Wall Street shows some signs of confidence

Indices post their largest weekly gains in months

US stocks were quick enough in responding to some announcements made in the Wall Street last week and the three major indices witnessed their largest weekly gains in quite a few months for the week that ended on Friday, 13 March, 2009. Dow, Nasdaq and S&P 500 – all gaining 9% to 10% in a week, is something, investors have stopped expecting in recent times.

All the major announcements during the week were related to banks. Banks (Citigroup, Banc of America and JP Morgan Chase) being profitable in US till date in 2009 also a word from Citigroup that it will not require additional funds from US government this year gave investors some reason to breathe a sigh of relief. Other than these, reinstitution of the uptick rule and suspension of mark-to-market accounting were the other market drivers.

During the week, investor Warren Buffet said that he is not sure about the US economy in the short term. But at the same time he said that he remained confident about the long term potential of US.

The Dow Jones Industrial Average gained 598 points (9%) for the week to end at 7223.98. Tech - heavy Nasdaq gained 137 (10.6%) to end at 1,431.5. S&P 500 gained 73.2 (10.7%) to end at 756.55.

Strength in financial sector followed by consumer discretionary, industrials and materials sector helped the indices post huge gains for the week which mainly witnessed two days of good rally – one on Tuesday, 10 March, 2009 and Thursday, 12 March, 2009. the Dow gained 380 points and 240 points respectively on these two days. On Tuesday, Citigroup Chairman, Vikram Pandit said that the bank has earned profits in the first two months of 2009. On Thursday, BofA Chairman followed suit.

there was somme good news in the economic front also, mainly the retail sales data. The Commerce Department reported during the week that U.S. retail sales began the year 2009 much stronger than expected. It came after a disastrous holiday shopping season in 2008. Retail sales dropped 0.1% on a seasonally adjusted basis in February, better than the 0.4% decline expected. More importantly, January's sales gain was revised much higher, to a 1.8% growth rate from the 1% increase estimated a month ago.

Retail sales are down 8.6% in the past year and had declined for a record six straight months before January's surprising gain. Sales had plunged 3.1% in December. The data also acted as some sort of market mover during the week.

On Friday, 13 March, 2009, stocks were a bit shaky earlier during the day but then showed solid gains in the second half. The Dow Jones Industrial Average ended higher by 54 points at 7,223, the Nasdaq closed higher by 5.5 points at 1,431 and the S&P 500 closed higher by 5.8 points at 756. Other than financials, healthcare was a strong performing sector. Energy was the main laggard of the day.

Among major economic news at Wall Street on Friday, the Commerce Department reported that U.S. trade deficit narrowed by 9.7% to $36.0 billion in January on an across-the-board decline in global trade flows. The drop was helped by a continued decline in oil prices and a sharp drop in exports.

In inflation-adjusted terms, the trade deficit widened slightly. Export volumes fell a record 8.6% in January, while import volumes fell 4.6%. The U.S. trade deficit was $59.16 billion in the same month last year. This is the sixth straight monthly drop in the U.S. trade gap, the longest string since the latest data series was started in 1992.

There were some activity in M&A area this week. Less than two months after Pfizer announced it will acquire Wyeth for nearly $68 billion in cash and stock, Merck and Schering-Plough announced they will merge their companies. Schering-Plough shareholders will receive 0.5767 shares of Merck and $10.50 in cash for each share of Schering-Plough.

In another set of merger news, it was reported today that Genentech and Roche are progressing toward a deal. As per reports, Roche is expected to pay $95 for each share of Genentech. Also, among impending mergers, Dow Chemical has agreed to pay $78 in cash for each share of Rohm & Haas.

On Friday, crude-oil futures for light sweet crude for April delivery closed at $46.25/barrel (lower by $0.78 or 1.7%) on the New York Mercantile Exchange. For the week, crude ended higher by 1.6%.

On that day, the IEA said in the monthly report that global oil supply in February is estimated at 83.9 million barrels a day, down 1 million barrels from a month ago and 3.4 million barrels from a year ago. The agency also lowered its forecast for this year's global oil demand to 84.4 million barrels a day, 1.5%, or 1.2 million barrels, lower than a year ago.

For the year 2009, Dow, Nasdaq and S&P 500 are down by 17.7%, 9.2% and 16.2% respectively.

WallStreet Cartoons

WallStreet Cartoons

Wall Street tumbles

Wall Street tumbled again Monday, joining a sell-off around the world as fears grew that the financial crisis will cascade through economies globally despite bailout efforts by the US and other governments. The Dow Jones industrials skidded nearly 500 points and fell below 10,000 for the first time in four years, while the credit markets remained under strain.

The markets have come to the sobering realization that the Bush administration's $700 billion rescue plan won't work quickly to unfreeze the credit markets, and that many banks are still having difficulty gaining access to cash. That's caused investors to exit stocks and move money into the relative safety of government debt.

Over the weekend, governments across Europe rushed to prop up failing banks. The German government and financial industry agreed on a $68 billion bailout for commercial-property lender Hypo Real Estate Holding AG, while France's BNP Paribas agreed to acquire a 75 percent stake in Fortis's Belgium bank after a government rescue failed.

The governments of Germany, Ireland and Greece also said they would guarantee bank deposits.

The Federal Reserve also took fresh steps to help ease seized-up credit markets. The central bank said Monday it will begin paying interest on commercial banks' reserves and will expand its loan program to squeezed banks.

Investors took a bleak view of the future, seeing no end to the crisis in the near term.

"This is a psychologically important moment that we passed below the 10,000 level," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. "But, the issues are worldwide. The fact is people are scared and the only thing they're doing is selling."

In midmorning trading, the Dow Jones industrial average fell 443.08, or 4.29 percent, to 9,882.30, dropping below 10,000 for the first time since Oct. 29, 2004. At one point, the Dow was down nearly 600.

Broader indexes also tumbled. The Standard & Poor's 500 index shed 53.12, or 4.83 percent, to 1,046.11; and the Nasdaq composite index fell 101.07, or 5.19 percent, to 1,846.32. The Russell 2000 index of smaller companies dropped 29.31, or 4.73 percent, to 590.09.

There were only 78 advancing stocks on the New York Stock Exchange, compared to 3,080 decliners. Volume came to 512.4 million shares.

Wall Street Nightmares

For those of us who had only a nodding acquaintance with Wall Street, news this week has been bafflingly littered with the big Wall Street names. Lehman Brothers filed for bankruptcy, the venerable Merrill Lynch was taken over by Bank of America and AIG, bailed out by the US Fed.

So, how has the housing crisis in the US impacted Wall Street? What were the repercussions on the Indian markets?
The (sub)prime crisis

Taking advantage of the housing boom in the US, mortgage banks disbursed loans to many sub-prime (less credit worthy) borrowers.

To compensate for the risk undertaken, these loans were given at higher interest rates. To raise more money, banks packaged these loans into securities and sold them to investment banks.

These highly leveraged positions paid off as long as the housing market continued its upward move, with rising property prices.

When recession set in, borrowers began to default. The banks seized properties and foreclosures rose. But, by then, the fall in the housing market was so steep that the foreclosed properties were difficult to sell.

The mortgage banks began to make huge losses on the outstanding loans and foreclosed assets. In the process, investment bankers who bought securities based on these loans too were hurt.
Bear Stearns flagged it off...

Bear Stearns, the US mortgage giant, was the first of the large investment institutions to fail on sub prime related issues, after it declared losses on mortgage lending in March 2008. Unable to sustain operations, the institution was sold to JP Morgan Chase.

Many other small and mid-sized firms in the US too declared losses on sub-prime mortgages. This triggered a lowering of interest rates by the US central bank- the Fed- to ease the credit crunch in the economy.

Following the Bear Stearns episode, there were similar problems at Fannie Mae and Freddie Mac, the two other mortgage giants of the country. This prompted the Fed to infuse $200 billion to shore up these institutions.

Just when the markets thought the worst was over, came the news of Lehman Brothers’ filing for bankruptcy on huge mortgage-related losses.

And even before the market could absorb this shock, came similar news from Merrill Lynch and AIG (US’ largest insurer). The stock markets plummeted. As the week drew to a close, the US Fed, with other central banks, assured the markets that the impact of the credit crunch would be contained.

Bailouts have been put together for the troubled banks with AIG taken over by the Fed and other investment banks in takeover talks with the stronger firms. The names that you just read are not of some neighbourhood bankers. All are renowned global bankers which served some of the largest corporations, governments and high net worth investors worldwide.

Also, several banks of other nations have invested in funds of these bankers.

Impact on the Indian market

FIIs, who are the key source of liquidity in Indian stock markets, continue to dominate , with sizeable holdings in many stocks. A weak stock market also makes foreign PE (private equity) funds hesitant to bring in money. In a scenario where the cost of borrowing is already high, poor foreign inflows (both FII and FDI) worsen the funding situation making fund availability tougher for corporates.

Given the size of FII holdings in stocks, bulk selling by foreign institutions has the potential to severely impact individual stocks as well broader markets. The Sensex lost 6 per cent off its value on the day the Bear Stearns collapse came to light.

But Lehman had already liquidated a significant part of its India holdings when its troubles came to light. However what worsened the initial falls this week were fears that other foreign institutions that run similar risks may also sell their holdings.Banking stocks were in the limelight, as they are most vulnerable to the credit crunch. A leading domestic bank that had exposure to the bonds of the Lehman Brothers faced tough times last week. Until reports clarifying that the bank expected recovery of the investments made came in, rumours had triggered huge selling in the stock.

The Banking Index too was in the red until the Finance Minister gave the assurance that the public sector banks had limited exposure to Lehman’s assets and that the Indian financial sector was well-placed to handle the crisis.

Lessons from Lehman

Are there lessons for Indian investors from the events on Wall Street? Here are a few. If the housing collapse in the US was triggered by ordinary borrowers being unable to repay loans, interest rates back home too have been rising. The Indian housing market has been showing signs of slowdown with property prices correcting in many markets. This should set the alarm bells ringing for borrowers, as also bankers. As banks become more cautious in offering credit to individuals, it is time for us to take stock of whether we have enough of a safety margin on our borrowings, be they home loans, credit cards or any other kind of credit. Stock market investors obviously should brace for choppy markets ahead!

via Businessline

Is this the great depression of modern era ?

Wall Street, which for long has been the symbol of the US' superpower status, came crashing down, as two of its storied financial firms became history, and another one was rescued by the government from the brink of a collapse. The shocking events, which sent global financial markets into a tailspin, came just a few days after Washington's bailout of Freddie Mac and Fannie Mae, and could change the financial landscape in the US. Put on the backfoot by the alarming and disastrous developments on Wall Street, the Bush regime launched a multi-pronged assault to salvage the rapidly deteriorating situation. By the close of trading on Friday, Washington was still putting together a mega rescue package to get to the root of the credit crisis and restore sanity in financial markets. And, though stock markets across the world cheered the efforts of governments and regulators to stem the financial firestorm, doubts persisted over the fate of Wall Street and its larger ramifications for the global economy.

It all started with the 158-year old Lehman Brothers filing for bankruptcy as it failed to find any buyers and Washington refused to lend a helping hand. Fearing a similar fate, Merrill Lynch decided to sell itself to Bank of America. It didn't stop there, as insurance giant AIG too almost blew up. But, unlike Lehman, it was a little more fortunate, as the Federal Reserve lent it $80bn for two years in return for an 80% stake. Amid all the gloom, Morgan weighed its options, and kicked off merger talks with Wachovia and China's sovereign wealth fund. Washington Mutual too put itself on the block. The contagion was not restricted to the US alone. Across the Atlantic, the British government too had to engineer the rescue of HBOS, the biggest housing mortgage lender in the UK, by asking Lloyd TSB to acquire it. Another British bank Barclays agreed to purchase Lehman's core US businesses after dropping a plan to buy the whole of it. Similar deals were being contemplated for buying Lehman's various businesses in Asia and Europe.

One of the biggest money market funds imposed a seven-day freeze on investor redemptions after the net asset value of its shares fell below $1. The rates on loans that banks charge each other rapidly rose in the turmoil. The London interbank offered rate, or LIBOR, jumped by 3.33 percentage points, to 6.44%, on its overnight dollar rate, its biggest increase ever. Yields on three-month Treasury bills fell to their lowest level since daily records began in 1954. Trading was suspended on Russia’s stock markets when they went into a free-fall that was not halted even by a government injection of $44bn into the country’s three biggest banks.

In the midst of it all, the central banks swung into action to inject billions of dollars in liquidity to unclog the stress in credit markets. The world's top 10 banks and financial firms formed a mega fund to ease the credit crunch. But, the Fed decided to keep interest rates unchanged, pledging to take action when the need arises. The Bank of Japan too left its benchmark interest rate steady. However, China cut interest rates and lowered the reserve requirement for small banks. China also took a series of other steps to bolster its sagging stock markets. In India, the RBI too had to move in to boost liquidity, which worsened due to the outflows towards advance tax numbers. The Finance Minister threw his weight behind Indian banks, saying that they are well regulated and were largely unaffected by the western financial turmoil. ICICI Bank's share took a hit amid news of $80mn exposure to Lehman, but the bank's top management said the bank was safe and sound.

Stocks across the world took a severe beating in the early part of the week, but staged a smart rebound after regulators in the US and UK banned short selling in financial companies. AIG's rescue and talk of a comprehensive program to cleanse the US financial system also helped in the turnaround. Crude oil and gold were highly volatile. Gold initially rallied as investors rushed to safe-haven assets like precious metals and government bonds, as equities remained under pressure. The dollar weakened early on in the face of the crippling financial mess. But, by the end of the week, trend across these markets reversed amid growing optimism that the US government's move to come out with a wider bailout plan for its battered financial markets will prevent further pain and restore confidence among global investors. As a result, crude oil had its biggest three-day rally in almost a decade, while gold futures dropped the most in a week and the dollar rose the most against the yen since April.

Wall Street Braces for Bumpy Ride

If last week was Wall Street's big dive, this week will be where it tries to figure out how deep the water is.

Stocks are in for a shaky ride, now that the past five sessions have erased all of this year's gains and then some. Investors in the coming days will be grasping at any and all signals, both domestic and foreign, to see if the market can find a foothold.
Most market watchers now agree that last week's plunge doesn't signal disaster. The stock market, which pushed the Dow to 31 record highs since early October, had been climbing at a pace that was arguably more extraordinary than the depth of Tuesday's drop. Chatter about a big correction had been circulating the floors of stock exchanges for months -- it just came as a shock that so much of the correction happened in a single day.

What the sages are split over is whether stocks have hit a short-term dip or entered a bear market, so they'll be closely watching this week's economic data. Many say there's no reason that stocks shouldn't resume their trek into record territory in the coming months, given that little has changed fundamentally in terms of the average consumer, corporate earnings, manufacturing activity or inflation. But others argue that stocks had inflated way too much given the torpidity of many areas of the economy, and that there is still more air to be let out.

The Dow Jones industrials are down 3.3 percent on the year, the Standard & Poor's 500 index is 4.4 percent lower, and the Nasdaq composite index is down 5.9 percent.

If the Labor Department's employment data on Friday shows stability in U.S. jobs -- previously a big market driver, as it suggests consumers will keep spending money -- the stock market has a better chance of regaining its footing. At the end of last week, the market was expecting February nonfarm payrolls growth to slip to 100,000 from 111,000 in January; February's unemployment rate to hold steady at 4.6 percent; and hourly earnings to inch up 0.3 percent, more than January's 0.2 percent. Other reports, including a snapshot of the nation's service economy and the U.S. trade balance, will also be closely watched.

No matter where the data falls, however, Wall Street is anticipating choppiness this week as some investors flee from stocks to the traditionally safer Treasury market, while others swoop in to scoop up bargains.

And because last week's plunge was triggered in large part by a sharp decline in Chinese stocks, which also set off drops in other Asian markets and European markets, U.S. investors will undoubtedly be looking abroad to see if other countries' stocks are recovering or collapsing.

OTHER ECONOMIC DATA IN THE FOREFRONT

The Institute for Supply Management on Monday will report its index on the services economy in February. The market is expecting a reading of 57.5, down slightly from 59.0 in January.

Also Monday, St. Louis Fed President William Poole will speak on inflation and economic growth in Santiago, Chile.

On Tuesday, the market expects the Labor Department to revise its fourth-quarter productivity growth measure to an annual rate of 1.7 percent from a previous 3.0 percent, and the Commerce Department to report a 4 percent slowdown in January factory orders. Factory orders include the previously reported durable goods -- one of the many disappointing factors contributing to last Tuesday's freefall -- plus non-durable goods orders.

Meanwhile Tuesday, the National Association of Realtors reports January's pending home sales.

On Wednesday, investors will read the Fed's beige book, which describes economic conditions in regions around the country. The Federal Reserve's monthly measure of consumer credit comes Wednesday as well, and is expected to be $7 billion for January, up from December's $6 billion.

On Thursday, the nation's retailers report their sales for February.

And Friday will be a data-heavy day, bringing the jobs report and the trade balance for January. The market is forecasting the trade gap will come in narrower at $60.0 billion from $61.2 billion in December. Also, January wholesale inventories are expected to show a 0.1 percent decline, less than December's decrease of 0.5 percent.

AND IN THE BACKGROUND, A TRICKLE OF EARNINGS

Earnings season is mostly over, and corporate growth in the last quarter of 2006 came in at around 10 percent -- slower than in previous months, but still healthy. Investors haven't been too occupied lately with individual company news, but they shouldn't discount the possibility of a big earnings surprise rattling the markets.

BJ's Wholesale Club Inc. and Costco Wholesale Corp. release their earnings Wednesday and Thursday, respectively. The market is expecting BJ's to report profit of 66 cents per share. BJ's closed at $31.93 Friday, at the upper end of its 52-week range of $25.18 to $34.04.

Costco is also expected to report profit of 66 cents per share. Costco closed at $55.75 Friday, at the upper end of its 52-week range of $46.00 to $58.70.

Meanwhile, analysts predict homebuilder Hovnanian Enterprises Inc. on Thursday to report a loss of 59 cents per share. Hovananian closed at $30.75 Friday, in the middle of its 52-week range of $24.79 to $47.80.