Market 360: The Best and Worst of the Week for US Equities, Commodities, Currencies, and More
For the historic week ending Friday, September 19, 2008, the major U.S. Indices managed to close mixed and almost flat after one of the most volatile trading weeks ever, driven by the collapse of investment bank, Lehman Brothers, enormous government actions around the globe, and billion dollar deal making. In one week, the government bailed out AIG, pumped funds into money markets, and banned short selling of financials - all while keeping the Fed Funds target unchanged and taking unprecedented actions to halt the liquidity crisis. The CBOE Volatility Index surpassed the benchmark level of 30, hitting an intraday high of 42.16 on Thursday, its highest level since 10/2002. The major indices were all up and down +/- 3% for 4 of the past 5 days. The Dow posted a 2 day point move of more than 778 points as of Friday’s close, after plummeting 811 between Monday and Wednesday and hitting 10,609.66, its lowest level since 11/9/2005. On Friday, The Nasdaq Composite recorded a 2-day point move of greater than 175 points after it closed down 109.05 points on Wednesday, its first triple digit decline for one day since it began trading after the 9/11 attacks. The S&P 500 flirted with record territory closing up 98.7 over the last two days, marking its biggest 2-day point move since 3/16/2000, the largest 2-day point move ever.
Next Week's Highlights: Next week there will be more economic news that could impact the markets including Gross Domestic Product (GDP- final), Durable Orders, New Home Sales, and Consumer Sentiment. Companies reporting earnings include Lennar Corp, Bed Bath & Beyond, Red Hat, Nike, Research in Motion, Discover Financial, and KB Home. Also Kraft Foods will replace AIG in the Dow Jones Industrial Average as of Monday.
Market Moving News: Dominated by Financials and the Credit Crunch
- Financial stocks crumbled on Monday on news that Lehman Brothers filed for Chapter 11 bankruptcy protection after the investment bank failed to find a buyer over the weekend, and the Federal Reserve offered no support. As per Lehman, the bankruptcy filing will not include its asset management business-Neuberger Berman said to be valued around $6 billion nor its broker dealer operations unit.
**Barclays U.K’s third largest bank stated that it will acquire Lehman’s brokerage business for $2 billion. The deal will allow Barclays to expand in asset underwriting and mergers & acquisition advisory businesses. Shares of Barclays’ American Depository Receipts (ADR) rallied 18.8% for the week, while Lehman shares tumbled 98.6% for the week.
- AmericanInternational Group’s stock lost more than half of its market value on Monday after the world’s largest insurer turned to the government in a failed plan to raise $40 billion in capital over the weekend. AIG also received New York state approval to post $20 billion of its insurance subsidiaries assets as collateral in order to create liquidity. Furthermore, on Tuesday, the insurer’s credit ratings were downgraded by the three major credit agencies, as the government came to AIG’s rescue with a short-term $85 billion “bridge loan” avoiding filing for bankruptcy. AIG’s shares hit a 23-year low, closing at $3.75/share on Tuesday, levels not seen since October 1985, plummeting 68.3% for the week, and resulting in its replacement by Kraft Foods (KFT) to the Dow Jones Industrial Average Index.
- Bank of America the second largest U.S retail bank announced it will seize Merrill Lynch for $50 billion, representing a 70% premium of Merrill’s 9/12 closing price, in a deal that will create a global financial behemoth. This will mark the second biggest merger for the year for Bank of America, which had acquired troubled mortgage lender Countrywide Financial in early July. Both Merrill Lynch and Bank of America’s stocks rallied 73% and 11% respectively for the week.
- On Friday, the U.S Securities and Exchange Commission (SEC) announced a temporary halt to short-trading practices, targeting hedge fund managers from short-selling on 799 financial companies. The ban aims to restore value in stock prices of financial institutions and will take effect immediately through October 2, 2008. Some of the shares that can not be shorted include: Zions Bancorp (ZION), WellPoint (WLP), Wells Fargo (WFC), Ambac Financial (ABK), Blackstone Group (BX), Goldman Sachs (GS), Morgan Stanley (MS), and NYSE Euronext (NYX) to name a few.
**Friday’s huge rally was also attributed to the U.S. Treasury's costly plans to remove “illiquid assets from financial institution’s” balance sheets, financing it through the sale of treasuries which is said will cost as much as a half of a trillion dollars.
**In addition, under the new government insurance program, $50 billion from the Treasury’s Exchange Stabilization Fund, which was created in 1934, will be used to insure the holdings of any eligible publicly offered money-market fund.
- Money manager stocks like StateStreet, Genworth Financial , Bank of NY Mellon faced heavy selling pressure on Thursday, a day after one of the largest money market funds-The Reserve Primary Fund was basically cashed out by frantic investors pulling out approximately $40 billion, causing the fund to fall below the time honored Net Asset Value (NAV) $1/shared in a term defined as “breaking the buck”. State Street’s stock reached a 10-year low as it touched an intraday low of $29.09/share on Thursday, a level not seen since Oct 1998. Shares of STT fell 16.8% for the week, while BK also shed 10.6% for the week.
- As the credit crunch is linked to the housing market meltdown, Housing stocks faced another week of selling pressure affected by negative report from the Commerce Department that showed housing starts had dropped by a bigger than expected 6.2% in August, declining to their lowest level since January 1991. Housing stocks that took a big hit on Wednesday after the housing report included: Centex Corp (CTX), Pulte Homes (PHM), DR Horton (DHI), Lennar Corp (LEN), all dropped 11.4%,11.5%, 5% &12% respectively.
M&A, Deals, Corp Actions:
The take over of financial firms spread abroad, as British bank Lloyds proposed to acquire U.K mortgage lender and bank owner HBOS PLC for $22 billion, marking one of the biggest U.K banking deals in history. The combined synergies will account about a third of all UK mortgages and a quarter or approximately $715 billion of all U.K savings deposits will be tied to this entity. Shares of Lloyds’ American Depository Receipts (ADR) managed to finish up 7.9% for the week.
Walgreen proposed to acquire Long Drug Stores (LDG) for approximately $3 billion including its debt, topping CVS Caremark’s (CVS) prior deal with Long Drugs for $2.61 billion. The merger will allow Walgreen to expand its prescription plans in California and Hawaii, where Long Drugs has dominant presence. Shares of Walgreen and Long Drug’s stock both advanced more than 4.5% for the week.
DatascopeCorp agreed to be acquired by Sweden’s pharmaceutical firm Getinge for approximately $830 million as the buyout is expected to strengthen Getinge’s cardiovascular market in the U.S. Datascope’s stock closed higher for the week, up 1.7% on merger news.
Best Buy agreed to buy Napster Inc. (NAPS) for $121 million in an effort to compete against Apple’s iTunes, with hopes of reaching new customers. Best Buy's deal came after the company reported disappointing 2Q net income decline of 19% on higher spending from additional stores and acquisition of new ventures. Shares of Best Buy dropped 6.7%, while Napster Inc more than tripled for the week, up 89.7%.