Monday, October 13, 2008

I'm Almost Speechless...

That was a stunning end of the day rally. The markets were trading within about 100 points of where they opened in the morning until the final hour when the program trades and trend chasers start pushing the panic button. While the headline numbers are simply eye-popping (up 11% on the Dow and 17% since the Friday afternoon lows) and the global rally looks to continue (the Nikkei is up another 12% as I write) there were some unbelievable moves in many individual stocks.

The US Treasury continues to leak out details of their revised bank bailout, that is morphing into a quasi-nationalization of the banking industry.

Neel Kashkari, the U.S. Treasury official overseeing the $700 billion rescue of the financial system, said government equity injections will be aimed at ``healthy'' firms.


``We are designing a standardized program to purchase equity in a broad array of financial institutions,'' Kashkari, who heads the department's Troubled Asset Relief Program, said in a speech in Washington. ``The equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions.''

A couple of quick points:

- if you are a healthy institution, you probably aren't going to be in need of capital.

- by the time the Government gets around to implementing their program, stocks which are already 20% higher than they were on Friday, might be back near their previous overvalued levels. So, the taxpayer is likely to overpay for equity in "healthy" banks (I'm not sure who is in charge of defining healthy - but I hope it is someone other than the 35yr old former Technology Banker from Goldman Sachs).

My final point on today's stunning rally - 5 of the largest point gains in the HISTORY of the DOW JONES INDUSTRIAL AVERAGE have now occurred in 2008! Does it feel like you've had 5 of the biggest one day rallies in history this year?

Also, note that while today's rally was clearly historic (ranking number 4 on the list of greatest one day percentage gains), 8 of the other 10 greatest percentage gain days occurred in the three years FOLLOWING the great crash of 1929 as the market ultimately fell 80% over three years and it took another 20 years to surpass the price levels seen in the 1920's.


Cheers!


Update: $25 billion for Citibank, Wells Fargo, JP Morgan and Bank of America. The quick and the dirty - capital injection is good for the banks and it may or may not increase lending (I think not). I'm most concerned with the investments in Citibank, Wells Fargo, and Bank of America - these are far from "healthy" financial firms. Note that US Bancorp, widely regarded as the healthiest bank in the US is not on the list. Finally, it would have been nice if we'd bought our Morgan Stanley stock before it went up 87% TODAY!!


"The Treasury Department, in its boldest move yet, is expected to announce a plan Tuesday to invest up to $250 billion in large and small banks, according to officials. The United States is also expected to guarantee new debt issued by banks for a period of three years, officials said.

And the Federal Deposit Insurance Corporation will offer an unlimited guarantee on bank deposits in accounts that do not bear interest — typically those of businesses — bringing the United States in line with several European countries, which have adopted such blanket guarantees.

Treasury Secretary Henry M. Paulson Jr. outlined the plan on Monday to nine of the nation’s leading bankers at an afternoon meeting, officials said, in which he essentially told the participants that they would have to accept government investment for the good of the American financial system. This capital injection plan will use a huge chunk of the money authorized for Troubled Assets Relief Program.

Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch.

The goal is to inject massive liquidity into the banking system. The government will purchase perpectual preferred shares in all the largest U.S. banking companies. The shares will notbe dilutive to current shareholders, a concern to banking chie executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings.

The capital injections are not voluntary, with Mr. Paulson making it clear this was a one-time offer that everyone at the meeting should accept. "
Wall Street Rejoices!

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