- Markets are under extreme pressure this morning as credit market dysfunction
deepens, central banks undertake major liquidity injection and investors await
the House vote on the Emergency Economic Stabilization Act (formerly TARP). Oil
is off more than $6 around $100 and other commodities are also down on global
economic concerns, although gold is higher on safe-haven buying. Overnight
governments in the UK,
Germany and Iceland
moved to rescue several major financial firms, including Fortis, Bradford &
Bingley, Hypo Real Estate and Glitnir Bank as the shockwaves from the US
financial crisis take out the European banking system's weakest links. European
borrowing costs rose to record levels after the government-led bailouts
heightened concern that there will be more trouble to come in Europe,
prompting financial institutions to hoard cash. The Fed, FDIC and Treasury
arranged the sale of Wachovia to Citigroup this morning. Morgan Stanley
released the concrete details of Mitsubishi UFJ's investment, noting that it
would pay $25.25 for an initial 9.9% stake, eventually raising that to 21% for
a total investment of $9B. MS is down more than 10%. Apple was cut at RBC and
Morgan Stanley overnight. Analyst Kathryn Huberty cut her AAPL price target 35%
and reduced the name to equal-weight, noting that slowing iPhone and Mac orders
should force the company to cut prices to compete this holiday season, weighing
on earnings. AAPL is down nearly 14% on the news, while fellow tech names GOOG,
RIMM, DELL and TXN have fallen 4-6% in line with Apple; QCOM is down 8%. The
Baltic dry bulk index fell sharply again today, the sixth consecutive decline
for the critical indicator of shipping rates. Ocean freight companies are down
sharply on the news, led by EXM-16% and EGLE-14%, with DRYS, DSX and GNK down
10%. The energy complex is weak as oil falls more than $6, with COP and BP down
more than 6% and CVX and XOM down around 4%. Mining stocks RTP, RIO and FCX are
down more than 10% on news that Chinese buyers of Indian iron ore are
defaulting on import contracts, while steel names down on cautious comments in
the WSJ, which reported overnight that US steel companies are facing a sharp
decline in demand as buyers become concerned about the credit crisis and global
slowdown. Inventories are rising and prices on some key products have fallen by
10%. CC-10% missed EPS and revenue estimates by broad margins this morning, and
withdrew its 2009 guidance. The firm's CEO noted that "Our sales were
below plan for the quarter, driven by a significant decline in traffic, which
we believe reflects the worsened macroeconomic environment, competitive
pressures and a weakened brand position." WAG-4% is under pressure despite
reporting mostly in-line with estimates.
- Events moved quickly at Wachovia over the weekend, with the government
finally stepping in to arrange the sale of the bank to Citigroup this morning.
Last night reports circulated that Citi and Wells Fargo were bidding to take
WB's banking operations, with the WSJ even saying that WFC was the preferred
buyer. This morning Citi was tapped to assume $42B of losses, senior and
subordinated debt, and a $312B pool of loans from Wachovia for $2.1B in total.
As part of the deal, Citi has granted the FDIC $12B in preferred stock and
warrants to compensate it for backing up certain losses from the bank. As a
result of the acquisition, Citi cut its dividend in half. This FDIC's Bair said
the decision was made under extraordinary circumstances with significant
consultation among the regulators and Treasury, and was necessary to maintain
confidence in the banking industry given current financial market conditions.
Treasury Secretary Paulson noted that Wachovia's failure would have posed a
systemic risk, while the sale has prevented a market disruption. Oppenheimer
analyst Meredith Whitney told CNBC that she believes she would be a seller of
Citigroup following the deal, noting that Citi would need to raise as much as
- Stress in the credit system remains extremely elevated both here and overseas
as money flows to the relative safety on shorter-dated Treasuries. The curve is
steeper with the US
two-year yield falling to 1.85%. The US
three-month TED spread traded briefly traded above 350 basis points for the
first time. Talk that credit default swaps for certain countries were widening
out noticeably added to the jitters.
- In currencies the global liquidity crisis remained the dominant theme, with
USD, JPY and CHF seeing significant moves in a trading session defined by
heightened stress, thanks to the European bailouts, US
development central bank liquidity operations. The EUR/JPY cross was off 350
pips as it probed towards the 151 handle while GBP/JPY fell over five big
figures to test 189.50 during the New York morning. The EUR/USD traded as low
as 1.4305 before retracing toward the mid 144 area. Safe-haven flows headed to
the shorter end of the yield curve in both Europe and
the Satets. The Fed said it would take a series of steps to help global central
banks to increase dollar funding in their home markets, noting that
dollar-funding rates abroad "have been elevated relative to dollar funding
rates available in the United States," reflecting "a structural
dollar funding shortfall" outside of the US. The Fed increased the size of
the 84-dayTAF auctions to $75B per auction from the current level of $25B and
proceeded to raise swap lines foreign central banks to $620B versus $290B
prior. Note that several European central banks added to upside momentum in
gold after curbing futures sales of the yellow metal. Germany's
Bundesbank said it would halt gold sales this year under its existing central
bank agreement while the SNB noted that no more sales are planned at this time after
reducing its amount held to 1,040 tons.
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