market," says Farr. "It may have more to go but we are much closer to the bottom than the top."

What should investors take away from Monday's market? "Emotional decisions are mistakes - if you feel like you need to do something think about what you want to buy when things are down and don't think about what you want to sell when things are down," says Farr.

Finance, commodity and technology related industry groups were hammered mercilessly Monday. Among the S&P industry indexes under the gun:

Investment Banking & Brokerage fell 14.82% amid big drops in Goldman Sachs (NYSE: GS - news) (GS) and Morgan Stanley (NYSE: MS - news) (MS). Asset Management was down 17.12%.

Diversified Banks was down 13.50%, paced by Wachovia Corp (AWO - news) . (WB), which fell nearly 80% after it announced plans to sell its retail bank, corporate and investment bank and wealth management businesses to Citigroup (NYSE: C - news) (C).

Regional Banks was down 13.14% amid investor jitters likely due to the assumption that this group faces a similar situation as Washington Mutual (NYSE: WM - news) . The shares of industry member National City Corp. (NCC (Stockholm: NCCB.ST - news) ) were down significantly.

Consumer Finance was down 12.78% as shares of American Express (NYSE: AXP - news) (AXP) were weak after Credit Suisse cut its estimates and target on the stock. Credit Suisse said it expects AmEx's credit quality deterioration to continue over next several quarters.

In technology, Computer Hardware was down 9.23%, dragged lower by Apple (AAPL) after Morgan Stanley downgraded its rating on the stock to equal weight from overweight. RBC Capital lowered its rating on the stock to sector perform from outperform, citing a worsening consumer spending environment.

In commodities, Diversified Metals & Mining fell 16.60%, while other commodity groups such as Coal [-17.63%], Steel [-18.50%] and Aluminum [-9.96%] came under pressure as a defeated financial rescue plan heightened fears the world is headed into a severe recession that will reduce demand for commodities.

Oil & Gas Exploration & Production sank 13.83% along with November (Frankfurt: A0S9N7 - news) crude oil futures amid concerns that slowing global economic growth would likely lessen demand for oil.

Treasuries surged on the back of a flight to safety as the House of Representatives failed to pass a rescue package for the financial sector. The 10-year note soared 66/32 to 103-04/32 for a yield of 3.62%. The 30-year bond rocketed 120/32 to 105-25/32 for a yield of 4.16%.

Fed funds futures are almost fully priced for a 50 basis point Fed rate cut next month, says Action Economics. "While the market is being dramatically skewed by flight to quality flows, many are starting to factor in the probability of a recession, and perhaps a deep one which the Fed might address with further easing."

The VIX equity volatility index surged above 47 as the bailout vote failed and stocks nose-dived. That puts the market's favored "fear gauge" through the 42.16 six-year high hit recently, notes Action Economics. It would take a move to 50-60 to reach areas previously struck at the times of inflection/capitulation points on stocks, with the next upside benchmark the 110 area struck on Black Monday in 1987.

PIMCO fund manager Bill Gross predicted a "freeze of significant proportions" in the credit markets if the rescue plan is truly dead -- "even more frozen than before" in a CNBC interview. As a next step for authorities, he sees the possibility that coordinated interest rate cuts are undertaken by global central banks if the credit markets seize up further and stocks plunge.

Markets around the world were also disturbed by more turmoil among financial institutions as the credit crisis goes global, with indexes in London and Paris dropping over 5% Monday. Among the developments: news that Wachovia's (WB) banking assets were to be acquired by Citigroup (WB) and that the Justice Dept. and Securities and Exchange Commission subpoenaed mortgage giant Freddie Mac (NYSE: FRE - news) 's (FRE) records. News that two European banks were being nationalized suggested that the industry's problems were global in nature.

Monday brought word of another shotgun marriage for a troubled financial firm. Wachovia plans to sell its retail bank, corporate and investment bank and wealth management businesses to Citigroup (C). Wachovia will remain a public company with two main operating subsidiaries: Wachovia Securities, the nation's third largest brokerage firm, and Evergreen Asset Management, a leading provider of asset management services. Citi will pay $2.1 billion to Wachovia and assume the company's senior and subordinated debt. The FDIC would backstop any losses beyond $42 billion on Wachovia's $312 billion pool of loans.

In economic news Monday, U.S. personal income rose 0.5% in August, and above the 0.2% markets had expected. However, spending was flat and below the 0.2% increase. Moreover, July and June spending readings were also revised down. Disposable income fell 0.9%, a third consecutive monthly decline. The savings rate slowed to 1.0%. The core PCE deflator accelerated to a 2.6% rate compared to 2.5% in July [revised from 2.4%].

"Consumption spending shows a significantly weaker trend after this morning's personal income report," wrote Morgan Stanley economist David Greenlaw in a note Monday.

"The income data are a little better than expected, while the deflator numbers were a little worse. However, markets today will likely focus on the credit markets and the Congressional vote on the rescue package," wrote S&P senior economist Beth Ann Bovino Monday.

Fed funds futures were mixed in early trading Monday as traders bet on the merits of the Treasury bailout package, and weigh the likelihood of its success in rescuing the financial markets and salvaging economic growth, according to an Action Economics report. The market is fully priced for a 25 basis point rate cut at next month's Fed policy meeting, says Action, with some modest risk for a 50 basis point easing, even though the Fed has indicated over the past several months it prefers to hold the line on the target Fed funds rate at 2%.

"We still believe the Fed will hold its powder dry unless data show the economy is taking a severe hit from the credit stresses," according to Action Economics analysts.

There were also some worrisome new credit-crisis developments out of Europe on Monday.

The deepening of the financial turmoil has led to sharp rise in interbank rates and the ECB allotted 120 billion in a special 38 day tender, that will be extended into next year. Meanwhile European central banks have announced that they will double their USD swap facilities in another co-ordinated move to deal with the troubles in the financial sector.

Belgian, Dutch, and Luxembourg governments agreed to inject 11.2 billion [US$16.4 billion] into Fortis (Amsterdam: FOO.AS - news) , and U.K. mortgage lender Bradford & Bingley (LSE: BB.L - news) became the second British bank to be taken under the government's wing since the crisis began last year. Fortis is the first major euro zone bank to buckle under the financial turmoil triggered in August last year by U.S. mortgage defaults.

Meanwhile, Germany's Hypo Real Estate (Xetra: 802770 - news) secured credit guarantees of 35 billion, the bulk of which will be provided by the German government.

European stock markets plunged Monday. In London, the FTSE 100 index fell 5.3% to 4,818.77. In Paris, the CAC 40 (Paris: news) index declined 5.04% to 3,953.48. Germany's DAX index (Xetra: news) shed 4.23% to 5,807.08.

Asian markets also felt the heat Monday. Japan's Nikkei 225 (news) index fell 1.26% to 11,743.61. In Hong Kong, the Hang Seng (news) index dropped 3.26% to 17,880.68.

The dollar index was higher at 77.59.

December gold futures were up $25.60 to $914.10 per ounce in volatile trading Monday afternoon. Investors were seeking the haven of gold in a flight to safety from worries the current financial crisis in the U.S. and Europe will result in a global recession. While a recession would reduce demand for commodities, some view gold as an alternative and safer investment. Regardless, the liquidity and negative sentiment in the banking sector will not go away soon and will have to be dealt with by the next administration.

November West Texas Intermediate crude oil futures tumbled $10.48 to $96.41 per barrel Monday afternoon after the House defeated the financial rescue plan.