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U.S Market Update

Mon, Sep 22 2008, 15:41 GMT
by Trade The News Staff

TradeTheNews.com

- Market players around the world are grappling with a radically altered Wall Street landscape this morning. In its latest attempt to calm markets, the Fed allowed Goldman Sachs and Morgan Stanley to become bank holding companies on Sunday night, implicitly abandoning the traditional investment banking business model. Markets are predictably unsettled, with the all three of the major indices off more than 1.5% in early trading. "This decision marks the end of Wall Street as we know it" has been the recurring quote, as multiple commentators weigh in on this significant change. The move places the firms under the direct regulation of the Fed, paves the way for them to rely more heavily on deposits and likely means leverage levels will fall substantially. Morgan Stanley CEO John Mack says the new structure will leave MS in the strongest possible position, and "...offers the marketplace certainty about the strength of our financial position and our access to funding." Deal news is also moving Morgan Stanley's stock this morning: before the open, reports circulated that Mitsubishi UFJ would buy a stake that would eventually reach 20% in the firm. The price has not been settled as of yet, but will be based on MS's book value as agreed upon following ongoing due diligence. Mitsubishi UFJ says it intends to invest up to JPY900B. In addition, the FT reported that MS's talks with WB-9% may be scrapped this week, although the firm is continuing discussions with China Investment Corporation. MS is up 10% in early trading, while GS is down 4%. The rest of the leading financials are under pressure, down 5-10%. WM-20% has returned to the downside after recent strength over uncertainty regarding plans to sell the company; this morning CNBC reported WM may wait until after the details of the government bailout become clear to make any decision on a sale, while the WSJ reported several scenarios overnight. AIG is up nearly 30%; CEO Liddy told CNBC this morning that he plans to publish a list of assets to be sold in seven to ten days. LM-18% is under serious pressure after the New York Post reported the firm is mulling going private; the company denied the reports after the open.

- The deeper ramifications of the short selling ban are surfacing this morning as firm after firm announces plans to undertake large stock buybacks now that there is a much-diminished threat from the shorts. HPQ has authorized an $8B share buyback (6.7% of market cap), NKE has ok'ed a $5B share repurchase program (20% of market cap), SYY is buying back 20M shares (3.3% of shares outstanding) while MSFT has authorized a whopping $40B buyback (17% of market cap) and boosted its dividend by 18%. SJI, RFIL, CVA and PCTI have also announced share buybacks this morning. In addition, S&P assigned an industrials AAA rating with a stable outlook to MSFT+4%. In other news, used-car outfit KMX-3% is under pressure after missing EPS and revenue targets this morning and reporting that same-store sales declined 17% for the quarter y/y. AZO is up modestly after reporting in-line with estimates. MAR-3% after a bomb leveled one of its hotels in Pakistan over the weekend.

- Commodities continue to exhibit some relative strength on Greenback weakness and continued demand for physical assets. WTI crude is trading around $108 while Dec gold has moved back above $900. Front-month silver and platinum have gained more than 7% while copper is trading at $3.25. Grains are trading up 3-4% across the board led by wheat while the CRB has added roughly 2%.

- In currencies, the carry-related pairs moved higher as dealers watched risk aversion ease off thanks to the government's bailout of US financial sector. Asian currencies JPY and CHF were a touch softer as numerous US equity names launched share buyback throughout the morning. The level of financial market stress remains elevated however, as shown by today's Libor fixings. The three-month USD Libor came in at 3.20% compared to Friday's level of 3.21%. Overall the greenback remains softer among the major pairs thanks to concerns over the gigantic price tag of the bailout and its implications for the government's debt ceiling. USD weakness is helping commodities move higher.

- The ECB's Nowotny reiterated his view that central bank has no bias on interest rates, adding that while inflation may be declining it remains above target following August. In addition, he said Europe will likely suffer from lower growth in 2009 given that global markets are going through a period of extreme volatility. The ECB's Trichet reiterated his familiar hawkish concerns over inflation, again repeating that price stability remained his top priority. Trichet promised that the ECB will remain on alert to sooth volatility in credit markets.

- Treasury prices have been under pressure from the onset of floor trading. In late morning trade the yield curve is actually a bit flatter reversing the overnight trend. The 2-year yield is back above 2.20% and athe 10-year is nearing 3.90%. Dec Gilts -85 ticks at 110.08; Dec Bunds -68 ticks at 113.05. Euro Stoxx 50 index -0.6% at 3,234; FTSE 100 Index -1.25%; CAC 40 Index -1.2% and DAX Index -2%.

Published on  Tue, Sep 23 2008, 07:22 GMT