Daily Market Reports | Sep 13 2008
By Rudi Filapek-Vandyck
It’s all about Lehman Brothers now.
While you are reading this, representatives of the US government, the Federal Reserve and various financial institutions are weighing up their options, deciding what road to take and ultimately they will decide the fate of one of those long standing Wall Street icons; Lehman Brothers.
Whatever the outcome, and it is very likely sometime over the weekend an announcement will be made, it is but a fait acompli that from next week onwards the US will have lost its fourth largest investment banker. The previous number five, Bear Stearns, went belly-up in an earlier phase of this financial crisis.
There will be more than one suspicious glance towards Merrill Lynch, the number three.
However, it remains yet to be seen whether a “solution” to Lehman’s demise can inject a similar amount of relief into financial markets. Some commentators are worried that if the US government does not commit in a similar manner as it did with Bear Stearns this will actually work in a negative way as investors will feel they no longer have the assistance of the US government while ploughing through this crisis. Being left on its own is what makes the financial sector scared right now.
Especially since Lehman is not the only one in dire need of a “solution”. Washington Mutual, also known as WaMu, tried to inject some optimism into the market on its own by reporting it still has US$50 billion in liquidity while its retail deposit base remained at levels reached at the end of 2007. The company also said it expects its third-quarter loan-loss provision to be about US$4.5 billion, down from US$5.9 billion in the second quarter. All this, however, couldn’t prevent a ratings downgrade by Moody’s to below investment grade on the basis of “reduced financial flexibility”.
Similar to Lehman Brothers, WaMu is rumoured to be in talks with at least one potential buyer.
The biggest casualty on Friday was, however, American International Group, AIG, whose large exposure to mortgages pushed the insurance company’s shares down more than 30% on the day. Thus AIG became the day’s biggest loser for both the Dow and S&P.
All worries culminated in US bond traders starting to price in another rate cut by the Federal Reserve at the next meeting, an option flatly dismissed by economists as another rate cut won’t be of any help in this matter at all.
But the market is looking for something to trade, anything! And so it was that the US dollar was sold off heavily – on renewed worries about US financials and expectations of a rate cut, were you to believe media reports elsewhere. Others, FNArena included, will tell you a bounce for the euro and other currencies against the greenback had become nothing but overdue (see also our story “On The US Dollar, Commodities And Gold” on Friday).
So the US dollar sold off, and financials had another horrible day. What to trade then?
As crude oil made a slight recovery, after initially dipping below US$100 per barrel, energy stocks once again become the trade du jour.
Europe had already set the tone with big gains recorded for resources stocks across the board and the FTSE in London, for instance, made a leap in excess of 3% on the back of fierce buying in resources stocks.
Bear markets… funds flowing into one sector are coming out of another one…
The Dow Jones Industrial Average ultimately closed down 11.72 points at 11,421.99, while the S&P 500 edged up 2.64 points, or 0.2%, at 1251.69. The Nasdaq gained 3.05 points, or 0.1%, to 2261.27.
Would you believe the US share market had a positive week with the Dow advancing 1.8% while the S&P added 0.8% and the Nasdaq edged up 0.2%?
Greg Peel is an expert guest on Sky Business’s Business View today (Saturday, 9-10am). He’ll be back writing the Overnight Report on Tuesday.
