Investors focus on financials, Washington's bailout plan; Lehman, WaMu unchanged; broad market mixed

By Stephanie N. Rotondo

Portland, Ore., Oct. 3 - The financial sector reemerged as the top trading sector Friday, as a heap of financial news flooded the market.

Lehman Brothers Holdings Inc. and Washington Mutual Inc. remained unchanged, though trading was heavy. Away from distressed names, Wachovia Corp. seemed to be the biggest player, gaining 7 to 8 points as Wells Fargo & Co. and Citigroup Inc. battle over the company.

A trader said "other stuff did trade," but noted "financials is where the action is."

"Guys that never thought to look at them before are now," he said.

Market players were also keeping one eye glued to Washington to see whether Congress would pass the controversial $700 billion bailout plan, which was previously voted down on Monday. Once Congress did approve the bill, and the president gave it his stamp of approval, profit takers came in.

"It was an uneventful day other than watching the rescue plan," one trader said. "There are lots of things to trade if people got money," he added, noting that they in fact do not.

Investors focus on financials

The financial sector came back to the forefront of trading as a glut of finance-related news flooded the market, including the approval of the government's $700 billion bailout plan.

Among distressed names, Lehman Brothers' senior paper was called unchanged by several sources at 14 bid, 14.5 offered. One source said the subordinated paper traded at 25 cents.

"[That only traded] just so people can get it off their books or to do some shorts," he said.

The trader said Washington Mutual's subordinated debt "remained" at 19 bid, 20 offered, while the senior issues, "depending on which issue," he noted, were "up and down around 60."

At another desk, a trader was focusing on Wachovia, still considered an investment grade name. He said the bank's bonds, such as the 5½% notes due 2013, gained 7 to 8 points on the news that Wells Fargo was looking to buy them out, closing around 90 from the low-80s previously.

Wells Fargo announced Friday that Wachovia's board of directors approved the bank's $15.1 billion bid - just days after the FDIC had agreed to sell the struggling company to Citigroup.

Though the FDIC said it is standing behind its earlier agreement with Citigroup, others are thinking that the sale without regulator intervention might be a better way to go.

"Wells' deeper and more considered due diligence has probably revealed fewer risky assets and a larger number of higher valued assets than originally thought," Anant Sundaram, a finance professor at the Tuck School of Business at Dartmouth College, wrote in an e-mail to The Associated Press.

"Although it is still too early to tell, this could presage a significant shift in market sentiment toward the value of companies such as Wachovia, and may suggest that there has been an overreaction in the downdraft that we saw in the past few weeks. It is a huge shot in the arm for market confidence. It is also a signal that market forces are capable of resolving some aspects of the crisis without undue Congressional, and hence, taxpayer, intervention," Sundaram continued.

The fight over Wachovia comes as President George W. Bush signed a historical piece of legislation that would allow the government to mingle with the private sector.

Under the bailout plan, the government will buy up to $700 billion in bad debt at auction, though details of how that auction might work have not been released. The aim is to help free up the credit markets to get money flowing again.

Before the bailout plan was approved by Congress and then quickly signed by Bush, the equity market had pared its losses from the previous session. But once the bill was officially signed, stocks fell back into negative territory, which was blamed on profit takers.

"There is going to be a lot of talk about it over the next week or so," one trader said, of the bailout plan and other financial news. "Everyone will digest it this weekend, then on Monday, [the Dow Jones Industrial Average] will either be up 500 or down 500...and nothing in between."

Another trader was not as optimistic.

"That's right," he said, with just a hint of sarcasm. "The government can do it better than the private sector."

"We need a floor," he added. That would help get things moving, he opined. Now, the government has provided one, or at least an artificial one.

"The private equity guys will come in once the government provides a floor," he speculated.

Yet another trader held more of a "who knows?" approach, stating that there are still issues facing the economy.

"We got over one hurdle, now we have another one," he said. "There are huge problems with the economy."

He explained that as discretionary spending has hit a lull, sectors such as retail and automotive have felt the burn. But consumers at large have little choice but to tighten their belts, as jobs are being lost and higher commodity prices continue to "pinch their wallets."

Broad market mixed

Aside from the financial sector, traders reported there was little else to keep them busy during the last trading day of the week.

One trader said Metaldyne Inc. received a downgrade from Standard & Poor's, but investors were too busy with financials to respond.

Rafaella Apparel Group Inc.'s 11¼% notes due 2011 also showed little reaction after Moody's Investors Service said it might yet again slash its rating on the company. The trader said a Wednesday conference call pushed the debt down to 39 on Thursday, but there was nothing to speak of on Friday.

Pilgrim's Pride Corp.'s 7 5/8% notes due 2015 dropped 13 points on Thursday, the trader continued, and regained about 3 during Friday trading. He pegged the bonds around 50.

Another trader said Calpine Corp.'s stubs "have really been coming in," the 8½% notes due 2011 at 8.5 bid, 9.5 offered.

"The stock is at 11, so that is probably one reason," he said.

Harrah's Entertainment LLC's 10¾% notes due 2016 opened at 42 bid, 43 offered and moved up to finish at 44 bid, 45 offered, another trader said. Meanwhile, Tropicana Entertainment LLC's 9 5/8% notes due 2014 also headed higher, closing at 7 bid, 10 offered from 5 previously.

Idearc Inc.'s 8% notes due 2016 "continues to be fairly active," the trader said, quoted the bonds around 25.

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