Banks Drag Down Dow - Closes Below 8,000

DOW DROPS 4% TO BELOW 8,000

Wall Street ushered in the Barack Obama presidency with a substantial drop in the Dow, amid fresh signs the global bank crisis is far from over.

High expectations for details on how the new administration would address the growing banking crisis and faltering economy were dampened after the inauguration speech concluded with little new information to digest.

Meanwhile investors hammered banking stocks on fears that some US banks could be nationalized, after Britain took a 70% stake in Royal Bank of Scotland.

After hours the market learned that Citigroup would move forward with a previously announced dividend cut, to a penny a share.

BANK STOCKS FALL TO NEW CREDIT-CRISIS LOW

The banking sector closed sharply lower on Tuesday, with Citigroup and Bank of America hitting their lowest levels since the early 1990s, as a series of analysts cut their forecasts for both banks for the rest of 2009.

Confidence in the banking sector was also rattled as State Street the world's largest institutional money manager, spooked investors when it said it had a $6.3 billion unrealized loss in its investment portfolio and lowered its outlook. Its shares plunged 59 percent.

The rout was widespread, with regional banks like PNC Financial getting hit hard and even relative islands of safety like J.P. Morgan Chase getting hammered on concerns about a worsening U.S. economy.

"The market doesn't trust that banks have properly marked their balance sheets and their loan portfolios. The sense is there are further marks to come, that tangible book is not as it is stated today, observes Robert Patten, a bank analyst for Morgan Keegan.

Strategy Session with the Fast Money Traders (and banking analyst Gerard Cassidy)

“The new administration has to create more equity capital. The banking system needs equity,” explains RBC bank analyst Gerard Cassidy on Fast Money. “And we might have to go with common equity like Britain did.”

(If that happens it will probably zero out the common shareholders.)

”We need to bailout the system and recognize the losses. Then banks will start lending again. But it seems the new administration is more focused on the homeowner.”

If you’re looking for a trade Cassidy tells us, “I remain bearish on the banks. Stay on the sidelines.”

How do we get confidence back in the banking system? That’s the question the new administration must address, muses Guy Adami. And be careful of State Street. I wouldn’t run in and buy the stock just because it’s so beaten down.

It doesn’t seem that any firm tied to the financial sector will be immune to this crisis, adds Pete Najarian. Even gains in the insurers are gone.

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AFTER HOURS ACTION: IBM

Shares of IBM climbed after hours when big blue reported earnings that easily beat estimates and gave guidance for the current year that was ahead of analysts' consensus view.

Their margins were impressive, says Guy Adami. And they numerous signed contracts for the months ahead.

In fact, IBM reported $17 billion in new service contracts, an impressive number, adds Pete Najarian. Hewlett Packard might be worth a look on that news. They too, could have more service contracts than the Street is anticipating.

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OIL REBOUNDS 6%

Oil prices jumped 6 percent Tuesday as traders sought to square their books ahead of the February contract expiration.

Meanwhile, oil use in the industrialized countries that are members of the Organization for Economic Co-operation and Development (OECD), such as the United States, Japan and western Europe may have peaked already, according to some analysts.

"There is a reasonable likelihood that OECD oil demand has peaked," said Peter Davies, former chief economist at BP Plc who was in charge of preparing BP's annual Statistical Review of World Energy, a standard reference work.

I continue to like the refiners, says Tim Seymour. I’d look at Tesoro or BP .

I like the service sector, says Pete Najarian. I’d take a look at Noble Energy .

In commodities, I thought it was more interesting that gold rallied today, muses Guy Adami. However, copper and aluminum continue to slide, I think the global demand story is broken.

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Trader disclosure: On Jan. 20th, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (C), (BAC), (TM), (SDS); Adami Owns (AGU), (C), (BTU), (GS), (INTC), (MSFT), (NUE); Seymour Owns (AA), (AAPL), (BAC), (F), (EEM), (FXI), (TSO); Najarian Owns (MS), (PALM) ; Najarian Owns (EEM) Call Spread; Najarian Owns (FCX) & (FCX) Short Calls; Najarian Owns (MS) Short Calls & Short Put Spread; Najarian Owns (NVLS) Calls; Najarian Owns (XME) Long Calls; Najarian Owns (IYR) Puts

CNBC.com with wires