No Bailout Yet!

Well, what do you know. For good or for ill, Congress actually listened to its constituents this time around and voted against the billion dollar bailout. The news, of course, was a big surprise to virtually everyone and Wall Street was not happy.

As counterintuitive as it may sound, this may very well turn out to be a step in the right direction. The last thing we needed is yet another attempt at big Wall Street rescue that many thought was ultimately doomed but felt there was no other good choice. At a minimum, this will require more negotiations and much more thought, and we'll probably end up with a much better plan than what was currently proposed. At least that's the hope.

Warren Buffet and the Magazine Cover Indicator

The major weekly magazines each had a cover profiling the recent turmoil in the financial markets and system. An old adage is that the market often turns contrary to the views and headlines expressed in magazine covers...hence, we may see the potential for atleast an intermediate term low in the market (no guarantees!). And, Warren Buffett invested $5 billion into Goldman Sachs, his first foray into the financial sector since 1987 (1987 Crash).

A Historical Week

You can tell a story is really important when the Wall Street Journal runs the lead headline across the entire front page. This week, we didn't get one day where the headline ran the entire front page, we got five! Whether or not you agree with the various actions taken this week, remember as much of it as you can, because whatever the outcome, good or bad, people will be talking about this for a long time.

Rebound Day - RTC the Sequel?

The market turned in a strong performance Thursday on the heels of rumors the government is looking at creating a mechanism to take bad assets off the balance sheets of financial companies. This mechanism might be similar to the RTC (Resolution Trust Company) which the government put together in 1989 to help deal with the savings & loan crisis. This move would show a more comprehensive, systemic approach to solving the financial system's problems, as opposed to the recent string of ad hoc measures to deal with the crisis, putting out fires as they arose. The SEC has also imposed a temporary ban on short selling (betting against a stock), similar to what the UK did earlier in the day. And, $180 billion of liquidity was pumped into the global markets via a coordinated approach by several world banks. Yet another day of non-stop developments, but cast in a much more optimistic, constructive light.

A Surprise Interest Rate Cut?

Financial market turmoil continues...who would have thunk it: Lehman Brothers declares bankruptcy and Merrill Lynch is acquired by Bank of America. Attention next turns to insurance giant AIG (there is talk of Warren Buffet potentially making a play for the company) and Washington Mutual (the nation's largest thrift). In terms of dark horses, watch out for GE (big financial exposure through it's GE Capital unit). Market scuttlebutt is for a surprise Federal Reserve interest rate cut, particularly with the recent down-draft in commodity prices. Won't do much to settle the economy, and likely to be more symbolic than effective. Every day brings a new story...

Is Your Head Stuck in the Sand?

Nice commentary on investor behavior in good - and bad - financial times (click on this link to read the full commentary).

Submerging Markets

While the US market is officially in bear territory, international markets have fared much worse. They were hot over the past 5 years, but the past year has been dreadful. While the US market has lost just over 20% from it's one year high, European markets have lost 25-30%, and the "emerging" markets of Brazil, Russia, India and China have lost between 30-65% of capital from their 52 week highs.

The Roller Coaster Ride Continues

Markets fell 3% today, after a 2% spike up yesterday after the weekend Fannie Mae/Freddie Mac government bailout news came out. Today, the story was anxiety over Lehman Brothers, one of the biggest investment banks, which saw it's shares drop 40% on news that hopes of a capital injection from Korea Development Bank will not come through as anticipated. What will tomorrow bring? After hours saw positive news from Fedex (shipping) and Texas Instruments (semiconductors) which affirmed their earnings expectations for the recent quarter and for the next year. The Jekyl and Hyde market continues...

Rosy Scenarios (Still)?

Wall Street analysts continue to expect a vigorous recovery in corporate earnings. Take a look at the chart - earnings over the past 3 quarters have seen a 20% haircut from the levels of a year ago. Sort of explains why the market is down roughly the same amount in price over that same time period. However, looking forward, analysts are expecting not only a sharp recovery (50% from current levels) but expect profits to surpass levels achieved prior to the financial crisis. A bit optimistic? Yes, and potentially the source of future market dissapointment (and further declines) if these earnings expectations are not met.

Oil Price Drop Should Boost Economy

Crude oil has declined over $35 from it's mid July all time highs. It is estimated that each $10 reduction in the price of a barrel of oil translates into an additional 0.1% of economic growth (or roughly $14 billion of added growth in dollar terms). Based on current prices, the recent decline in oil would add 0.35% of growth to the economy, or almost $50 billion in additional economic growth. Think of it as another stimulus plan to help spur the economy, but hopefully of a more permanent and durable nature than the government stimulus put forth earlier this summer. FYI, the chart above serves as a reference on recent quarterly economic growth trends.

Crude Oil Closes Below $110/Bl

Oil closed below the $110 mark today, an important technical level as this is where the last run up in oil took a breather before the price bolt to $150 per barrel was seen in July. Next key levels of support are around the $100 mark and then around the $85 area as these are other areas where oil rested prior to it's continued up move.