Taking Stock of Wall Street 2008-09-08

Today, most world stock exchanges went up due to what happened here in USA yesterday: Treasury Secretary Henry Paulson announced the takeover of Fannie Mae (FNM) and Freddie Mac (FRE). Central banks of most of those countries had bought substantial amount of debt securities issued by those two big mortgage guarantors.

According to Paulson, that alone comes to more than $5 tln in debt and mortgage-backed securities.

Even with preemptive sales by their central banks over the last two months, both China and Russia are still left holding billions' worth of bonds issued FNM and FRE. Fortunately for bondholders, their rights are upheld by the Treasury.

Though making the rounds for considerable time now, US Treasury finally determined that under-capitalization of both FNM and FRE had crossed into the danger zone. And with widespread, global investments into both firms and with domestic housing credit and mortgage markets down, both were considered too big to fail.

FNM and FRE will be placed under the conservatorship of the Federal Housing Finance Agency (FAHA). The Treasury will infuse $200 bln capital.

Who lost in this intervention:

1. Common and preferred stock shareholders in both companies.
2.?The US Taxpayer - the experts are divided on this, hence placed second.

With their confidence shaken, will foreign banks stop selling the bonds they still hold? We can't blame them. If we are in their place, we will also try to get away from all this as early as possible, salvaging as much of the original investment. While the capital infusion does wipe out the mammoth bankruptcy, that may not be enough to restore the shaken investors' confidence.

Skeptics may even see in this a purposely created exit route for foreign lenders at the expense of the shareholders.

But there is another argument by the investor community that government is benefiting the taxpayer. Because, while the Treasury is purchasing 1 billion of senior preferred shares in each institution, with maximums of $100 billion each, these shares also carries a dividend of 10%.

The counter argument is that dividend is payable only when either company can afford it and need not reach the people's Treasury any time soon, considering the state of economy in general and the mortgage market in particular.

Oil settled at $106.34 per barrel after rising 3.5% in earlier. May be the market is not worried as much about hurricane Ike as they did about Hanna. Gold was down to $802.50.

As for market indices both Dow and S&P 500 made decent gains supported by convincing volumes. Nasdaq which reversed midway also managed to scramble back to positive territory:
Dow was UP 280.43 (2.6%) to 11510.74
SP 500 UP by 25.48 (2.0%) to 1267.79
Nasdaq UP by 13.88 (0.6%) 2269.76

Volumes at NYSE crossed the 1.5 bln mark after almost three weeks: 1.7 bln. It was 2.6 bln at the Nasdaq.

A/D ratio also was bullish. Advancing stocks were 1.5-2 times those that declined: In NYSE 2020 stocks advanced against 1094 declined. In the Nasdaq, it was 1672 against 1104.

The market started higher today in a festive atmosphere already created by foreign counterparts, domestic premarket and stock futures.

As can be expected, the Treasury announcement pushed financial stocks up with the exception of Lehman Brothers (LEH) who are yet to find suitable investors and Washington Mutual (WM) who replaced their CEO, Kerry Killinger.

FNM and FRE shares fell by more than 80% as existing shareholders saw their holdings diluted, if not decimated, by the new majority owner - the people's Treasury.

As the sector that is the end-beneficiary of the government's largess, housing sector advanced in all its sub sectors: construction and building supplies.

Technology stocks took a backseat with all their major players declining including: Apple (AAPL), Dell (DELL), Google (GOOG), Oracle (ORCL), Qualcomm (QCOM), SanDisk (SNDK) and Research In Motion (RIMM).

Bankruptcy rumor took its toll on UAL (UAUA ), holding company of United Airlines. UAL fell by three-fourth of its price and trading was halted by mid-morning. By midday company denied the false reports. In this era of fast internet, an old 2002 story that reappeared online on the South Florida Sun-Sentinel suddenly assumed currency as it passed from one guy to another until it reached New York to create all that havoc. UAL barely managed to recoup 80-90% of the lost price.

Jet Blue (JBLU) cornered media attention with their online offer of limited discount tickets on eBay!

Boeing (BA) could not avoid the employee strike by its 26,8000 machinists. The company's daily loss is reported to be around $100 million.

Altria (MO), the largest American cigarette company is acquiring smokeless tobacco manufacturer UST (UST) for $11.7 bln. MO's offer of $69.50 per share carries a premium almost one-third the current price of UST.

Nowadays, cigarette manufacturers are not usually favored by investment advisers due to health hazard litigation and compensations that run to millions. That these companies are still around shows how much customer base and loyalty they have!

The following companies were upgraded:
Adolor Corp (ADLR), Advanced Micro Devices (AMD), Almost Family Inc (AFAM), Alvarion Ltd (ALVR), Annaly Capital Mgmt (NLY), Anworth Mortgage Asset Cp (ANH), East West Bancorp Inc (EWBC), Jos. A. Bank Clothiers Inc (JOSB), Marvell Tech Grp (MRVL), Monolithic Power Sys Inc (MPWR), PHH Corp (PHH), Prudential Financial (PRU), Regions Financial Corp (RF), Research In Motion (RIMM), Roper Industries (ROP), Tenaris SA (TS), Transocean Inc (RIG), UCBH Holdings (UCBH), UST Inc (UST), and Zions Bancorporation (ZION).

Today's Downgrades include:
CEMEX Sab De Cv (CX), Ceradyne Inc (CRDN), Fannie Mae (FNM), Freddie Mac (FRE), Huntsman Corp (HUN), Intersil Corp (ISIL), Investment Technology Grp Ne (ITG), Mohawk Industries(MHK), Nokia (NOK), NVIDIA (NVDA), RF Micro Devices Inc (RFMD), Sherwin-Williams Co (SHW) and Tractor Supply Co (TSCO).

Today the bull won with the help of the US Treasury.

Let us see how the market reacts next week, if the taxpayer also decides that he/she too has been taken for a ride with the shareholder.

Especially, if the foreign bankers decide to run to the door with whatever is left of their money.

Now, another event of immediate concern takes place tomorrow: the OPEC meeting.

The question is, will America's friends the Arabs be able to oppose the demand of its enemies that oil production be slashed?

We will know within hours.