Daily Insight

Capping off a historic week, stocks rallied sharply for the second-straight day as drastic moves by the government were announced to bail out the banks. Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke announced the removal of illiquid mortgage securities from companies’ balance sheets while the SEC temporarily banned the short sale of 799 financial services companies. As a result, financials led the rally gaining 11.13 percent on Friday.

Market Activity for September 19, 2008
If you were on vacation last week, you might think nothing interesting happened since stocks ended relatively flat for the week. However, the Dow posted triple-digit moves every session in response to a variety of events such as Lehman Brothers filing for Chapter 11 bankruptcy protection, Merrill Lynch and Bank of America’s shotgun wedding, the Fed leaving its target fed funds rate unchanged, the government taking over the world’s largest insurer AIG, two money market funds “broke the buck,” and yields on three-month Treasury Bills rose a few basis points above zero.

On Saturday morning, a three-page bill was delivered to members of Congress asking them to give Paulson unchecked power to buy $700 billion in bad mortgage investment from financial companies in what would be an unprecedented government intrusion into the markets.

The plan would raise the ceiling on the national debt and spend as much as the combined annual budgets of the Departments of Defense, Education, and Health and Human Services. Paulson was asking for the power to hire asset managers and award contracts to private companies. Most provisions would expire after two years from the date of enactment.

On Sunday, the Fed agreed to convert investment banks Morgan Stanley and Goldman Sachs into traditional bank holding companies, thus subjecting the firms to greater regulation and likely lower profitability. (It has become somewhat of a Sunday ritual for me to see what big announcement the government will make on Sundays.)

Goldman and Morgan Stanley have maneuvered through the credit crisis better than other investment banks, but the Fed feared the investment-banking model could not function in these markets for much longer. Investment banks depend on short-term money markets to fund themselves, but that has become increasingly difficult, particularly in the wake of the collapse of Lehman Brothers. As bank holding companies, Morgan Stanley and Goldman Sachs will be allowed to take customer deposits, which are potentially a more stable source of funding.

With the attention focused squarely on the financial crisis and government efforts to unclog the credit markets, the economic calendar will probably take a back seat on Wall Street again this week.

Wednesday we will get the report on existing home sales, which account for about 85 percent of the total home sales and have been at the root of the financial crisis that shook the markets last week. Sales in August are forecast to decline 1.2 percent to an annual rate of 4.94 million units, suggesting that the housing market will get no relief from the uncomfortably high inventory levels and declining home prices.

It is still too early to tell how homebuyers will be affected by the recently-passed housing bill, the bailout of the nation’s largest mortgage buyers Fannie Mae and Feddie Mac, and the monumental developments in the financial markets, but it is crucial for homebuyer confidence to begin to be restored for the economy to gain traction.

Other reports that will be released include durable goods orders, new home sales, and weekly initial jobless claims on Thursday. And, of course, the final 2Q GDP will cap off the week.\

Brent will be back tomorrow and I’m sure he will have plenty to say about these historic events.


Have a great day!


Peter Lazaroff, Junior Analyst