U.S. stocks dramatically scaled back losses as investors breathed a sigh of relief over the settlement of Lehman Brothers credit default swaps "with no loss allocations imposed," according to the Depository Trust & Clearing Corp. There were a huge amount of redemptions both on the hedge fund side and the mutual fund side that were driving that in the darkest of days. Investors now have more time to evaluate stocks on merit. It's a more or less a normal reaction to company-specific news.
The markets fluctuated between steep losses and minor gains throughout the session before ending near the lowest levels of the day. Earnings worries were most evident in tech stocks, sending the Nasdaq Composite down by more than 4%. Fears that tech companies will struggle to make money amid a potential recession and an ongoing credit crisis were bolstered after a series of companies reported weak forecasts, including Sun Microsystems (JAVA: 4.77, -1.01, -17.47%), Logitech (LOGI: 15.53, -2.74, -14.99%) and Texas Instruments (TXN: 16.85, -1.13, -6.28%).
There was also significant apprehension ahead of scheduled earnings reports from tech heavyweights Apple (AAPL: 91.49, -6.95, -7.06%) and Yahoo! (YHOO: 12.07, -0.79, -6.14%), which were slated to reveal results after Tuesday's closing bell.
On Tuesday, the Federal Reserve pledged $540 billion to make sure they really are. In another bold gambit to restore confidence in the financial system, the Fed announced that it would provide a backstop for the short-term debt that many money-market funds hold. The central bank will buy certificates of deposit and certain types of commercial paper from the funds, in hopes of restoring the free flow of credit and easing worries about the investments. It is the third program of its kind that the Fed has announced this month. The Fed has created a Money Market Investor Funding Facility (MMIFF), "which will support a private-sector initiative designed to provide liquidity to U.S. money market investors," the Fed announced Tuesday.
The MMIFF joins other facilities established by the Fed: the Commercial Paper Funding Facility (CPFF) and the Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF). Earlier, the Fed established the Term Auction Facility (TAF), and the Term Securities Lending Facility (TSLF).
Lehman collapse is a rare occurrence that shattered confidence in the usually serene world of money funds, which hold about $3.45 trillion in assets, according to iMoneyNet, a research firm. The subsequent flood of redemption requests eventually reached about $500 billion, according to the Fed.
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