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Financial Sector Continues To Cause Concern

8 August 2008 - Markets - Editor

Persistent concerns over the state of the financial sector, rising unemployment and mediocre retail sales are cited as some of the reasons for the 225 point decline in the Dow Jones Industrials and the sharp increase in bond prices on Thursday 7 August. This stock market draw back is seen by many as an indication of insecurity among investors leading them to react strongly to any negative indications on the market.

Top of the list of concerns was the release of second quarter results by insurer American International Group Inc. which reported a loss of more than $5 billion and revealed that weakness in the credit markets had expunged significant value from its investments and its credit default swaps portfolio. Of the thirty stocks that comprise the Dow Jones Industrials, American International Group (AIG) was by far the steepest decline.

The news that the long-term ratings of credit card lender American Express were under review by credit-ratings agency Moody’s Investors Service, with the likelihood of a downgrade, fuelled the anxiety being experienced by investors. This announcement may have caused the 4.2 percent fall of American Express stock on Thursday.

State regulators announced settlements on Thursday in which Citigroup Inc. will pay $100 million in fines and will repurchase over $7 billion in auction-rate securities. The company had been accused of making false claims for securities they were seeking to unload on the public, as well as destroying key documents in an attempt to obstruct justice. While neither admitting guilt, nor proclaiming innocence, Citigroup entered into a plea bargain, which circumvented the discovery process and possible criminal prosecution.

The Labor Department disclosed that the number of people laid off from their jobs last week, and therefore seeking unemployment benefits, jumped to its highest levels in more than six years. This unexpectedly high increase was to some extent as a result of job cuts in recent weeks by General Motors Corp., Weyerhaeuser Co. and Starbucks Corp.

Further illustrating investor uncertainty and the volatility of the market, was the brief rally in Thursday’s session after an announcement by the National Association of Realtors that it’s seasonally adjusted index relating to pending sales for existing homes increased by 5.3 percent in June over May. This came as a surprise to economists who were anticipating a decline. However, despite this increase, the index is still 12 percent below results for the same period last year.

The recurring concerns over the financial sector once again highlighted that many companies are struggling to deal with bad debt on their balance sheets, a problem which tightness in the credit markets only serves to compound. Reports of rising unemployment served to fuel fears that defaults on mortgages and other loans are likely to continue for some time as consumers continue to buckle under economic pressures.

 


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