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FINANCIAL CRISIS: GLOBAL TURMOIL

Fears of world recession deepen

Plummeting markets indicate limits to government's power to help

October 07, 2008|Walter Hamilton, and Martin Zimmerman and Tiffany Hsu | Times Staff Writers

NEW YORK — The collapse of stock markets worldwide Monday reflects deepening concerns that government intervention won't be enough to stave off a potentially severe global recession.

"Recession is unavoidable at this point," said Marc Pado, stock market strategist at Cantor Fitzgerald. "Now it's just a matter of depth."

Despite the $700-billion bailout bill enacted last week, the Dow Jones industrial average plummeted 800 points, or 7.7%, before rebounding to close down nearly 370 points. The blue-chip barometer fell below the 10,000 level for the first time in four years. Stock markets in Europe plunged as much as 9% after a series of hastily arranged bank rescues there over the weekend.

Beyond the stock market, credit remained extremely tight, economic worries sent crude oil sinking more than $6 to less than $90 a barrel, and fearful investors huddled in super-safe Treasury securities -- the financial equivalent of hiding under the covers until the storm passes.

"In terms of the menagerie of investor emotions, we've already gone through anxiety, despair, panic and capitulation," said Sam Stovall, chief investment strategist at Standard & Poor's Equity Research. "Now we're wrestling with despondency."

The Dow finished down 369.88 points, or 3.6%, at 9,955.50 -- its lowest close since October 2004 and a level it first crossed in 1999 during the tech boom. The Dow has dropped 30% from its record close a year ago this week.

The broader Standard & Poor's 500 index fell 3.9% on Monday, while the technology-dominated Nasdaq composite index skidded 4.3%.

The stock sell-off came after investors spent the weekend absorbing more bad economic news last week, including a report showing a loss of 159,000 U.S. jobs last month.

Investors have been waiting for weeks or even months for signs of what is known on Wall Street as a capitulation -- the point in a market downturn where the news is so bad that every investor who plans to sell has sold -- the point where stock prices simply can't fall anymore.

But some analysts say the current panic isn't strong enough to suggest the market has hit bottom.

"I'm not getting the sense that people are ready to jump off a cliff yet," said Brian Rauscher, director of portfolio strategy at Brown Bros. Harriman in New York.

Nonetheless, for many individual investors who are seeing their personal savings shrink, there is "a level of panic and fear that I have not seen in years," said Rose Greene, a certified financial planner in Santa Monica.

The level of anxiety, she said, is greater than during the 2000-02 bear market, the deepest downturn since the Depression.

The expanding credit crisis spurred the Federal Reserve on Monday to ramp up its efforts to inject cash into the banking system and encourage banks to build up their own reserves. And the Bush administration said it was committed to using "substantial force on a number of fronts" to help the economy.

The Fed tripled, to $900 billion, the amount of money available to banks under emergency short-term loan programs the central bank has set up.

"It's reflecting their seriousness to try to get a grip on this and try to make sure the Fed is doing all it can to try to maintain liquidity," said Henning Bohn, an economics professor at UC Santa Barbara.

The Fed also quickly used power it was granted in the bailout legislation enacted Friday to announce it would begin paying interest on reserves held by banks.

The move will apply to reserves required by regulators as well as excess reserves to encourage banks to keep more cash on hand.

The central bank also reportedly is considering buying commercial paper to help thaw the market for unsecured corporate IOUs.

The late rally Monday in U.S. stocks may have been fed by speculation that the Fed and other central banks would trim their benchmark interest rates to stimulate economic growth. Early Tuesday, Australia's central bank cut its key rate by 1 percentage point to 6%.

In California, Caryn Goldberg, 55, of Valley Glen estimated that she lost 20% of her savings in the third quarter, causing her to rethink her plan to retire in three years.

Goldberg, a business development consultant in the adult entertainment industry, said she and her spouse were also rethinking their spending plans -- cutting back on restaurant meals and vacations and even talking to friends about having a gift-less holiday season this year.

"We're looking at our budget, but when you're losing 10, 20 and $30,000 out of your portfolio, you don't get it back by cutting the gardener," she said.

Others are more sanguine. Alfred Webster, 74, a retired math professor who splits his time between Maine and Florida, said he wasn't letting the stock market volatility faze him.

"I'm not changing anything, especially since I've seen enough ups and downs over the last several decades," said Webster, who has been investing since the 1950s.

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