Wall Street Breakfast: Must-Know News

• Global markets rejoice. Overseas markets and U.S. futures posted unprecedented gains overnight (see below) on cross-border measures to halt short sales in financials, and on news Congress is ready to legislate some sort of comprehensive mechanism to help faltering U.S. banks and financial houses purge their sickliest assets (see below). Gold and precious metals tumbled as the recent 'flight-to-safety' motif that boosted gold prices an unheard-of 15% over the past two days lost its shine (see below).
• SEC stops shorts. The SEC joined the UK's FSA in banning short sales on 799 (list (.pdf)) financial stocks. "The Commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets," SEC chief Christopher Cox says. The halt will initially last for 10 days, with an option to extend up to 30. Other steps taken include a temporary requirement that money managers report new short sales of certain securities, and easing restrictions on securities issuers to repurchase their stock. "Under normal market conditions, short selling contributes to price efficiency and adds liquidity to the markets," the SEC noted. "At present, it appears that unbridled short selling is contributing to the recent, sudden price declines in the securities of financial institutions unrelated to true price valuation."
• No more putzing around. Worn down by endless one-off crises, Congress says it's committed to fasttracking an $800B-1.2T comprehensive framework designed to unburden U.S. financials from their most toxic holdings. Described as "a giant dumpster for illiquid assets," the measure may also rescue faltering money-market funds. The effort is a recognition Treasury Secretary Paulson's and Fed Chairman Bernanke's steps thus far have failed to adequately address faltering housing and credit markets. The big question: With the government embracing even more devalued assets, will its own balance sheet be called into question.
• Morgan Stanley weighs options. Morgan Stanley (MS), searching for answers to its recent stock price plunge, and the loss of 15-20% of the balances in its prime-brokerage division this week, continues to talk to Wachovia (WB) about a possible deal. One possible footnote to a deal is spinning off its troubled mortgage portfolio using a so-called good bank/bad bank restructuring - which may appease Wachovia shareholders reluctant to expose themselves to even more mortgage debt not-yet having digested the $24B 2006 acquisition of Golden West. Besides a full merger, MS may look for a large minority investment to restore Street confidence. Sources say CEO John Mack has talked to Goldman Sachs (GS) CEO Lloyd Blankfein five or six times in the past few days, and was a major force behind the push to blockade short sellers.
• Smaller, leaner AIG. Edward Liddy, AIG's (AIG) new CEO, says he hopes to keep as many of the company's largest insurance operations as possible intact in a publicly traded company - after selling off some assets to pay back the government's $85B loan at a 'loan-sharkish rate of interest.' "There will be a company at the end of this," he said. "It'll be smaller; it'll be a lot nimbler." He's giving himself four weeks to tool the turnaround. Shares gained 31% Thursday and are up 15% in the premarket.
• WaMu sale generates interest. WaMu (WM), which put itself up for sale this week, has attracted several potential bidders for all or part of the bank, Bloomberg says. Financial Times insists it's attracted none. While stopping short of commenting on WaMu, Citigroup (C) CFO Gary Crittenden said it may be "a source of the solution" - not part of the problem - a new role he seems to like. Sources say Citi, eager to expand its U.S. retail-banking business, is considering a bid.
• Buck breaking spurs mass money-market cash-outs. Putnam Investments shuttered its $12.3B Putnam Prime Money Market Fund, while a money-market fund run by Bank of New York Mellon (BK) fell to below $1/share - ominously known as 'breaking the buck' - something that until this week hadn't occurred since 1994. Recent turmoil has led money-market investors to withdraw their funds en-masse, further weakening the battered funds' positions.
• Credit crunch ebbs. The Fed injected another $50B into cash-strapped credit markets Thursday, after receiving $77.65B in bids. Demand was less than a day earlier, which drew $102B in bids. The same was true overseas: On Friday, 64 banks bid for $96.7B in ECB funding, down from over $100B Thursday.
• State Street scare. Shares of State Street (STT) went on a wild roller-coaster ride Thursday, falling as much as 40%+ on fears of its exposure to the newly-toxic money-market market and concerns it would be unable to roll over its outstanding debt. The stock rebounded to close down a mere 8.8% ($59) after STT issued a statement claiming its money market funds are stable and that it has ample liquidity.
• Sick and sicker. Freddie Mac (FRE) disclosed Thursday it hasn't received principal payments of $1.2B plus interest on short-term loans to Lehman (LEHMQ.PK) that were due Monday. The disclosure demonstrates just why Freddie fell apart: "It's obvious Freddie didn't exercise reasonable safeguards," Egan-Jones Ratings' Sean Egan said. Why else would it have exposed itself so heavily to an I-bank teetering on the brink?
• Barclays wants more of Lehman. Barclays (BCS) is in talks to acquire at least some of Lehman's (LEHMQ.PK) French assets, sources say.
• Initial jobless claims for the past week were 455,000, higher than the 440K, and up 10K from last week. The four-week average rose 5K to 445,000.
• The Leading Indicators index fell 0.5% in August, worse than the -0.2% consensus. Building permits, supplier deliveries and unemployment claims made large negative contributions.
• The Philly Fed's manufacturing survey soared into positive territory for the first time in ten months, reaching 3.8 in September vs. -12.7 in August, suggesting manufacturers expect sector growth over the next six months. "Overwhelmingly exports are helping," NCC chief economist Richard DeKaser said. "Inventories are at relatively healthy levels and are no longer a weight on the factory sector."
• Russia joins global bailout lineup. Russian President Dmitry Medvedev unveiled an expanded $120B rescue package for the country's battered financial system. The package includes up to $20B in government purchases of blue-chip stocks, $60B in bank deposits, and another $30B in repo loans. Meanwhile, Russia's bourses were shuttered once again - this time due to a sudden surge in share prices.

Earnings: Thursday After Close

• Cintas (CTAS): FQ1 EPS of $0.51 misses by $0.01. Revenue of $1B in-line. Shares -1.8%. [PR]
• Oracle (ORCL): FQ1 EPS of $0.29 beats by $0.02. Revenue of $5.42B (+18%) in-line. Shares +6.7%. [PR]
• Palm (PALM): FQ1 EPS of -$0.12 beats by $0.06. Revenue of $367M vs. $325M. Shares -9.4%. [PR]

Today's Markets

• Asia market strength was exceptional. Nikkei +3.76% to 11,921. Hang Seng +9.61% to 19,327. Shanghai +9.46% to 2,075. BSE +5.46% to 14,042.
• Europe surged higher. London +7.2%. Paris +6.6%. Frankfurt +4.1% at midday.
• U.S. futures are up big. Dow +2.53%. S&P +3.35%. Nasdaq +2.25%.
• Treasurys retreated as stocks surged: 30-year -1.55%. 10-year -1.35%. 5-year -1.18%. 2-year -0.65%.
• Precious metals lost their 'flight-to-safety' shine. Gold -6% to $842.90. Silver -4.7% to $12.10. Platinum -2.8% to $1,105. Crude +2.6% to $100.40.

Friday's economic calendar:

• 0:00 Quadruple Witching
  9:15 Treasury's Kashkari Speaks On Covered Bonds
  1:00 PM Fed's Evans Speaks on Economy
  

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Comments

[Shiv139:]

Like the UK FSA, early Friday morning the SEC too has banned short selling for financial services. While stocks can still be shorted; naked short selling is history for now. You can see the full text of the SEC orders at www.sec.gov/news/press....

A significant rally is likely to develop in companies where naked shorts have been high. These would include GS, MS, C to name a few. The financial services sector has a positive catalyst in terms of the additional liquidity provided to the market and initial steps taken to address the solvency issues causing great concern on capital markets. It would take significant foolish guts to short the sector. So for this sector expect a strong rally on account of short covering.

Outside financial services, we can expect to see Energy and Metals recover too; though the exuberance might be muted compared with financial services. Technology is another area where naked shorts have built up since Dell cited concerns on growth. NOTE THAT THE BAN IS ONLY ON FINANCIAL SERVICES, BUT I EXPECT SYMPATHY TRADING IN OTHER SECTORS.

Since the short covering adjustment will be a one time event, it will make sense to adopt a trading position - i.e. use the rally to exit in a few weeks. For financial services, the risks to short term positions, long term positions and secular positions, while considerably reduced, remain elevated. The healing process has begun and much will happen between now and the end game; this will allow building value positions with lower levels of risk (because of better visibility).

2008 Sep 19 07:36 AM

[axelrod608:]

I assume one can still buy puts, so is there such a huge volume of short sales to make a significant difference ? Where can one find numbers on short sales ? I've read in numerous places that "short selling is a problem" but so far nobody backs that up with any numbers.

2008 Sep 19 08:22 AM

[eddie6442:]

Wow, the SEC finally acts............after stocks are decimated by 80-90%...
...........BUT only for 10 days!!!!!!!!!! I'm guessing the coffers of those who SHORTED, especially NAKED SHORTS, will really suffer from this "proactive" SEC action.............
LMAO!

2008 Sep 19 08:37 AM

[axelrod608:]

"investing" these days is like playing russian roulette. It no longer has much to do with valuations, it all depends on what one part of the government or another is doing. Here I sit with stocks and options I;ve researched, done my due diligence, and it all goes out the window on a tidal wave of liquidity, a change in the rules, a whim or a whisper.

It would be different if the federal government had a track record of fixing or solving ANYTHING. Heck, they're the worst run "financial" in the world. Pouring trillions of dollars into insolvent companies run by greedy idiots is not a solution. It is foolishness.

2008 Sep 19 08:58 AM

[david roper:]

"Hi, I'm from the government and I'm here to help"

Sound familiar?

2008 Sep 19 09:03 AM

[notsosmart:]

if you listened to dumb me-i have been saying for years wall st i s vegas,you would treat it as such.homework,graphs,c... longer work.gold could be declared illgal.this due diligence is now a joke.think for yourself.dont believe anybody anytime about anything.you will be less stressed re this phony system.

2008 Sep 19 10:05 AM

[bbowen7:]

Can McCain dump Palin and put Paulson in her place? He obviously is the most powerful person on the planet.
Months ago he recommended a set of regulatory changes which were ignored. When all is said and done, he may actually make money for the taxpayer on this mess - until the Treasury stepped up to buy artifically deflated mortgage securities at a discount the only seriously interested party that I have seen was PIMCO. With all of the panic selling there is value for a discerning buyer.

2008 Sep 19 11:52 AM

[hurls111:]

The idea that short sales are an appropriate component of establishing stock prices is purest BS. Short selling is essentially printing counterfeit stock - particularly when the SEC doesn't have the stones to punish it when done illegaly.
If I own a stock and am willing to wait out a problem it is not right that someone who does not own the stock is allowed to sell mine and drive my value down.

2008 Sep 19 12:07 PM

[User 265669:]

This article and the sheeple that buy into it are all GARBAGE! As I believe the rock group, The Who, exhorted, "And we won't be fooled again!"

The powers that be are playing everyone for SUCKERS and doing it very well... I won't take THAT away from them.

The massive financial cover-up is a real joke that is being foisted on the stupid people of the world who have no understanding of the depth of the problems. What about the 375 TRILLION in derivatives that are floating in the world and are about to expire, WORTHLESS!?!

Get out the champaign and celebrate denial! In '29 the same junk was told to the people, even AFTER the market initially crashed... "We have strong economic fundamentals..." BULLS**T!!!

This author ought to be given 20 lashes with some fiat paper... we all know there is plenty around!...

I am so taken aback at what is presently going on that I must give Bush, the PPT, the media and all the other people and groups that make up the cabal that is destroying the world's economy... tons of credit for their efforts and I also give the American people an "F" for their stupidity and greed which allows them to bask in, temporarily enjoy and fall for such utter nonsense!!!

2008 Sep 19 12:12 PM

[whenmusicstops:]

265669

Just when I was starting to follow your argument I noticed your website...Shame. Hard to find like minds...

2008 Sep 19 02:25 PM

[captainjohann:]

Sir,
India's RBI is pumping nearly $ 2 billion equivalent indian rupees in the market to pep up Indian markets and indirectly wall street. the whole thing looks to me as crony capitalism of worst kind with Bush leaving, is his friends make a killing?

2008 Sep 19 09:44 PM

[nukldrager:]

What no sympathy for the devil? Jagger got it right about the central banks. Except they are not you or me.

2008 Sep 20 07:38 AM