- Markets surged in pre-open trading and shot up higher after the bell this
morning thanks to Hank Paulson's announcement that he will exercise the
Treasury's authorization to bail out Fannie Mae and Freddie Mac. The DJIA
topped out at +3% just after the bell and the Nasdaq was up just over 2%, but
indices have been trending downwards in early trading. As nearly everyone now
knows, the Treasury said late on Friday that it would seize control of the
GSEs, ensure that the firms would continue buying mortgage-backed securities
and back up the holders of the firms' outstanding bonds. No support was offered
to holders of common stock, although interestingly both names have been allowed
to continue trading; FRE and FNM opened down more than 75% and even traded up
momentarily. Central bankers, administration officials, the presidential
candidates and almost every other major stakeholder in the world financial
system has commented on the bailout over the last three days; the commentary
has tended to the admission that the bailout was inevitable and more or less
positive. Leading financial names opened strong, up 7-9% (GS opened +5%, C
+9.2%, XLF+8%), but the sector has given up a third to a half of these gains in
early trading. LEH is an exception, opening up 9% and then falling
precipitously into negative territory. A South Korean Regulator said over the
weekend that potential Lehman suitor Korea Development Bank (KDB) needs to
think carefully about any investment in firm, noting that while there is no
conflict between KDB and the government on pursuing â€śoverseas deals,â€ť KDB
should concentrate on fighting domestic risk. In addition, the London Times
reported that Lehman is preparing a plan to split the firm in two with Q3
earnings, hoping to spin off its toxic assets in a separate company.
Oppenheimer's Whitney lowered her outlook on US investment banks, cutting Lehman's Q3
EPS estimates to -$2.70/shr from -$0.23/shr prior and Merrill's Q3 estimates to
-$4.60/shr from -$2.93/shr prior. Both WM and WB opened +16% and have declined
to +3% and +10%, respectively. The WSJ reported overnight that both banks are
close to announcing new CEOs; WM later confirmed the story. ZION+8% is up (after spiking up 20% at the
open) despite the FDIC seizing its Silver State Bank subsidiary ($2B in assets)
on Saturday. Homebuilders have benefited from the GSE news as well as positive
comments on the sector from a Goldman analyst; the XHB traded up as high as
+12% before settling to around +8% in early trading. Crude has remained calm
ahead of the OPEC conference in Vienna tomorrow and news that Hurricane Ike
will likely miss the industry in the Gulf. Overnight the Kuwaiti oil minister
said there is no need to cut production at the meeting, while the UAE oil
minister said global oil markets are well supplied. A Goldman analyst
recommended the Homebuilders as long-term investment. MO+4% after saying that
it would acquire UST+2% for $69.50/shr in cash in deal worth $11.7B, confirming
earlier media speculation. United Airlines was halted after falling steeply
this morning after a staffer at the Chicago Tribune reportedly posted a four-year-old story
on the airline going bankrupt, taking the entire airline sector down with it.
Investors are disappointed in BIOD-65% lukewarm diabetes trial results. It is
also worth noting that the NASDAQ is noticeably underperforming today with the
semis and shares of Apple weighing on the index.
- Treasury prices came off hard in electronic trade mostly in reaction to the
GSE bailout plane and subsequent strength in stocks. Prices did pare losses
after the open of floor trade though yields are still higher and the benchmark
curve is flatter. The 10-year note future is down 29 ticks with the cash
yielding 3.74%. The Jan fed fund future is again pricing in roughly a 15%
chance for a rate hike by the end of the year. That contract had seen very
small odds of a rate cut following Friday's disappointing jobs data.
- In currencies, the greenback maintained a firm tone against the European
currencies as oil and gold retreated from their best levels. The EUR/USD
continues to hover around Friday's pre-US employment low of 1.42 and Euro
tested fresh 11 months lows below 1.4175 area. Risk aversion slowly creeping
back into the market causing JPY and CHF to firm against various European pairs
with EUR/JPY back below the 154 handle and EUR/CHF dipping below the 1.60 area.
Germany's IG Metall Union is reportedly seeking
a 7-8% wage increase, which the board will likely endorse on Sept 23. Various
central bankers continued to speak highly of the US government bailout of the GSEs, adding
that the process of repricing risk is continuing while central banks must
remain alert to the remaining risk in this process. The ECB's Trichet said that
the US action was welcome, reiterating that
global inflation remains at a very high level and that anchoring global
inflation expectations remain important, as global levels are
"abnormal." ECB's Stark reiterated that slower economic growth may
not dampen inflation in the short term and added that the current stance will
help achieve stability in prices.
- European equities remain broadly higher on the US GSE bailout. Euro Stoxx 50
+3.9% at 3,307; FTSE 100 Index +3.8% at 5,440; CAC 40 Index +4.3% at 4,377 and
DAX Index +2.9% at 6,303.
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