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Stocks, oil plunge as credit crisis bites STEVE LADURANTAYEMonday, September 29, 2008

The Toronto Stock Exchange plunged Monday morning, kicking off a fresh week on weaker oil and a credit crisis that continues to reverberate through the global economy.
In Toronto, the S&P/TSX lost 3.57 per cent, or 432.35, to 11693.65 at 11 a.m. (ET). Oil was down $6.55 (U.S.) a barrel to $100.34.

“There is a ‘Just-get-me-out mentality,'” said Lyle Stein, president of Red Barn Capital in Toronto. “I think there was a bit of hope that this bailout would put a finger in the dyke, but obviously it isn't the plug people were hoping for.”

The Dow Jones industrial average fell 2.32 per cent, or 258.94 points, to 10,884.19. The broader S&P 500 fell 3.29 per cent, or 39.91 points, to 1,173.36.

“Despite the U.S. bailout plan now being committed to paper, there's hardly a jubilant mood expected as the new trading week gets under way,” commented Tony Cross, director of Monk Communications. “The fact the funds won't be released in one lot but instead a series of tranches is certainly detracting from its appeal.”

The Federal Deposit Insurance Corp. said Monday that Citigroup Inc. would take over Wachovia's banking operations. Citigroup will absorb up to $42-billion (U.S.) in losses, with the government backing any further losses. In return, Citigroup will issue FDIC $12-billion in preferred shares and warrants.

Wachovia is the latest institution to succumb to the credit crisis – mortgage lenders Freddie Mac and Fannie Mae were taken over by the government to protect $5-trillion in mortgages, insurer American International Group was bailed out by the governments in an $85-billion effort, Lehman Brothers Holdings declared bankruptcy and Merrill Lynch was absorbed by the Bank of America.

The banking crisis also cut deeply into Europe over the weekend, with Fortis and Bradford & Bingley banks receiving government bailouts and other European banks getting hammered in the markets on Monday.

“Irrespective of the current relief program, it must be recognized that the past year of deterioration in credit conditions globally argues for softer than expected order and sales activity over the next six months, at a minimum, for many industries tied to capital spending where returns on investment are compared to what have been higher costs of capital,” commented Tobias Levkovich, Citigroup's chief equities strategist.

“This reality cannot be turned around overnight and thus leaves earnings risk for technology hardware companies, industrial products producers, raw materials vendors and even energy equipment and services.”
More to come
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