Taking Stock of Wall Street 2008-10-03

How far off the mark can market expectations be from real market movements? That was evident on Friday. Until the House of Representatives voted on the bailout plan the market rose. And as soon as the news came pout the sell down started and the market plummeted. And once again the age old wisdom of our predecessors proved right: Buy the rumor and sell the news!

Globally Asian markets fell by 2-4% while European markets rose only minimally by below 0.50%
Will the U.S. follow Ireland's lead in fully insuring bank deposits, or can it learn from the follies of Japan's decade-long experiment with full guarantees?

Ireland removed all limits on bank deposit insurance. Hereafter, all bank deposits in Ireland are fully guaranteed by the government! Greece did the same before.

France unilaterally introduced liquidity measures for its banking system. Another $28 bln will be used to aid small businesses.

While still not ready to start a bailout plan like in US, the European Central Bank (ECB) extended overnite funds to minor banking institution apart from the already eligible major banks.

Sweden became the first Scandinavian nation to offer governmental liquidity aid to banks. Sweden's central bank will offer local banks up to 60 bln Swedish kronor as three-month loans.

Germany also extended full guarantees on private deposits. This comes close on heels of a 50 bln euro bailout of the stricken commercial property lender, Hypo Real Estate

The House of Representatives has passed the Senate's amended $700 billion bailout bill The House of Representatives passed the Senate's version of the $700 billion financial relief plan by a 263 to 171 margin. But that was in stark contrast to Monday when the previous version was rejected by a 228 to 205margin.

The break-up of the $700 bln disbursement:

- $250 bln for immediate release.
- $100 bln after President certifies the report on the first disbursement.
- The final $350 bln only after a second approval from Congress.

Special provisions for taxpayers include:

- Protection for taxpayers if the illiquid assets of companies covered by the bailout prove to be unprofitable after five years
- Increased FDIC insurance limits on bank deposits from the current deposit insurance from $100,000 to $250,000.
- Tax credits for individuals and businesses
- Terms of relief from the alternative minimum tax
- Extension of the solar income tax credit

The amended provisions and additions are expected to raise the total to $800 bln from the proposed $700 bln.

Economic Data:

Jobs Data for September - Non-farm payrolls declined by -159,000, the largest fall in the past six months. The figure for August was only -73000. The economists' forecast for September was -105,000.

Most of the job losses occurred on construction, manufacturing and retail. Job addition occurred in government and health care.
The average workweek fell from 33.7 to to 33.6 hours.

ISM non-manufacturing index for September - fell to 50.2 from last month's 50.6. But it was more than the consensus forecast of 50.0.

Oil fell by -$0.09 (1.10%) to $93.88.
Gold fell by -$11.10 (-1.20%) to $833.00.

CBOE Volatility Index (VIX) again spiked to 45+.

Market indices

Dow was DOWN by -157.15 (-1.52%) to 10325.70
Nasdaq DOWN by -29.33 (-1.51%) to 1947.39
SP 500 DOWN by -15.04 (-1.37%) to 1099.24

NYSE

Daily Volume: 1.4 bln
A/D Ratio: 1172 stocks advanced against 2032 declined
52-week Hi/Lo: 5 stocks attained new Highs while 535 broke down to new Lows.

Nasdaq

Daily Volume: 2.5 bln
A/D Ratio: 730 stocks advanced against 2055 declined
52-week Hi/Lo: 6 stocks topped new Highs while 445 fell to new Lows.

The main news on Friday, of course, was Wachovia (WB) reneging on the agreement to sell its operations to Citibank (C) and instead, accepted Wells Fargo's (WFC) offer of $15 billion.

On Saturday, Citibank (C) obtained an interim stay on that merger from a New York trials court.

While taxpayers were enthused by WFC & WB's claim that there is no cost to them, that is questionable. Because WFC had earlier opted out of talks to acquire WB. And returned only after the bailout bill was passed. That means nobody can stop them from dumping the illiquid assets of WB on the government.

The Citi's suit is going to be another landmark case in the annals of judiciary pertaining to Contract and Tort Laws.

That government's Federal Deposit Insurance Corporation (FDIC) was the mediator in the talks between Citi and Wachovia will find it difficult to argue that no agreement existed with Citi.

If the courts ultimately side with WB, the status of FDIC as a mediator and facilitator will be irretrievably undermined as in future Citi's predicament can be taken as an excuse for banks not to accept such FDIC roles.

In the mistaken idea that WFC-WB is totally free of liability for taxpayer, even the media spent lot of time and columns in discrediting Citi and some even launching personal attacks on Citi's CEO. But they do not know that WB had been accepting financial liquidity support from Citi based on the previous agreement witnessed by FDIC officials.

Another controversy is brewing, this time from creditors who lost in the Lehman Bros debacle. These creditors now claim JPMorgan (JPM) froze more than $17 bln of Lehman's assets and thus contributed the liquidity crisis for the latter. It is still not known whether that will reach courts.

Yahoo (YHOO) won from the court a confidentiality order to hide parts of its deal with Google (GOOG).

AIG (AIG) wants to focus on property and casualty insurance in future. It is one company that feels they can repay the $85 bln loan from the fed.

M&A News:

Latin American telecom carrier NII Holdings (NIHD) is showing interest in acquiring Nextel operations from Sprint Nextel (S)

Blackstone Group (BX) acquired a a 20% stake in China National BlueStar Group for $600 mln.

Nomura Holdings (NMR) is acquiring Lehman's back-office operations in India.

Company Results:

Family Dollar Stores (FDO) posted earnings exceeding the market's forecasts.

Analysts' Ratings:

Company stocks upgraded include:

Compass Minerals International (CMP), Dynamic Materials Corp (BOOM), General Growth Properties Inc(GGP),
Global Payment Inc (GPN), Great Plains Energy Inc (GXP), Kenexa Corp (KNXA), MetLife Inc (MET), MSCI Inc (MXB)
and Virgin Mobile USA Inc (VM).

Those downgraded are:

Adobe Systems Inc (ADBE), Agrium Inc (AGU), Arkansas Best Corp (ABFS), Burlington Northern Santa Fe (BNI),
Cummins Engine Co (CMI), Dice Holdings Inc (DHX), Federal Realty Investment Trust (FRT), Glu Mobile Inc (GLUU),
Intuit Inc (INTU), Lawson Software Inc (LWSN), Merrill Lynch & Co (MER), Molex Inc (MOLX), Mosaic Co (MOS),
Norfolk Southern Corp (NSC), Old Dominion Freight Line (ODFL), Salesforce.com Inc (CRM), SAP Aktiengesellschaft (SAP),
Symantec Corp (SYMC), Tanger Factory Outlet Centers (SKT), Terex Corp (TEX), Trimble Navigation Ltd (TRMB),
Union Pacific Corp (UNP), Urban Outfitters Inc (URBN) and Xyratex Ltd (XRTX).

Interbank Rates:

After the Fed's liquidity infusion, overnight rate fell to 1.996% just below the fed fund rate of 2%.
Three-month Libor is still higher at 4.33%.

Expect the volatility to remain high.

On a weekly basis all indices fell:
Dow -7.34%
S&P 500 -9.38%
Nasdaq -10.81%

Pointers to the future:
*The unemployment rate of 6.1% is the highest in five years and is expected to rise to 9% by mid-2009.
*Speculation on futures on fed fund rate is high that, at this time market analysts forecasts that even a cut by 0.75 in fed interest rate is possible at the FOMC meeting on October 29. Consensus is for the rate to be reduced to 1.5% from the present 2%.