Soothing words from the Fed, along with an active discount window, allowed investors to breathe a sigh of relief. Oh, and Bank of America throwing a $2B lifeline to Countrywide didn’t hurt either. As markets stabilized, investor’s jittery nerves were calmed (or perhaps that was vice-versa). Either way, following last week’s reversal Thursday and rally Friday, the markets continued on this week taking back much of early August’s losses with more gains.
Global stocks gained 4.1%, while European issues tacked on 2.9%. The Nasdaq also grabbed 2.9% this week, as investors came to realize that Tech stocks have no sub-prime exposure or other credit issues. REITs, the S&P500 and the Dow Industrials managed a 3 way tie, all moving 2.3% ahead. Gold added 1.7%, while the small cap Russell2000 brought up the rear, gaining 1.6%.
Losers for the week were the trade weighted dollar (-0.5%) and Crude oil (-1.0%).
Barron’s Trader column identified the key question on the mind of investors and the Fed:
"Its the central question driving stock trading these days: If the financial market manages to stave off a crippling credit crunch, will tighter lending nonetheless choke off the economy enough to kill companies’ profits?"
We may find out the answers to that question in the coming weeks. But for today, we will review som e of the more interesting and important stories you may have overlooked amongst all the madness. Its linkfest time!
INVESTING & TRADING
• How a Panicky Day Led the Fed to Act: The Wall Street Journal goes into the details that ultimately led the Fed to cut the discount window rate by 50 bps. If you are interested at all in how Central Bankers operate, you will find this discussion and timeline fascinating.
• Our overconfidence in technology doomed us to this crisis:
Brains, the flesh and blood kind, are back on Wall Street. Gray matter
is the new silicon. In the wake of the credit crisis, there is a new
premium placed on the
kind of active management that’s not a bunch of souped-up computers
running algorithms and firing off trading orders. The high-profile
collapses of funds
that we’ve come to know as "quants" or quantitative funds has
challenged what had been an arrogant confidence in the power of
computers, models, formulas the efficiency of electrified trading.
• Fed Easings and Market Tops: There have now been 3 hair-raising instances in the past 20 years when the
capital markets broke down badly enough to cause commercial and investment banks
alike to stare into the abyss of total collapse. In each case, the stock market
fell after hitting recent new highs and the Fed came riding to the rescue. Here
are those periods, the amount of the decline in the S&P off the highs, and
how many days after those highs were seen for the Fed to take action . . .
• My, How Fast Liquidity Disappeared: The Garden of Eden began to look like a perfect storm until the Fed acted last Friday.We experienced a host of "Black Swans" that spooked the equity markets. We are now experiencing a temporary reprieve that will enable the de-leveraging of credit to continue. (Forbes)
• How a Gulf Petro-State Invests Its Oil Riches: The Gulf petro-states control a vast hoard of investable funds, one that is sure to grow vaster. Combined, government investment arms in Kuwait, Saudi Arabia, Dubai, Abu Dhabi and Qatar hold an estimated $1.5 trillion. That gives them the potential to sway the course of broad global financial markets, including exchange and interest rates, the now-slowed buyout boom and the global credit dislocations stemming from U.S. subprime mortgages. Yet for the most part, the operations of these funds are opaque. (Wall Street Journal)
• Beware Bailouts:
For anyone with a 401(k), it was hard not to greet the Fed’s move with
relief. But the short-term relief comes with a long-term cost. Money
managers created the current turmoil by failing to take risk seriously,
enabling borrowers with sketchy credit records to borrow money nearly
as cheaply as blue-chip companies. In the past weeks, managers had been
paying for their folly. The Fed’s decision to flood the system with
cheap money will create a textbook case of what’s usually called moral
hazard: insulating fund managers from the consequences of their errors
will encourage similarly risky bets in the future. (New Yorker)
• Wells Fargo Gorges on Mark-to-Make-Believe Gains: There’s the kind of earnings investors can take to the bank. And then there’s the kind the bank can show to investors. Word to Wells Fargo & Co. investors: Beware the second kind. Last quarter Wells Fargo reported record net income of $2.28 billion, up 9 percent from a year earlier. Read the footnotes to its latest quarterly report, though, and you will see a new term in accounting lingo called "Level 3” gains. Without these, the financial-services company’s earnings would have declined. (Bloomberg)
• Mixed views on the Bank of America (BAC) investment in Countrywide (CFC) which I suspect will be a profitable bet for BoA: The Wall Street Journal wrote Countrywide’s Surge Was Sweet but Short; However, Dow Jones reported OCC: BOA Can’t Convert Countrywide Secs Into Cmn Stock
• Commercial Paper Has Biggest Weekly Drop Since 2000:
Outstanding U.S. commercial paper fell 4.2 percent, the biggest weekly
drop in at least seven years, as investors fled asset-backed debt and
opted for the safety of Treasuries. The retreat may indicate that the
Fed’s decision to lower
the discount rate last week failed to instill enough calm to draw
back investors. Commercial paper backed by assets led the fall as
buyers fled debt linked to subprime mortgages. (Bloomberg)
• Bearish Bets Fall on the NYSE; Bearish Bets Fall on Nasdaq: Short-selling activity fell for the August reporting
period at the Nasdaq Stock Market, in line with the recent decline at
the competing New York Stock Exchange. (Wall Street Journal)
The Wall of worry continues to build:
• Credit Crunch Moves Beyond Mortgages: It’s not just mortgages. As it gets tougher to land a home loan, some people are also finding it harder and more expensive to get other types of consumer credit. Some lenders, such as USAA, are nudging up credit-score requirements across their auto loans, credit cards and personal loans. Bank of America Corp. and Capital One Financial Corp. recently raised fees and interest rates for some of their credit-card customers. And this month, Citigroup Inc.’s CitiFinancial Auto started charging higher auto-loan rates for borrowers with less-than-perfect credit. (Wall Street Journal)
• The one question you must never ask an economist: Orthodox economics assumes that
people know roughly what they are doing, that they are rational, and that
rationality is unambiguous. Such assumptions are often fair enough in
everyday life – hence the justified success of [Economist/Authors] Levitt, Landsburg and
Harford. But in financial markets, people often don’t know what they are
doing. Recognising this helps to solve our puzzles. (UK Times)
• Financial job cuts soar on housing woes: A deepening U.S. housing slump has caused an alarming surge in job losses at U.S. financial services companies, and the end is nowhere in sight, consulting firm Challenger, Gray & Christmas Inc. said on Tuesday. The industry has announced 87,962 job cuts so far this year, 75 percent more than the 50,327 recorded for all of 2006, Challenger said. Nearly one-fourth of this year’s cuts have been announced in August alone. (Reuters)
• Consumer Confidence Tanks in Sharpest Drop in 20 Years: Consumer confidence sustained its steepest one-week drop in more than 20
years of ongoing polls this week, falling to its lowest level since the
aftermath of Hurricane Katrina in late October 2005. (ABC)
• In First Crisis on the Job, Bernanke’s About-Face Is Weighed: The way he has handled this is completely in character, said Mark Gertler, chairman of the economics department at Columbia University and a longtime colleague of Mr. Bernanke. What’s going on is in many ways a textbook financial disturbance and nobody I know understands these things better than he does. (New York Times)
• Robert McTeer: Moral hazard at the Fed: Moral hazard,
illustrated above, is another one of those things that’s easier to
recognize than to define. My definition is, when the cost of an action
is borne by someone else or when mitigating the consequences of bad
behavior encourages such behavior in the future. The
Fed’s reluctance to intervene in financial markets began as fear of
inflation but soon became fear of moral hazard. The Fed didn’t bail out
the Long Term Capital hedge fund in 1998, but it’s still haunted by the
myth that it did. (The Dallas Morning News)
• Retracted Memos, Canceled Vacations: Fed Cut Shocks The S&P 500 surged as much as 2.8 percent, after tumbling 9.1 percent through yesterday from a July 19 record on concerns losses on mortgages will hurt bank earnings and cause borrowing costs to rise. Yields on three-month bills climbed as much as 23 basis points, or 0.23 percentage point, in the hour and 15 minutes after the Fed announcement, before paring the increase.
• Jatropha Plant Gains Steam In Global Race for Biofuels:
Jatropha, a lowly forest plant that grows wild in India, has suddenly
found itself at the center of a new phase in the world’s alternative
energy boom. (Wall Street Journal)
• The journalism that bloggers actually do (Los Angeles Times)
• Report Offers Grim View of Iraqi Leaders; Doubt on Bush Tactics: A stark assessment released Thursday by the nation’s intelligence agencies depicts a paralyzed Iraqi government unable to take advantage of the security gains achieved by the thousands of extra American troops dispatched to the country this year. (New York Times)
• Congress Approval Rating Matches Historical Low: A new Gallup Poll finds Congress’ approval rating the lowest it has been since Gallup first tracked public opinion of Congress with this measure in 1974. Just 18% of Americans approve of the job Congress is doing, while 76% disapprove, according to the August 13-16, 2007 (Gallup Poll).
TECHNOLOGY & SCIENCE
• Dumb head line of the week: Apple’s surprise weapon: Computers
• A torn rotator cuff, shorn cartlidge, and other wear & tear has me looking at Voice Recognition Software (Its not the years, its the miles). Any suggestions from readers as to what’s better or worse?
• Henry Blodgett gets to indulge in a little schadenfreude at Mary Meeker’s public arithmetic error: Mary Meeker’s YouTube Math
• The Out-of-Body Electric Two teams of neuroscientists have made a breakthrough in the study of "out-of-body experiences," according to this week’s issue of Science. About one in 10 people report having had the strange sensation of floating away from their bodies at some point in their lives. According to the new studies, it’s now possible to induce that feeling of astral projection in the lab. (Slate)
• Have you driven a Fjord lately? (Business 2.0)
MUSIC BOOKS MOVIES TV FUN!
• How I Became a Quant: Insights from 25 of Wall Street’s Elite: A timely book, given all of the quant funds that seem to be having some difficulty these days. Its reviewed here, and the WSJ online excerpts chapter 14, by Clifford S. Asness, Managing and Founding Principal, AQR Capital Management.
• Off the record:
In recent years, the economics of pop music have been upended. The
market for CDs has collapsed, and not even the rise of legal
downloading can offset the damage to record companies. Meanwhile,
demand for live performances has rocketed. There is a story doing the
rounds in the US that says a lot about the state of the music business.
It concerns a young rock band who decided to stop selling their CDs at
concerts. Selling CDs has, for many years, been a good way for an act
to reclaim the margin that would otherwise have been snaffled by a
retailer. But it made no sense to this band once they discovered that
by selling CDs for $10 they were cannibalising sales of their $20
Its threatening to get nice outside, and I need to go outside and enjoy it for a few hours. Have a good weekend!