Taking Stock of Wall Street 2008-09-16

LATE EVENING NEWS FLASH:
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1. The U.S. government on Tuesday bought out American International Group (AIG) with a $85 bln bailout and acquiring a 79.9% stake in the shareholding. It had no choice as it couldn't allow not only USA's but the world's biggest corporate insurer go into bankruptcy.
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2. Primary Fund (RFIXX), one of the original money market funds declared a seven-day freeze on unit redemptions as its net asset value broke below $1 per share. Reason: Its $785 million holding of Lehman Bros securities suddenly fell to $0.
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Now to the daytime events:

The global ramifications of US bank failures is unraveling.

China, usually very obstinate in making economic changes to fight inflationary pressures, not only made its first interest rate cut in six years recently, but is considering more if needed!

Foreign stock exchanges which fell by 1-2% more are slowly picking up now. (Asia's Wednesday has already started).

As liquidity dried up, many foreign central banks infused billions into their banking systems to avoid collapse.

US Economic data:

Federal Open market Committee (FOMC) Announcement - FOMC stunned the majority experts who bet on a 0.25% reduction in the current circumstances. (80%+ analysts went wrong by predicting a cut in the fed funds rate to 1.75%.)

The Fed agreed unanimously to leave the fed funds rate unchanged at 2.00%. This, despite a minority of Fed members favoring 0.25% cut in their public pronouncements recently! The discount rate was also left unchanged at 2.25%.

ICSC Retail Store Sales - Weekly retail chain store sales fell by 1.6% from a week ago. But it was more by 1.3% compared to the same period last year.

Consumer Price Index - showed a monthly decline 0.1% . But if fuel and food prices were excluded, the core rate actually increased by 0.2%.

Redbook Chain Store Sales - National chain store sales fell by 1.1% in the first two weeks of September but was still higher by 1.4% compared to the same period last year.

Treasury International Capital - Foreign buying of U.S. assets in July was sluggish. Net purchases of U.S. long-term equities dropped to mere $6.1 bln, a far cry from previous month's $53.4 bln.

NAHB Housing Market Index - Homebuilder sentiment index was up by 2 points. What is encouraging is that the trend was noticed in all regions of USA.

Oil had gone down by -$4.56 (-4.7%) $91.15. Gold also fell by -$6.50 (-0.8%) $780.50.

Market Indices:
Dow went UP by 141.51 (1.3%) to 11,059.02
S&P 500 UP by 20.90 (1.7%) to 1,213.60
Nasdaq UP by 27.99 (1.2%) to 2,207.90

NYSE:
Volume: 2.14 bln
A/D Ratio: 1440 stocks advanced v. 1815 declined
52-week Hi/Lo: 16 1111

Nasdaq:
Volume: 3.20 bln
A/D Ratio: 1684 stocks advanced v. 1260 declined
52-Week Hi/Lo: 28 stocks topped new Highs. 458 stocks hit new Lows.

Ironically, financials were in the positive side today. So also, energy and airline stocks.

Barclays (BCS) agreed to buy Lehman's (LEH) core U.S. broker-dealer operations for about $2 bln. While this saved thousands of NY jobs, it also leaves LEH with the headache of finding new buyers for its loser divisions.

AIG was very volatile today, market being unable to predict what would happen to the insurer. The company's credit rating was downgraded by Moody's, Standard & Poor's and Fitch. If it couldn't raise $80 bln by Wednesday, it would have had to file for bankruptcy. AIG lost nearly 75% of value as it rejected private offers - first one led by J D Fowler and the second one led by former CEO Hank Greenberg. Only Bloomberg.com kept the possibility of a Federal government bailout alive throughout.

Other Company News:

Washington Mutual's (WM) credit worthiness was downgraded to junk level by Standard & Poors and their stock went down below $2.

Wachovia (WB) is writing off $20 bln, mostly debt securities, from its balance sheet.

SanDisk (SNDK) refused Samsung's offer for a merger. Now Toshiba (TOSBF) appears to be the favored suitor.

Google (GOOG) - Yahoo (YHOO) deal had vociferous opposition from The World Association of Newspapers who want global regulators to clamp antitrust provisions on the two.

Hewlett-Packard (HPQ), with its acquisition of EDS Business Group, will be laying off 24,600 of its staff and writing down $1.7 bln.

Dell (DELL) reported softening in global markets and will be realigning its computer business in the face of it.

T-Mobile (DT) will bring out smartphones with GOOG'S Android software from November. Their 2008 target is around 600,000 units.

Wells Fargo (WFC) held LEH debt and preferred securities costing nearly $200 mln and announced non-cash charges against its third quarter earnings.

Company Reports:

Monsanto (MON) issued a guidance for year 2008 that sees better returns than the market's predictions.

Morgan Stanley (MS), Kroger (KR) and Adobe Systems (ADBE) brought out earnings that exceeded market's expectations.

Darden Restaurants' (DRI) results conformed to consensus.

Goldman Sachs (GS) earnings, though less than the previous year's, managed to beat the forecasts.

Best Buy's (BBY) earnings were disappointing.

Analysts' Ratings:

The following company stocks were upgraded:

Adobe Systems (ADBE), AU Optronics (AUO), Chubb (CB), Endo Pharmaceuticals (ENDP), Forest City Enterprises (FCE.A), LG Display Co Ltd (LPL), SAP AG (SAP) and Travelers Co Inc(TRV).

Downgraded stocks included:

Broadcom Corp (BRCM), CGG Veritas (CGV), Intersil Corp(ISIL), Lam Research (LRCX), Masco Corp (MAS),Meritage Homes(MTH), Micron Tech (MU), Morgan Stanley (MS), Nabors Inds Ltd (NBR), Northrop Grumman (NOC), OYO Geospace (OYOG), Patterson-UTI Energy (PTEN), Sirf Technology Hldg(SIRF), Union Drilling (UDRL), Vail Resorts (MTN), Varian Semiconsuctor Equip (VSEA), Winnebago Inds (WGO) and Zep Inc(ZEP).

It is a welcome scenario to see Federal Reserve and the Regional Feds shedding their fear for "Big Government involvement" and taking timely actions to restore normalcy.

Libor rate is the interest rate banks charge each other to borrow overnight funds. Now that rate rose from 3.10% to 6.44% in the wake of the LEH debacle. That shows that banks have less confidence now on each other's repayment ability than before.

That would have meant less liquidity in the market as banks will not have enough money for day to day operations. So, the New York Fed quickly responded by infusing a $50 billion liquidity to ward off any such alarming situations.

Soon, we can expect executive and Congressional measures asking for tighter financial regulation and oversight.