Well, we seem to have our bailout package -- but it also does not seem to be helping.
Pre-market trading (7am) is down considerably. It’s possible that there is still some worry since the package has not yet been voted on, but the selling is a bit overdone. As it stands now, the bailout program (now renamed the Emergency Economic Stabilization Act of 2008) will provide $250Bn immediately, $100Bn more if the President decides it’s necessary and $350Bn subject to additional Congressional approval. The bill expires on Dec 31st, 2009 and assets are to be purchased at "market value," whatever that is.
Another thing hammering the financials is a provision that a broad-based fee will be assessed, apparently against the whole industry, to pay for any losses incurred by the government in funding this bailout, oops, Stabilization Act. The government also gets warrants to participate in the upside for the financials but, between that and caps on compensation, well-capitalized firms will have little reason to participate, so we can expect our warrants to be coming from the dregs of the dregs of our financial markets.
The Treasury will also establish an insurance program to cover losses with a risk-based premium also paid by the financial industry -- another scary cost for the financials. We should be retesting last week’s lows today but, if we survive it, I’m actually thinking we may have a short-term bottom here, well called by Warren Buffett last week. Wachovia (NASDAQ:WB) has no bottom so look for Citi (NYSE:C) to get a sweetheart deal for the bank.
Over in the UK, mortgage lender Bradford and Bigley has failed and will be taken over by the Treasury as a crisis of confidence, more so than debt took them down very quickly. "The Treasury with the other tripartite authorities, acting in their respective capacities, sought a range of private sector solutions before taking this action," the UK Treasury said Monday. "However, with its financial advisor, HM Treasury concluded that this option best delivered its objectives of maintaining financial stability, protecting consumers and protecting taxpayers." Europe is down about 3% this morning.
Also in Europe, the governments of Belgium, Luxembourg and the Netherlands combined to pay $16Bn to Fortis, Belgium’s largest retail bank, in return for 49% of the company. Fortis must now sell its stake in ABN (ABN) and that is now driving down ABN partner RBS on fears the fire sale by Fortis will devalue that asset - see how everything is connected! The ECB and other Central Banks continue to pump tens of Billions into the markets on a daily basis, trying to shore up the financials around the world and maintain some semblance of liquidity.
On the bright side, NY Invesment firm JC Flowers has raised $2.5Bn from investors to form a buyout fund that will target banks and other financial firms in a bottom-fishing expedition. Flowers wants to “take full advantage of the blood in the streets,” said Michael Holland, chairman of Holland & Co. in New York, which manages $4 billion of assets. “He had a coup in Japan and is going to visit similar opportunities in the U.S.” Flowers was part of an investor group that bought Long-Term Credit Bank of Japan Ltd. for 121 billion yen ($1.1 billion) in 2000, renaming it Shinsei. The group sold two-thirds of the company in 2004 for 532 billion yen. David Rubenstein, co-founder of the Carlyle Group buyout firm, hailed it as perhaps the most successful private equity deal in history. Let’s hope Flowers is once again calling the bottom correctly.
Asian markets are way down with the Hang Seng dropping 4.3% and the Nikkei falling 1.3% after falling 300 full points from a good open. Any improvement in the US markets today can be played by taking the FXP ((FXI ultra short)) puts, but it remains to be seen whether the US markets will respond, even assuming the House does pass the bill today. The dollar is going strong and China is pitching in by making moves to slow Yuan apprectiation, which has been up 6.7% this year alone.
Click to enlargeAdding more pressure on the US financial markets is a widening investigation by NY Attorney General, Andrew Cuomo, whose ongoing investigation into short selling is now expanding to include the $54.6Tn credit-default swap market. According to Bloomberg: "Cuomo is probing whether credit-default swaps were manipulated by short sellers to spread false rumors about financial companies such as bankrupt securities firm Lehman Brothers Holdings Inc. to drive down stock prices." According to Anthony Carfang of Treasury Strategies, Inc.: "You have a set of people doing this trade and they’re targeting one company at a time,” he said yesterday in a phone interview. “When Fannie Mae goes under, they move on to the next target, which was Lehman Brothers, and now you see them in Wachovia and Morgan Stanley.” Credit-default swaps on both Wachovia Corp., the fourth- largest U.S. bank, and Morgan Stanley (NYSE:MS) reached record highs yesterday, suggesting investors are betting on a failure or hedging against losses.
9am: It looks like C is getting the WB deal and clearly that marks them, along with JPMorgan Chase (NYSE:JPM), as REALLY too big to fail. I’m liking Oct $20 calls as a gamble if C opens below $19.50 (now $19.25 pre-market) as well as the 2010 $22.50s for about $3 as a play on a long-term recovery. We had a lot of speculative put plays on financials on Friday afternoon and if you do well on some of those, then picking up a couple of bullish calls is an interesting way to balance things out.
Both MS and RBC dropped price targets dramatically on Apple (NASDAQ:AAPL) and that stock is getting hammered ahead of the open. MS dropped the price target to $115 and RBC from $200 to $140. If this is the kind of downgrade we are going to be getting on the best of tech companies, it will not be a pretty picture at all in the rest of the markets. The Nasdaq was already on the ropes but with RIMM and now AAPL hitting new lows, that rope is clearly going around the neck of Tech in general. If the Qs fail to hold $40 then look for QID (QQQQ ultra shorts) to really take off -- but the premiums are outrageous on the option side.
One more bright spot is oil rapidly selling off, back to testing $100 this morning. We’re going to need oil to head MUCH lower than that to help the consumers at this point. Oddly enough, Personal Income was up 0.5% for August, much more than the up 0.3% expected and way better than the -0.7% we had in July. Personal Spending, on the other hand, was 0%, lower than the 0.2% increase expected - another indication that consumers are tightening. Tomorrow we get Chicago PMI and Consumer Confidence and that’s where we’ll end the month.
It’s going to be a rough one today; a Nasdaq breakdown will be very tough to recover from as it was our best hope for new leadership. Let’s watch the Transports, who SHOULD benefit from lower fuel costs but are unlikely to be in a party mood today. I’m looking for the Nasdaq Transportation Index to hold 2,100 and it’s a critical level while holding 2,200 will be mildly positive but It’s hard to be optimistic looking at this opening.