Poor US Economy: Wall St Sags, Less Optimistic On Fannie Mae Freddie Mac

NEW YORK - US stocks fell on Monday as worry about the health of the US banking sector after Friday’s collapse of IndyMac outweighed earlier optimism over the government’s plan to stabilise Fannie Mae and Freddie Mac.

On Sunday, the US Treasury and the Federal Reserve said they would lend money and buy equity if needed to rescue the two pillars of the US housing market, sending shares soaring early on Monday.

But the gains soon fizzled as analysts noted any direct government investment in Fannie Mae and Freddie Mac would further dilute existing shares - the last thing investors want.

Regional banks were also under fire as investors fretted about the possibility of more bank failures after regulators seized the mortgage lender IndyMac Bancorp late on Friday, following withdrawals by panicked clients.

National City Corp, responding to market rumours, said in a statement it was ‘experiencing no usual depositor or credit activity.’ But the Midwestern banking institution’s stock still plunged 14.71 per cent to US$3.77 after the statement.

Shares of other regional banks such as Washington Mutual and M&T Bank Corp also plummeted, with Washington Mutual down 34.8 per cent at US$3.23, and M&T Bank down 15.6 per cent at US$58.82. The S&P financials sub-index fell 5 per cent to 239.22, its lowest level since October 1998.

‘Bottom line is the market is in no mood to give anyone any benefit of the doubt right now,’ said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

Mr Kenny pointed to the long-term impact of Fannie Mae’s and Freddie Mac’s poor performance as the key drivers of investor uncertainty.

‘I mean, it’s nice to know that the government is willing to take unorthodox steps to calm the markets and to infuse confidence on the part of the investors, but this is a long road ahead of us here,’ he said.

The Dow Jones industrial average fell 45.35 points, or 0.41 per cent, to 11,055.19, while the Standard & Poor’s 500 Index lost 11.19 points, or 0.90 per cent, to 1,228.30. The Nasdaq Composite Index slipped 26.21 points, or 1.17 per cent, to 2,212.87.

After the closing bell, General Motors shares rose as much as 5 per cent on news that Chief Executive Rick Wagoner will announce the automaker’s second restructuring package in six weeks, in an attempt to cut costs and shore up investor confidence in the company. GM closed at US$9.38, down 5.4 per cent on the NYSE.

In the regular session, the Dow’s drop was cushioned by the performance of defensive stocks like McDonald’s and Coca-Cola, which tend to weather economic downturns because consumers still buy their products even in tough times.

McDonald’s shares rose 1.3 per cent to US$58.09, while Coca-Cola gained 1.4 per cent to US$50.96 on the New York Stock Exchange.

Apple shares gained 0.8 per cent to US$173.88 on Nasdaq after the company said it sold 1 million units of the new iPhone in its initial weekend, in line with analysts’ estimates.

On the other hand, shares of Fannie Mae fell 5.1 per cent to US$9.73, while those of Freddie Mac slid 8.3 per cent to US$7.11, both in NYSE trading. Both stocks had risen more than 20 per cent in trading before the opening bell.

Among regional banks, Fifth Third Bancorp tumbled 10.6 per cent to US$11.16 on the Nasdaq.

In other news, activist shareholder Carl Icahn blasted Yahoo on Monday for rejecting his joint proposal with Microsoft Corp, saying management was more focused on who would run the Internet company than on the details of the offer.

Shares of Yahoo fell 4.2 per cent to US$22.57 and Microsoft shares dipped 0.4 per cent to US$25.15, both on the Nasdaq.

Trading volume was low on the New York Stock Exchange, with about 1.41 billion shares changing hands, below last year’s estimated daily average of roughly 1.90 billion, while on Nasdaq, about 2.07 billion shares traded, below last year’s daily average of 2.17 billion.

Declining stocks outnumbered advancing ones on the NYSE by 3 to 1, while on the Nasdaq, more than two stocks fell for every one that rose. — REUTERS