The mother of the mother of all bailouts is quickly turning into not just one of the largest financial events in history, but a heated political argument as well. As we head into a vote on Capitol Hill this week, many, many questions still remain unanswered about how this plan is structured and whether it should be implemented at all.
You're bound to get a different viewpoint from almost anyone you ask, but here are a few thoughts on four of the chief areas of debate getting tossed around.
Myth: The proposed bailout will cost taxpayers at least $700 billion
The proposed $700 billion isn't a donation, a grant, or a gift -- it's an investment. The money will be used to purchase assets from banks at a steep discount to nominal value, and then sold down the road once the smoke clears. The proceeds from those sales will ... say it with me ... go back to the Treasury and pay off the debt issued for the bailout. It's completely reasonable to assume taxpayers could in fact profit from this venture in years to come if done properly.
Half-truth: This is a bailout of Wall Street
Oh boy, I can already hear the keyboards furiously punching out the hate mail on this one, but, please, hear me out. This is not a bailout of Wall Street: It's a bailout of the American financial system from a problem caused by Wall Street (as well as Main Street). There's a tremendous difference between the two.
Inconsistency: The economy won't implode if a big bank goes under
After all, we hear that, "Lehman Brothers was allowed to go bankrupt and the world didn't come to an end." I can see why this is a widely held belief, but let's dig a little further into the events of two weeks ago. Lehman Brothers went belly up sometime Sunday afternoon. By Sunday evening, Merrill Lynch (NYSE: MER) had to be hastily thrown into Bank of America's (NYSE: BAC) arms. By Tuesday, AIG had imploded. By Thursday, Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) were on the brink of collapse.
I'll go out on a limb and assume that four once-in-a-lifetime events happening within 96 hours of each other wasn't a coincidence. The only thing that stopped the domino-style financial meltdown was word that the mother of all bailouts was taking shape. Like it or not, many of these firms truly are too big to fail.
Inconsistency: Let 'em fail, the sooner they die, the sooner we recover
Hogwash. "Tough medicine" makes sense insofar as the medicine isn't so tough that it kills you. The big factor that needs to be addressed here is that foreigners own more than one-quarter of all the public debt in America, which in effect gives them the ability to send the financial system into Armageddon if they sense our financial fortitude teeters on collapse.
Any large-scale fallout in the financial sector could give foreigners a good reason to start dumping treasuries en masse, causing a bank run on the largest debtor in the world: the U.S. government. There is no doubt that such a run would push the value of the dollar to unimaginable lows, as well as cause a domestic credit crisis to boil into a currency meltdown. Such a meltdown would make any recovery several orders of magnitude more difficult than it would be with the bailout.
* * *
[9/25/08] Confident but not yet celebrating, congressional leaders agreed Thursday on a multibillion-dollar bailout plan for Wall Street aimed at staving off a national economic catastrophe. President Bush brought the two men fighting to succeed him to a historic White House huddle on how to sell a deal to lawmakers who were still resisting.
Under the tentative plan, the government would buy the toxic, mortgage-based assets of shaky financial institutions in a bid to keep them from going under and setting off a cascade of ruinous events, including wiped-out retirement savings, rising home foreclosures, closed businesses, and lost jobs. Bush warned darkly in a prime-time address Wednesday night, "Our entire economy is in danger."
While lawmakers engaged in nitty-gritty dealmaking, Democrat Barack Obama and Republican John McCain, who have each sought in their own ways to distance themselves from the unpopular Bush, prepared to sit down together with the sitting president at the White House for an hourlong afternoon session apparently without precedent. By also including Congress' Democratic and Republican leaders in the meeting, much of Washington's political power structure was to be gathered at one long table in a small West Wing room.
Tuesday, September 30, 2008
What Next?
Schwab's Liz Ann Sonders writes..
Regardless of the remedies proposed and tried, it’s becoming more and more likely we’re facing a global recession. As you know, that’s been our view. We’re seeing a collapse in global industrial demand as evidenced by oil, coal and steel declines yesterday. Here in the United States, a lot of economic news is being pushed to the back pages, but it’s grim nonetheless. First of course is the impact of the stock market correction: the 9% drop we saw yesterday wiped out $1.3 trillion in value for equities’ holders (twice the value of the failed rescue plan). August’s personal income and spending numbers were out yesterday and they showed real spending unchanged last month, weaker than expected. It now appears that third quarter consumption will fall at a 2% annualized rate, which would be the worst performance since the end of 1991. A lot of the pressure is coming from autos, but consumers are cutting back broadly. And of course, we have the monthly jobs report this Friday, which will capture the market’s attention given the recent acceleration in the deterioration of employment conditions.
When the market moves dramatically in a single day, the volatility index (VIX) gets a lot of attention. Yesterday saw a big move in the VIX. According to Bespoke Investment Group, the 34% move yesterday was the sixth largest ever on a percentage basis. Large moves in the VIX aren’t necessarily indicative of any future direction in the market. Following the 10 largest one-day percentage moves since 1990, the S&P 500’s performance in the following day, week, month and quarter is mixed.
While large one-day moves tell little about the future direction of the market, the S&P 500’s performance following a high absolute reading in the VIX, more specifically above 40, is more consistent. Yesterday, the VIX closed at 46.7, which is the highest level in the index’s history. Since 1990, there have been four other periods when the VIX closed above 40. Following each period, the S&P 500’s performance was mixed the following week, but over the following month and quarter, the S&P 500 had consistently positive returns.
But before getting too excited, let me make one final comment on yesterday’s stock market action. It’s very rare to see selling pressure this great when the market is diving to a fresh 52-week low. It has only happened once in history and that was the crash of 1987. Historically, when we’ve seen similar action, the precedent is for a short-term bounce followed by extreme volatility which has typically, though not always, led to a medium-term lower low.
Regardless of the remedies proposed and tried, it’s becoming more and more likely we’re facing a global recession. As you know, that’s been our view. We’re seeing a collapse in global industrial demand as evidenced by oil, coal and steel declines yesterday. Here in the United States, a lot of economic news is being pushed to the back pages, but it’s grim nonetheless. First of course is the impact of the stock market correction: the 9% drop we saw yesterday wiped out $1.3 trillion in value for equities’ holders (twice the value of the failed rescue plan). August’s personal income and spending numbers were out yesterday and they showed real spending unchanged last month, weaker than expected. It now appears that third quarter consumption will fall at a 2% annualized rate, which would be the worst performance since the end of 1991. A lot of the pressure is coming from autos, but consumers are cutting back broadly. And of course, we have the monthly jobs report this Friday, which will capture the market’s attention given the recent acceleration in the deterioration of employment conditions.
When the market moves dramatically in a single day, the volatility index (VIX) gets a lot of attention. Yesterday saw a big move in the VIX. According to Bespoke Investment Group, the 34% move yesterday was the sixth largest ever on a percentage basis. Large moves in the VIX aren’t necessarily indicative of any future direction in the market. Following the 10 largest one-day percentage moves since 1990, the S&P 500’s performance in the following day, week, month and quarter is mixed.
While large one-day moves tell little about the future direction of the market, the S&P 500’s performance following a high absolute reading in the VIX, more specifically above 40, is more consistent. Yesterday, the VIX closed at 46.7, which is the highest level in the index’s history. Since 1990, there have been four other periods when the VIX closed above 40. Following each period, the S&P 500’s performance was mixed the following week, but over the following month and quarter, the S&P 500 had consistently positive returns.
But before getting too excited, let me make one final comment on yesterday’s stock market action. It’s very rare to see selling pressure this great when the market is diving to a fresh 52-week low. It has only happened once in history and that was the crash of 1987. Historically, when we’ve seen similar action, the precedent is for a short-term bounce followed by extreme volatility which has typically, though not always, led to a medium-term lower low.
The Cramer and the Dow
Without the Paulson plan, or if the plan is so watered down and delayed, I have been saying all bets are off and we could be in for a huge swoon. How huge?
I like to sit down and noodle on the actual components of the Dow Jones Industrial Average to give you a real sense of what can go wrong. And there is so much going wrong.
I don't want to bury the punchline, but when you add these worst-case prices together you get Dow Jones 8378, which, reluctantly, I admit is where we are going if everything fails with the plan and the economies here and worldwide are left to their own devices.
[10/10/08] Now that it has been hit, Cramer now says his worst case scenario was too bullish.
I like to sit down and noodle on the actual components of the Dow Jones Industrial Average to give you a real sense of what can go wrong. And there is so much going wrong.
I don't want to bury the punchline, but when you add these worst-case prices together you get Dow Jones 8378, which, reluctantly, I admit is where we are going if everything fails with the plan and the economies here and worldwide are left to their own devices.
[10/10/08] Now that it has been hit, Cramer now says his worst case scenario was too bullish.
Monday, September 29, 2008
biggest point loss ever
NEW YORK (CNNMoney.com) -- Stocks skidded Monday, with the Dow slumping nearly 778 points, in the biggest single-day point loss ever, after the House rejected the government's $700 billion bank bailout plan.
The day's loss knocked out approximately $1.2 trillion in market value, the first post-$1 trillion day ever, according to a drop in the Dow Jones Wilshire 5000, the broadest measure of the stock market.
The Dow Jones industrial average (INDU) lost 777.68, surpassing the 684.81 loss on Sept. 17, 2001 - the first trading day after the September 11 attacks. However the 7% decline does not rank among the top 10 percentage declines.
The Standard & Poor's 500 (SPX) index lost 8.8% and the Nasdaq composite (COMP) fell 9.1%. The S&P 500's loss was its largest point loss ever and its biggest percentage loss since the 1987 market crash.
The carnage was broad, with all 30 stocks in the Dow showing losses, along with just 497 stocks in the S&P 500.
Stocks tumbled ahead of the vote and the selling accelerated on fears that Congress would not be able come up with a fix for nearly frozen credit markets. The frozen markets mean banks are hoarding cash, making it difficult for businesses and individuals to get much-needed loans. (Full story)
"The stock market was definitely taken by surprise," said Drew Kanaly, chairman and CEO of Kanaly Trust Company, referring to the House vote. "If you watched the news stream over the weekend, it seemed like it was a done deal. But the money is being held hostage to the political process."
The day's loss knocked out approximately $1.2 trillion in market value, the first post-$1 trillion day ever, according to a drop in the Dow Jones Wilshire 5000, the broadest measure of the stock market.
The Dow Jones industrial average (INDU) lost 777.68, surpassing the 684.81 loss on Sept. 17, 2001 - the first trading day after the September 11 attacks. However the 7% decline does not rank among the top 10 percentage declines.
The Standard & Poor's 500 (SPX) index lost 8.8% and the Nasdaq composite (COMP) fell 9.1%. The S&P 500's loss was its largest point loss ever and its biggest percentage loss since the 1987 market crash.
The carnage was broad, with all 30 stocks in the Dow showing losses, along with just 497 stocks in the S&P 500.
Stocks tumbled ahead of the vote and the selling accelerated on fears that Congress would not be able come up with a fix for nearly frozen credit markets. The frozen markets mean banks are hoarding cash, making it difficult for businesses and individuals to get much-needed loans. (Full story)
"The stock market was definitely taken by surprise," said Drew Kanaly, chairman and CEO of Kanaly Trust Company, referring to the House vote. "If you watched the news stream over the weekend, it seemed like it was a done deal. But the money is being held hostage to the political process."
Thursday, September 25, 2008
Wamu, the largest bank to fail
As the debate over a $700 billion bank bailout rages on in Washington, one of the nation's largest banks -- Washington Mutual Inc. -- has collapsed under the weight of its enormous bad bets on the mortgage market.
The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion.
Seattle-based WaMu, which was founded in 1889, is the largest bank to fail by far in the country's history. Its $307 billion in assets eclipse the $40 billion of Continental Illinois National Bank, which failed in 1984, and the $32 billion of IndyMac, which the government seized in July.
The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion.
Seattle-based WaMu, which was founded in 1889, is the largest bank to fail by far in the country's history. Its $307 billion in assets eclipse the $40 billion of Continental Illinois National Bank, which failed in 1984, and the $32 billion of IndyMac, which the government seized in July.
Monday, September 22, 2008
Goldman Sachs and Morgan Stanley are now ordinary banks
The Federal Reserve said it has approved, pending a statutory five-day antitrust waiting period, the applications from Goldman Sachs (GS $128) and Morgan Stanley (MS $30) to become bank holding companies. Goldman said its decision was "accelerated by market sentiment" but provides it with access to permanent liquidity and funding. Morgan Stanley said the move offers the marketplace certainty about the strength of its financial position and its access to funding.
By scrapping their current structures, the two investment banks will be able to gather deposits and reduce their reliance on short-term funding markets. During the transition, the Fed said it will extend funding to broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley. With over $150 billion in assets, GS Bank USA will be one of the ten largest banks in the US. Goldman Sachs is trading lower.
By scrapping their current structures, the two investment banks will be able to gather deposits and reduce their reliance on short-term funding markets. During the transition, the Fed said it will extend funding to broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley. With over $150 billion in assets, GS Bank USA will be one of the ten largest banks in the US. Goldman Sachs is trading lower.
Friday, September 19, 2008
short selling ban
The federal government, trying to boost investor confidence in the face of a market crisis, took the dramatic step Friday of temporarily banning a practice of betting against financial stocks.
The move by the Securities and Exchange Commission will temporarily ban what is called short selling of nearly 800 financial stocks.
The 799 companies covered by the ban are an A-to-Z of the nation's financial institutions, including the powerhouse investment banks such as Goldman Sachs Group Inc. (nyse: GS - news - people ) and Morgan Stanley (nyse: MS - news - people ) and commercial banks running the gamut from Bank of America Corp. (nyse: BAC - news - people ) to Cape Fear Bank Corp. (nasdaq: CAPE - news - people )SLM Corp. (nyse: SLM - news - people ), which is known as Sallie Mae and is the biggest U.S. student lender is on the list, as are Charles Schwab Corp. (nasdaq: SCHW - news - people ), Berkshire Hathaway Inc. (nyse: BRK - news - people ) and Principal Financial Group (nyse: PFG - news - people ) Inc.
Washington Mutual Inc. (nyse: WM - news - people ), the nation's largest thrift, which has lost billions from subprime mortgage exposure and seen its shares plunge in recent weeks, also is on the SEC list.
The move by the Securities and Exchange Commission will temporarily ban what is called short selling of nearly 800 financial stocks.
The 799 companies covered by the ban are an A-to-Z of the nation's financial institutions, including the powerhouse investment banks such as Goldman Sachs Group Inc. (nyse: GS - news - people ) and Morgan Stanley (nyse: MS - news - people ) and commercial banks running the gamut from Bank of America Corp. (nyse: BAC - news - people ) to Cape Fear Bank Corp. (nasdaq: CAPE - news - people )SLM Corp. (nyse: SLM - news - people ), which is known as Sallie Mae and is the biggest U.S. student lender is on the list, as are Charles Schwab Corp. (nasdaq: SCHW - news - people ), Berkshire Hathaway Inc. (nyse: BRK - news - people ) and Principal Financial Group (nyse: PFG - news - people ) Inc.
Washington Mutual Inc. (nyse: WM - news - people ), the nation's largest thrift, which has lost billions from subprime mortgage exposure and seen its shares plunge in recent weeks, also is on the SEC list.
The Mother of all bailouts
Even after committing $285 billion over the past couple of weeks to bail out mortgage lenders Fannie Mae and Freddie Mac and insurer AIG, the Federal Government is now looking to fork over more — much more.
The Treasury Department and Federal Reserve now are making plans to buy troubled mortgage securities en masse from banks and other financial firms. This would amount to moving from ad hoc loans and bailouts to a more systematic approach to resolving the bad-debt problems at the heart of the current financial crisis. Systematic apparently sounds good — the Dow jumped 400 points after CNBC first reported Thursday that such an effort was in the works, and on Friday, markets around the world opened sharply higher. But the price tag could be steep. "We're talking hundreds of billions," Treasury Secretary Hank Paulson said at a press conference Friday morning. "This needs to be big enough to make a real difference and get at the heart of the problem." The more alarmist economists are saying the cost of resolving the current crisis will exceed $1 trillion. To put that in context, total U.S. government spending in 2007 was $2.7 trillion.
* * *
Speaking in Green Bay, Wisc., Republican presidential candidate Sen. John McCain said Friday that the Federal Reserve should stop bailing out failed financial institutions.
The Republican presidential hopeful said the U.S. central bank must get back to "its core business of responsibly managing our money supply and inflation." He laid out several recommendations for stabilizing markets in the financial crisis that has rocked Wall Street and taken over the presidential campaign.
McCain renewed his call for tighter regulation of financial markets, even though he has generally championed deregulation throughout his career in the Senate and as chairman of the influential Commerce Committee.
The Treasury Department and Federal Reserve now are making plans to buy troubled mortgage securities en masse from banks and other financial firms. This would amount to moving from ad hoc loans and bailouts to a more systematic approach to resolving the bad-debt problems at the heart of the current financial crisis. Systematic apparently sounds good — the Dow jumped 400 points after CNBC first reported Thursday that such an effort was in the works, and on Friday, markets around the world opened sharply higher. But the price tag could be steep. "We're talking hundreds of billions," Treasury Secretary Hank Paulson said at a press conference Friday morning. "This needs to be big enough to make a real difference and get at the heart of the problem." The more alarmist economists are saying the cost of resolving the current crisis will exceed $1 trillion. To put that in context, total U.S. government spending in 2007 was $2.7 trillion.
* * *
Speaking in Green Bay, Wisc., Republican presidential candidate Sen. John McCain said Friday that the Federal Reserve should stop bailing out failed financial institutions.
The Republican presidential hopeful said the U.S. central bank must get back to "its core business of responsibly managing our money supply and inflation." He laid out several recommendations for stabilizing markets in the financial crisis that has rocked Wall Street and taken over the presidential campaign.
McCain renewed his call for tighter regulation of financial markets, even though he has generally championed deregulation throughout his career in the Senate and as chairman of the influential Commerce Committee.
AIG booted from Dow, replaced by Kraft
A week of pain and ignominy for American International Group Inc. (NYSE:AIG - News) took another hard turn on Thursday when it got booted from the Dow Jones industrial average, ending the shortest term any company has spent in the blue-chip index since the Great Depression.
Taking its place come Monday's opening bell is Kraft Foods Inc. (NYSE:KFT - News), the first pure food company in the index in 23 years. Emblematic of the current market turmoil, the maker of such comfort foods as Oreo cookies and Kraft Cheese was apparently seen as a better fit for the world's most-watched stock index than another risky financial company.
AIG, which required an $85 billion government bailout to avert bankruptcy earlier this week, was added to the Dow in April 2004 and was touted at the time as representative of the growing importance of financial services to the U.S. economy.
[via chucks_angels]
Taking its place come Monday's opening bell is Kraft Foods Inc. (NYSE:KFT - News), the first pure food company in the index in 23 years. Emblematic of the current market turmoil, the maker of such comfort foods as Oreo cookies and Kraft Cheese was apparently seen as a better fit for the world's most-watched stock index than another risky financial company.
AIG, which required an $85 billion government bailout to avert bankruptcy earlier this week, was added to the Dow in April 2004 and was touted at the time as representative of the growing importance of financial services to the U.S. economy.
[via chucks_angels]
Thursday, September 18, 2008
a crazy day at the markets
An early rally in stocks that pushed the Dow up by 215 points soon after the open, fell apart by noon. Forty-five minutes later, the Dow was suddenly down as many as 150 points. But the situation reversed again, largely on news that the United Kingdom's securities regulator said it would ban short-selling of all financial stocks until Jan. 19.
Then, a huge rally erupted in American stocks this afternoon on reports that the Treasury Department was working on a plan to take bad assets off the books of financial institutions.
News of the plan was first reported by CNBC around 3 p.m., and stocks immediately shot higher. A At the close, the Dow Jones industrials were up 410 points, or 3.9%, to 11,020. The Standard & Poor's 500 Index was up 50 points, or 4.3%, to 1,206, and the Nasdaq Composite Index was up 100 points, or 4.8%, to 2,199.
The idea, as reported by CNBC, would involve creating a federally-chartered company that would take over the bad assets of banks, investment banks and others. The financial institutions would then be able to raise new capital and lend money and finance new ventures.
It's been that crazy.
Then, a huge rally erupted in American stocks this afternoon on reports that the Treasury Department was working on a plan to take bad assets off the books of financial institutions.
News of the plan was first reported by CNBC around 3 p.m., and stocks immediately shot higher. A At the close, the Dow Jones industrials were up 410 points, or 3.9%, to 11,020. The Standard & Poor's 500 Index was up 50 points, or 4.3%, to 1,206, and the Nasdaq Composite Index was up 100 points, or 4.8%, to 2,199.
The idea, as reported by CNBC, would involve creating a federally-chartered company that would take over the bad assets of banks, investment banks and others. The financial institutions would then be able to raise new capital and lend money and finance new ventures.
It's been that crazy.
Wednesday, September 17, 2008
financial crisis
Here's what currently in-vogue economist (and NYU professor) Nouriel Roubini posted to his popular blog back in August, and again the day after Wall Street's latest Black Monday:
This is by far the worst financial crisis since the Great Depression, not as severe as the Great Depression but second only to it. ... We are only barely midway in the meltdown of U.S. and global stock markets.
Professor Roubini is currently in vogue for good reason. The guy has basically been right about everything since the financial crisis began to unfold in earnest, penning a paper back in February that scripted (per its subtitle) "The Twelve Steps to Financial Disaster" -- steps that, alas, have indeed been taken.
* * *
The Biggest Financial Story of the Past 50 Years
Wow.
That about sums up the events of this past weekend, which saw the following events transpire:
● After failing to finagle a government bailout, Lehman Brothers (NYSE: LEH) filed for bankruptcy protection.
● Bank of America (NYSE: BAC) spurned Lehman Brothers and instead agreed to acquire Merrill Lynch (NYSE: MER).
● Insurer AIG (NYSE: AIG) begged the Federal Reserve for as much as $40 billion of assistance.
This is bigger than either JPMorgan Chase's (NYSE: JPM) buyout of Bear Stearns or the government bailout of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). Our colleague Bill Mann, in fact, has deemed this weekend's credit-crunch-inspired string of bailouts, buyouts, and bankruptcies "the biggest financial story of the past half century."
Bigger than the dot-com bust? Yep. Bigger than Black Monday in 1987? Yep. Bigger than the oil shock of the 1970s? Mmmhmm.
NYU economics professor Nouriel Roubini, George Soros, and the International Monetary Fund have all called the overall credit crisis the worst since the Great Depression.
This is by far the worst financial crisis since the Great Depression, not as severe as the Great Depression but second only to it. ... We are only barely midway in the meltdown of U.S. and global stock markets.
Professor Roubini is currently in vogue for good reason. The guy has basically been right about everything since the financial crisis began to unfold in earnest, penning a paper back in February that scripted (per its subtitle) "The Twelve Steps to Financial Disaster" -- steps that, alas, have indeed been taken.
* * *
The Biggest Financial Story of the Past 50 Years
Wow.
That about sums up the events of this past weekend, which saw the following events transpire:
● After failing to finagle a government bailout, Lehman Brothers (NYSE: LEH) filed for bankruptcy protection.
● Bank of America (NYSE: BAC) spurned Lehman Brothers and instead agreed to acquire Merrill Lynch (NYSE: MER).
● Insurer AIG (NYSE: AIG) begged the Federal Reserve for as much as $40 billion of assistance.
This is bigger than either JPMorgan Chase's (NYSE: JPM) buyout of Bear Stearns or the government bailout of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). Our colleague Bill Mann, in fact, has deemed this weekend's credit-crunch-inspired string of bailouts, buyouts, and bankruptcies "the biggest financial story of the past half century."
Bigger than the dot-com bust? Yep. Bigger than Black Monday in 1987? Yep. Bigger than the oil shock of the 1970s? Mmmhmm.
NYU economics professor Nouriel Roubini, George Soros, and the International Monetary Fund have all called the overall credit crisis the worst since the Great Depression.
money fund breaks the buck
Extraordinary events are piling up on Wall Street so fast, it's hard to know where to focus. Forgetting the prospective bailout of AIG for a moment, since every media outlet is on that one, the most shocking development of the day for me is news that a $60 billion money market fund "broke the buck" on Monday due to losses in Lehman Brothers paper that it held. So much for the safety of "cash".
The Reserve Primary Money Fund (RPFXX) has become the first money-market fund in more than a decade to lose money because its board was forced to write down $785 million worth of LEH debt to zero. The fund has reportedly seen assets plunge by 60% to $23 billion in the past two days after holders got wind of the fact that it would have to cut its net asset value to less than its usual $1 per share.
[9/25/08] Help is on the way for some money market investors: TD Ameritrade says it's going to put up $50 billion to make sure its brokerage customers who have money in the Reserve Primary Fund suffer no losses. A drop in the fund's net asset value last week left investors with less than $1 for every dollar invested. Meanwhile, Ameriprise Financial says it'll backstop losses with up to $33 million. The firms said those amounts represent the cost of making up the 3 cents per share their customers stand to lose (the fund's net asset value dropped to 97 cents a share last week).
The Reserve Primary Money Fund (RPFXX) has become the first money-market fund in more than a decade to lose money because its board was forced to write down $785 million worth of LEH debt to zero. The fund has reportedly seen assets plunge by 60% to $23 billion in the past two days after holders got wind of the fact that it would have to cut its net asset value to less than its usual $1 per share.
[9/25/08] Help is on the way for some money market investors: TD Ameritrade says it's going to put up $50 billion to make sure its brokerage customers who have money in the Reserve Primary Fund suffer no losses. A drop in the fund's net asset value last week left investors with less than $1 for every dollar invested. Meanwhile, Ameriprise Financial says it'll backstop losses with up to $33 million. The firms said those amounts represent the cost of making up the 3 cents per share their customers stand to lose (the fund's net asset value dropped to 97 cents a share last week).
Tuesday, September 16, 2008
Dow 8360?
A market that falls below its 200-week (3.8-year) average usually heads straight for its 200-month (16-year) average. I learned this concept from Belkin during the past bear market, and it was great guidance to the then-shocking deterioration in Intel (INTC, news, msgs), Cisco Systems (CSCO, news, msgs) and Oracle (ORCL, news, msgs). Lest you think that's a crazy idea, the Philadelphia KBW Bank Index ($BKX), which encompasses Bank of America and Wachovia, already is well below this level. So are General Motors (GM, news, msgs), insurer American International Group (AIG, news, msgs), International Paper (IP, news, msgs) and Merck (MRK, news, msgs). General Electric (GE, news, msgs) is close. Moreover, you should know that the 200-month average was the exact spot where the plummeting Nasdaq Composite Index ($COMPX) finally bounced and recovered in 2002. The 200-month averages for the big indexes now are 981 for the S&P 500 Index, 1,771 for the Nasdaq and 8,360 for the Dow industrials.
The average bear market of the past century has lasted less than a year and generated losses of 30%. But ones that lasted more than 12 months showed an average loss of 42%. All of these figures are averages with relatively few examples, however, and thus deceiving in their exactitude. The current bear market was caused by a perfect storm of trouble: a real-estate collapse, a credit disaster, an oil price mega-spike, recession and inflation. Will it persist for only an average amount of time and decline by only an average amount? That's an open question. Put me down as doubtful. For your score card, this bear market has so far lasted 12 months and generated a loss of 17%.
A reversal higher can be swift and big, and it is usually disbelieved at the start. Eventually, all bear markets end -- very often with a roar and when least expected. The only statistical measure that I have seen work effectively in the past 20 years to signify the end of a major bear phase is a one-two punch in which the market experiences a session in which 90% of prices and 90% of volume is to the downside, and then, within three days, the opposite occurs: a 90% upside day. Most recently, this measure -- invented by the nation's oldest technical research firm, Lowry's Reports -- kicked in to signify the end of a 3-year-old bear market in late March 2003. When that massive buying occurs, most investors don't believe the inflection point is really occurring and consider it just one more rally to sell into or short. But in reality, that has been the signature of the end of a bear. Despite recent highly volatile up-and-down trading, this combination has not yet occurred.
[via doctorm_33139]
The average bear market of the past century has lasted less than a year and generated losses of 30%. But ones that lasted more than 12 months showed an average loss of 42%. All of these figures are averages with relatively few examples, however, and thus deceiving in their exactitude. The current bear market was caused by a perfect storm of trouble: a real-estate collapse, a credit disaster, an oil price mega-spike, recession and inflation. Will it persist for only an average amount of time and decline by only an average amount? That's an open question. Put me down as doubtful. For your score card, this bear market has so far lasted 12 months and generated a loss of 17%.
A reversal higher can be swift and big, and it is usually disbelieved at the start. Eventually, all bear markets end -- very often with a roar and when least expected. The only statistical measure that I have seen work effectively in the past 20 years to signify the end of a major bear phase is a one-two punch in which the market experiences a session in which 90% of prices and 90% of volume is to the downside, and then, within three days, the opposite occurs: a 90% upside day. Most recently, this measure -- invented by the nation's oldest technical research firm, Lowry's Reports -- kicked in to signify the end of a 3-year-old bear market in late March 2003. When that massive buying occurs, most investors don't believe the inflection point is really occurring and consider it just one more rally to sell into or short. But in reality, that has been the signature of the end of a bear. Despite recent highly volatile up-and-down trading, this combination has not yet occurred.
[via doctorm_33139]
Monday, September 15, 2008
Dow drops 500
Stocks tanked Monday, as investors reeled amid the fallout from the largest financial crisis in years after Lehman Brothers filed for the biggest bankruptcy in history and Bank of America said it would buy Merrill Lynch in a $50 billion deal.
Treasury prices rallied as investors sought the comparative safety of government debt, sending the corresponding yields lower. Oil prices tumbled, falling well below $100 a barrel on slowing global economic growth. The dollar rallied versus other major currencies and gold prices spiked.
The Dow Jones industrial average (INDU) lost 500 points, or 4.4%, according to early tallies. It was the biggest one-day point decline for the Dow since Sept. 17, 2001, when the market reopened for trading after having been closed in the aftermath of 9/11 terrorist attacks.
Treasury prices rallied as investors sought the comparative safety of government debt, sending the corresponding yields lower. Oil prices tumbled, falling well below $100 a barrel on slowing global economic growth. The dollar rallied versus other major currencies and gold prices spiked.
The Dow Jones industrial average (INDU) lost 500 points, or 4.4%, according to early tallies. It was the biggest one-day point decline for the Dow since Sept. 17, 2001, when the market reopened for trading after having been closed in the aftermath of 9/11 terrorist attacks.
Lehman files bankruptcy
Stocks plunge as worries now mount about AIG's future. Lehman Bros. files for bankruptcy. Bank of America will buy Merrill Lynch.
The fate of Lehman Bros. (LEH, news, msgs) and Merrill Lynch (MER, news, msgs) is sealed, with Lehman filing for bankruptcy and Merrill agreeing to be sold to Bank of America (BAC, news, msgs).
Wall Street is now watching and wondering what will happen to insurance giant American International Group (AIG, news, msgs), whose stock plunged $6.16, or 50.7%, to $5.98 this afternoon.
Shares of Lehman plunged $3.44, or 94.3%, to 21 cents per share after the company this morning filed for bankruptcy protection.
Wall Street is now left with two brokerages: Goldman and Morgan Stanley.
The fate of Lehman Bros. (LEH, news, msgs) and Merrill Lynch (MER, news, msgs) is sealed, with Lehman filing for bankruptcy and Merrill agreeing to be sold to Bank of America (BAC, news, msgs).
Wall Street is now watching and wondering what will happen to insurance giant American International Group (AIG, news, msgs), whose stock plunged $6.16, or 50.7%, to $5.98 this afternoon.
Shares of Lehman plunged $3.44, or 94.3%, to 21 cents per share after the company this morning filed for bankruptcy protection.
Wall Street is now left with two brokerages: Goldman and Morgan Stanley.
Friday, September 12, 2008
Asia stumbles
A 3.3% slide in the Shanghai Composite Index in China led a sell-off in Asia, sending shares to the lowest level in 21 months. Worries about asset quality at some of the major banks in China and fears growth is slowing were responsible for the latest slide. According to the Financial Times, Beijing is coming under increasing pressure to enact measures to stop the slide in stock prices, but so far, authorities have done little to signal any actions to prop up the market. Since peaking in October, Chinese shares have lost an astonishing 66%.
-- Charles Schwab, Morning Market View, September 11, 2008
-- Charles Schwab, Morning Market View, September 11, 2008
gurufocus stock performance
It has been a very tough year in the market. The S&P500 is down about 15% as of Sept. 10. Here we like to review the performances of our model portfolios. Each model portfolio consists of the top 25 stocks top ranked with its criteria. How did the model portfolios do in such a market?
All four model portfolios were rebalanced on Jan. 2, based on the close prices of Dec. 31, 2007 . Although all four model portfolios are down for this year, they all outperformed the S&P500.
* * *
In case you were wondering if there is any stock on all four lists, yes there is one. That stock is SHLD which has gone down from 116.01 to 99.09 (-14.58%) since being bought on 1/2/06. There are two stock on three of the lists. C has gone from 47.87 to 18.61 (-61.12%) since being bought on 1/2/06. CMCSK has gone from 17.3067 to 21.42 (+23.77%) since being bought on 1/1/06. Stocks that are on two of the lists are AXP, BRK.B, BSX, CNQ, HD, KO, LOW, MSFT, PENN, TGT, UNH, WB, WFC, WMT, XOM.
All four model portfolios were rebalanced on Jan. 2, based on the close prices of Dec. 31, 2007 . Although all four model portfolios are down for this year, they all outperformed the S&P500.
* * *
In case you were wondering if there is any stock on all four lists, yes there is one. That stock is SHLD which has gone down from 116.01 to 99.09 (-14.58%) since being bought on 1/2/06. There are two stock on three of the lists. C has gone from 47.87 to 18.61 (-61.12%) since being bought on 1/2/06. CMCSK has gone from 17.3067 to 21.42 (+23.77%) since being bought on 1/1/06. Stocks that are on two of the lists are AXP, BRK.B, BSX, CNQ, HD, KO, LOW, MSFT, PENN, TGT, UNH, WB, WFC, WMT, XOM.
Thursday, September 11, 2008
large cap value down again
According to Fama & French, large-cap value stocks have fallen for two consecutive years only five times in the past 100 years:
Great Depression: 1929-1932
World War II: 1939-1941
Arab oil embargo: 1973-1974
Collapse of the Internet bubble: 2001-2002
Collapse of the housing bubble: 2007-2008
It's rare, but this kind of marketwide value depression is a golden opportunity.
Great Depression: 1929-1932
World War II: 1939-1941
Arab oil embargo: 1973-1974
Collapse of the Internet bubble: 2001-2002
Collapse of the housing bubble: 2007-2008
It's rare, but this kind of marketwide value depression is a golden opportunity.
buying low p/e stocks
While it is not the end-all-be-all metric, the beauty behind the P/E ratio is its simplicity. Logic would argue that a stock trading at a lower P/E than its peers could be mispriced and therefore a potential value. Finding mispriced stocks is a fundamental principle of value investing, and there is plenty of evidence that low-P/E stocks outperform higher-P/E stocks over the long haul.
Despite the evidence that low-P/E stocks outperform their high-P/E counterparts, it's not enough to simply pick stocks with the lowest P/E ratio. It is important to look a company's risk and growth potential along with the quality of its earnings.
Despite the evidence that low-P/E stocks outperform their high-P/E counterparts, it's not enough to simply pick stocks with the lowest P/E ratio. It is important to look a company's risk and growth potential along with the quality of its earnings.
Wednesday, September 10, 2008
raising and cutting dividends
Remarkably, Schwab research has found that stocks that have raised their dividends in each of the past five years have underperformed all other dividend-paying stocks by almost 3% annually since 1990! What's more, stocks that cut dividends in the prior year have outperformed all other dividend-yielding stocks by about 2.5% per year over the same time—possibly because investors view dividend cuts as a signal that management is serious about addressing financial difficulties facing the firm.
Saturday, September 06, 2008
institutional selling
At Legg Mason (NYSE: LM), for instance, there was $18.4 billion in net redemptions in the quarter ending in June. Amazingly, that was an improvement from the $19.2 billion in the previous one. The fund run by Bill Miller, whose legendary 15-year streak of beating the market was unparalleled in recent times, represented around $2.4 billion worth of Legg Mason's first-half redemptions.
As investors' money leaves an institution's control, fund managers can be forced to sell stock to meet those redemptions. When billions of dollars flow out of a fund, its manager is left with no choice but to sell some of the stocks it holds to come up with the cash. Since many of these funds share the same holdings, all of that forced selling drives their prices down.
In a perfect world, a fund manager would be able to pick which shares to sell based on valuation. The more expensive a stock relative to its true worth, the more of it the fund manager would sell, thereby minimizing the long-term damage to the fund. In the real world, however, a fund manager facing huge redemptions will sell whatever stocks happen to be liquid enough to support it.
There aren't all that many stocks with enough trading volume to support a sell-off of that magnitude. Over the past month, for instance, there have only been 69 individual company stocks across the U.S. and Canada with at least half a billion dollars' worth of average daily trade volume. They're virtually all names you know.
If a single fund manager needs to sell tens of millions of dollars in a single day just to meet redemptions, these highly liquid stocks are about the only ones that manager can easily sell. Multiply that impact by all the fund managers who face redemptions in a generally declining market, and you can see how stock prices can quickly plummet.
... As an individual investor managing your own money, you're not beholden to the redemption pressure that massive mutual funds feel. On the contrary, you can do what those fund managers only dream of doing: buy into an irrational, forced sell-off.
As investors' money leaves an institution's control, fund managers can be forced to sell stock to meet those redemptions. When billions of dollars flow out of a fund, its manager is left with no choice but to sell some of the stocks it holds to come up with the cash. Since many of these funds share the same holdings, all of that forced selling drives their prices down.
In a perfect world, a fund manager would be able to pick which shares to sell based on valuation. The more expensive a stock relative to its true worth, the more of it the fund manager would sell, thereby minimizing the long-term damage to the fund. In the real world, however, a fund manager facing huge redemptions will sell whatever stocks happen to be liquid enough to support it.
There aren't all that many stocks with enough trading volume to support a sell-off of that magnitude. Over the past month, for instance, there have only been 69 individual company stocks across the U.S. and Canada with at least half a billion dollars' worth of average daily trade volume. They're virtually all names you know.
If a single fund manager needs to sell tens of millions of dollars in a single day just to meet redemptions, these highly liquid stocks are about the only ones that manager can easily sell. Multiply that impact by all the fund managers who face redemptions in a generally declining market, and you can see how stock prices can quickly plummet.
... As an individual investor managing your own money, you're not beholden to the redemption pressure that massive mutual funds feel. On the contrary, you can do what those fund managers only dream of doing: buy into an irrational, forced sell-off.
Are the banks cheap?
Since the beginning of the credit crisis last summer, bank stocks have been absolutely murdered -- the KBW Bank index, which tracks 24 of the most prominent U.S. commercial banks (including Bank of America (NYSE: BAC), Citigroup (NYSE: C), and JPMorgan Chase (NYSE: JPM)) is down more than 40% from a year ago, at levels not seen in almost a decade.
Prior to 2008, the last time the Bank index was at this level was the fourth quarter of 1998. Russia had defaulted on its debt over the summer, precipitating the meltdown of hedge fund LTCM. In response, the Fed organized a private rescue of LTCM by a consortium of 14 banks and broker-dealers -- the fund’s massive positions were thought to threaten the stability of the financial system.
If that sounds familiar, it should -- the summer of 1998 offers direct parallels with the current environment. In March, for example, the Treasury facilitated JPMorgan Chase’s rescue of Bear Stearns on the assumption that the troubled broker’s failure posed an unacceptable risk to the financial system.
As serious as the current problems are, when a bubble deflates, it’s common for sentiment to shift from unbridled optimism to exaggerated pessimism. That spurred my curiosity: What is a fair value for the KBW Bank Index?
* * *
[9/8] Which banks to buy?
Prior to 2008, the last time the Bank index was at this level was the fourth quarter of 1998. Russia had defaulted on its debt over the summer, precipitating the meltdown of hedge fund LTCM. In response, the Fed organized a private rescue of LTCM by a consortium of 14 banks and broker-dealers -- the fund’s massive positions were thought to threaten the stability of the financial system.
If that sounds familiar, it should -- the summer of 1998 offers direct parallels with the current environment. In March, for example, the Treasury facilitated JPMorgan Chase’s rescue of Bear Stearns on the assumption that the troubled broker’s failure posed an unacceptable risk to the financial system.
As serious as the current problems are, when a bubble deflates, it’s common for sentiment to shift from unbridled optimism to exaggerated pessimism. That spurred my curiosity: What is a fair value for the KBW Bank Index?
* * *
[9/8] Which banks to buy?
Fannie and Freddie
The government has formulated a plan to put troubled mortgage giants Fannie Mae and Freddie Mac under federal control, dismiss their top executives and prop them up financially, federal officials told the two companies yesterday, according to three sources familiar with the conversations.
Under the plan, which could prompt one of the most sweeping government interventions in the workings of financial markets in U.S. history, federal officials would place the firms under a conservatorship, a legal status giving the government the option and time to restructure and revive the companies, the sources said. The value of the companies' common stock would be diluted but not wiped out; while the holdings of other securities, including company debt and preferred shares might be protected by the government.
[9/8] What's all this mean to shareholders?
Under the plan, which could prompt one of the most sweeping government interventions in the workings of financial markets in U.S. history, federal officials would place the firms under a conservatorship, a legal status giving the government the option and time to restructure and revive the companies, the sources said. The value of the companies' common stock would be diluted but not wiped out; while the holdings of other securities, including company debt and preferred shares might be protected by the government.
[9/8] What's all this mean to shareholders?