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Dow ends 157 pts down as mood sours after rescue Bill is passed

FOR many investors, the unfolding drama on Wall Street resembles Hong Kong director Benny Chan’s latest movie Connected in many ways.

Those who stayed up on Friday night to watch the outcome of the US House of Representatives’ vote on a US$700 billion (S$1 trillion) bailout package would find one scene from the action-packed film particularly relevant.

In it, the car driven by the hero (Louis Koo) lurched out of control and went hurtling down a slippery slope. He managed to get out only seconds before the vehicle plunged down a cliff.

On Wall Street last Friday, feverish anticipation that the rescue package for financial institutions would be approved sent the Dow Jones Industrial Average up by as many as 313 points in early trading.

But the mood soured after the Bill was passed. The Dow slipped precipitously and ended 157 points down as selling accelerated in an alarming manner.

So what should investors do? Are financial markets careening out of control like Louis Koo’s car before it crashed?

The US$700 billion rescue package was supposed to inject a massive vote of confidence into financial markets, buy troubled assets off US banks and get them to start lending to each other again.

But the global credits markets have stayed frozen, despite efforts to unclog them.

The squalls unleashed by the death of Lehman Brothers and near-collapse of American International Group last month have transformed into a gale-force wind threatening even the world’s biggest banks.

The Libor rate - the interest rate for US dollars at which banks lend to each other - is almost double the US Federal Reserve’s short-term interest rate of 2 per cent.

There are reports that some banks are charging much higher rates and lending only on an overnight basis, in case their borrowers run into financial difficulties.

Even the world’s largest companies are not immune to the credit crisis.

Last week, rather than try to draw down on its massive credit lines, General Electric sold US$3 billion worth of preference shares to investor Warren Buffett on very generous terms.

The state government of rich and powerful California was forced to approach the US government for emergency funding to pay its bills.

To traders here, all these gloomy reports have a surreal feel. But beneath the sea of calm, there is increasing anxiety. Last week, the benchmark Straits Times Index fell 4.7 per cent to a 26-month low of 2,297.12.

Among the worst hit were biggies such as Keppel Corp and Sembcorp Marine which were considered to be strong defensive plays because they could ride out the financial storm with their fat order books.

But the credit crunch has also severely affected hedge fund managers, as they cope with the big flood of redemption orders from jittery investors. So it is no surprise that rig-builders should come under selling pressure, since these stocks were among their favourite picks last year.

How will it all end?

In Connected, Louis Koo was shown on top of a mountain resembling a Master of the Universe, back in charge of his destiny after his near-death experience.

For the central bankers charged with saving the global financial markets from hubris, a similar miracle will be appreciated.

Source : Straits Times - 6 Oct 2008