Taking Stock of Wall Street 2008-09-15

Once it was a famous company, an American icon, with international divisions. Its stock was costing $90 just two years ago. Today, it was quoting at $0.19 with no takers. And remember, this was no penny stock.

Thus ends the 178-year saga of Lehman Bros that filed for bankruptcy yesterday evening.

Now, we realize it takes years to build up a company and a name. However, it only needs just a few months to destroy it and close its shutters.

Lehman Brothers filed for Chapter 11 bankruptcy protection after its efforts to find buyers proved futile. All potential buyers wanted a government guarantee beyond specified limit of losses, which was refused.

LEH had $600 bln in assets but also had $550 bln in debts. What the media did not tell the people was the fact that only the parent holding company is going under. Its brokerage, asset-management and Neuberger Berman divisions will operate until suitable buyers are found.

Another prominent, iconic investment bank too is disappearing from the scene by early 2009:

Merrill Lynch (MER) is being acquired by Bank of America (BAC) for $50 billion - fortunately before it deteriorated to the level of LEH. Thus, the market was spared another torment. The proposal will soon be presented for approval by shareholders and the government. Each MER shareholder will get 0.8595 shares of BAC share for one share they hold.

Next in trouble is the mega insurer AIG (AIG). Strapped for cash, it is trying hard to avoid a downgrade in its credit rating with all its added problems. Early morning it was reported that they were talking to Warren Buffet, one of its previous investors. Possibly that was not successful. AIG has assets to sell. So Fed stepped in and with the reported help of Morgan Stanley (MS) prodded ten prominent banks to form a $70 bln collateralized loan fund for AIG (AIG). The consortium now includes Bank of America (BAC), Barclays (BCS), Citigroup (C), Credit Suisse (CS), Deutsche Bank (DB), Goldman Sachs (GS), JPMorgan (JPM), Merrill (MER), Morgan Stanley (MS) and UBS (UBS).

State of New York opened the doors of its financial subsidiaries to aid AIG (AIG) and will lend up to $20 bln to help the stricken insurer.

The weekend parleys in New York had their effects on European and Asian stock exchanges. They all fell by 3% to 5%. Australia even had to suspend trading in its markets.
ECB immediately injected $42.6 bln in additional funding in to the European market. Bank of England infused £5 bln into UK markets, considering the fact that Lehman's international division is headquartered in London.

Economic Data:

The Empire Manufacturing Index for September fell to -7.4 from 2.8. The forecast was for a rise of the index by 1%.

Fed's industrial production data for August fell -1.1% against an expected decline of -0.3%. Automobile production fell by -11.9%. Utility output decreased by -3.2%. Mining output was down by 0.4%. Production capacity went down from 79.7% to 78.7% against a predicted value of 79.6%.

As the stocks fell out of favor, Treasury securities were in great demand. Crude oil fell by -$5.47 to $95.71. Gold rose by $22.50 to $787.00

Market Indexes
Dow went DOWN by -417.28 (-3.8%) to 10993.27
Nasdaq DOWN by -72.38 (-3.31%) to 2187.62
S&P 500 DOWN by -49.99 (-4.16%) to 1201.56

NYSE
Volume: 1.7 bln
A/D Ratio: 187 stocks advanced v. 3081 declined.
52-week High: 21 52-week Low: 674

Nasdaq
Volume: 2.7 bln
A/D Ratio: 399 stocks advanced v. 2538 declined
52-week High: 15 52-week Low: 330

Market's Weakness was rather broad, affecting almost all major sectors. The only sectors that tried to swim against the slide were the retailers and the airlines.

The financial sector fell by nearly 6%. Wells Fargo (WFC) was an exception today with a slight gain even as fellow financials fell.

Credit rating firm Moody's does not take Bank of America's (BAC) acquisition of Merrill Lynch's obligations too lightly. It has cut BAC's credit rating to AA-. Remember, BAC had recently acquired LaSalle Bank and Countrywide Financial too.

UBS (UBS) is facing IRS charges against its offshore banking division for alleged tax evasion by its wealthy American depositors. The bank is trying to reach a settlement with the US government. Separately, it is also posting a $5 bln write down for its sub-prime exposure.

Goldman Sachs (GS) broke down below its 52-week Low.

Company News:

In August, CVS had proposed a merger with Long Drug at a price of $71 per share. Now, its competitor Walgreens also has entered the fray with a higher offer of $75 per share.

Best Buy (BBY) is acquiring the digital entertainer Napster (NAPS) for $121 mln.

Today United Airlines (UAUA) increased the second bag fee to $50, even as the fuel costs came down!

Electronic Arts (ERTS) gave up its protracted bid for the Grand Theft Auto fame Take-Two Interactive Software (TTWO).

BASF (BASFY) is buying Ciba Holding (CSBHY) for $5.5 bln.

Analyst Ratings:

Following stocks received upgrades today:
Air Tran (AAI), Allegiant Travel (ALGT), Continental Airlines (CAL), Delta Airlines (DAL), Jetblue (JBLU), Northwest Airlines (NWA), Potash (POT), Prestige Brands (PBH) and United Airlines (UAUA).

Downgraded stocks are:
Citrix Systems (CTXS), Cytec (CYT), DR Horton (DHI), Home Depot (HD), Hudson Highland Group (HHGP), Iberia Bank (IBKC), kforce.com (KFRC), Korn/Ferry (KFY), Lowe's (LOW), MPS Group (MPS), New Frontier Media (NOOF), POZEN (POZN), Pulte Homes (PHM), T.Rowe Price (TROW) and Whitney Holding (WTNY).

Mosaic (MOS) received both an upgrade and a downgrade.

There were some other relief measures today from the government:

The SEC finally got revved up to announce it will curb naked short selling soon, a proposal in the cold storage for long time.

Then we heard that the regulator overseeing Fannie Mae (FNM) and Freddie Mac's (FRE) will not allow fabulous severance packages to the former bosses of both companies, now under government conservatorship.

The Fed has revised the collateral list it will accept when loaning funds to investment banks. Now they will accept risky stocks and junk bonds too.

The Fed also increased the cap on lending Treasuries to bond dealers by $175 bln to $200 bln.

Treasury Secretary Henry Paulson conducted a news conference today at the White House. He cited "market excesses" and an "archaic" regulatory system for the present troubles of the market. He is very confident that the American people need not worry about their bank accounts!

One of the adverse effects of investment bank failures is that debt insurance is going to be costlier for the banking sector.

With the present financial crisis, there is a higher chance for FOMC to cut federal funds rates by 25 basis points on Tuesday.