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Daily Blog -02/10/09- 2:19 P.M.

Investors Respond with a Sell the News Reaction

The U.S. markets are down sharply today as investors react to the government's latest plans on reversing this economic crisis and stimulating the economy. This seems like a classic "sell the news" type of move but word on the street was that investors were unhappy by the lack of details in Geitner's speech. The reaction was to sell everything. All sectors are in the red. Only gold is showing any strength today with the GLD up 1.8%. The Dow Jones Industrial Average is off more than 330 points (-4%). The S&P 500 index is also down more than 4%. The NASDAQ Composite has fallen more than 3.5%.

The U.S. senate narrowly passed the $800+ billion stimulus bill by a vote of 61 to 37. The bill needed 60 votes to pass. This news took a back seat to Treasury Secretary Tim Geitner's speech on the financial sector. Geitner put forth a new plan. Here's an excerpt:

"This new Financial Stability Plan will take a comprehensive approach. The Department of the Treasury, the Federal Reserve, the FDIC, and all the financial agencies in our country will bring the full force of the United States Government to bear to strengthen our financial system so that we get the economy back on track."

One idea I was happy to hear is that the government is providing a website to publish where all this money is going and how it's being spent. Geitner said that, "FinancialStability.gov, will give the American people the transparency they deserve." Part of the new Financial Stability Plan (FSP) is that large banks will be put through a "stress test" to see if they can survive another sharp economic drop. If they pass then they qualify to participate in this new government program's "capital support" (a.k.a. government bailout money). My thoughts as a trader are when will the results of this test be known and how do we find out which banks failed and which passed? Those could be some powerful bullish and bearish trading opportunities.

Another part of the new FSP is a "Public-Private Investment Fund" designed to buy toxic assets from the banking system. This idea was to pair up government money with private capital to buy these bad debts and get them off the banks' balance sheets. This part of the program would start with $500 billion but could be revved up to $1 trillion in government funding.

The third part of the new FSP is to re-energize last year's Term Asset Backed Securities Loan Facility (TALF) by the Federal Reserve. According to the Treasury Secretary almost 40% of consumer lending was fueled by the ability to bundle this credit and sell it. Currently this part of the system has frozen to a crawl. The new plan will open up this program to allow more small business lending, student loans, consumer and auto finance, and commercial mortgages.

The last part of the new FSP was a "comprehensive housing plan". Unfortunately, Geitner didn't have any details to share and said that this would be developed over the next few weeks. Lack of details for most of these programs appeared to be the spark for today's sell the news decline in stocks. The one thing that Wall Street hates the most is uncertainty. That is why we're seeing such a decline today.

Naturally banking stocks are the hardest hit today. The BKX banking index and BIX banking index are down 11.7% and 12.4% respectively. The XLF financial ETF is down 8.2%. Citigroup (C) is down 12.6%. BAC is getting crushed with an 18% drop. JPM is down about 7%.

---- Sector Performance ----

BKX banking index.. -11.7%
BIX banking index.. -12.3%
XBD broker-dealer.. - 6.2%
IUX insurance...... - 7.4%

BTK biotech index.. -2.9%
DRG drug index..... -2.8%
HMO healthcare..... -4.0%

OIX oil index...... -3.8%
OSX oil services... -3.8%
XNG natural gas.... -2.5%
USO oil ETF........ -2.5%

XAL airlines....... -3.5%
DJUSRR railroads... -5.3%
CYC cyclicals...... -5.7%
DJ Transportation.. -4.9%

RLX retailers...... -3.8%
DJUSCA gambling.... -6.2%
DJUSHB home builder -8.4%
DFI defense sector. -3.4%

DDX disk drives ... -4.2%
INX Internet ...... -3.4%
SOX semiconductors  -3.6%
NWX networking .... -3.0%

Chart of the S&P 500 index:

Chart of the Dow Jones Industrial Average

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