For the week ending Friday, September 26, 2008, the major U.S. Indices tumbled for the week as uncertainty lingered over the Congressional $700B bailout package. We also witnessed a historic bank failure, unsatisfying housing data, a continued rise in jobless claims, and a record one-day gain in the price of crude. The S&P 500 and NASDAQ Composite shed more than 3% for the week. The NASDAQ had the worst weekly performance amongst the three major indices, losing 3.98%, followed by S&P 500 which lost 3.3%, marking their biggest weekly drops since the start of Sept. for the NASDAQ & since mid May for the S&P.
- Wild market swings deteriorated investors’ confidence with the investor’s fear gauge, CBOE Volatility Index , closing above 30 for the tenth consecutive day on Friday, levels not seen in more than 5 years since March 2003.
- Money markets remained distressed, as investors ran to treasuries and short-interest rate spreads skyrocketed. The TED Spread, or the spread between the 3-month dollar LIBOR and the 3-month T-Bill, was over 300 basis points at times this week.
- The New York Stock Exchange and NASDAQ OMX Group added more names to the short-sell ban. The list now includes more than 900 companies safe from shorting. Some of the companies included in this week’s additions are, General Electric (GE), Mizuho Financial Group (MFG), Legg Mason (LM), and CIT Group (CIT).
***A short sale is the sale of a borrowed asset by investors with hopes of profiting from the declining security by buying an equal amount of shares later at a lower price to replace the borrowed assets.
Next Week's Highlights: The markets will react to any decisions that come from the proposed Congressional bailout. The ban on short selling of financials is set to expire on Oct 2. The markets will also digest Employment Situation, Construction Spending, Consumer Confidence, ISM Manufacturing. Companies reporting before the big earning season starts, include: Walgreen, Pepsi Bottling, Mosaic, Constellation Brands, and Marriott International.
M&A, Deals, Corp Actions:
Washington Mutual was seized by Federal Regulators and is considered the largest bank failure in U.S. history, thus marking the third major casualty to suffer from the financial crisis, which originally began with the collapse of Bear Stearns and followed by the downfall of Lehman Brothers. WaMu’s demise led to a JP Morgan Chase deal to buy WaMu’s banking operations and assets for $1.9 billion, as JP Morgan will face a costly challenge of writing down about $31 billion of WaMu’s bad loans and will seek to raise $8 billion in new capital. WaMu’s shares fell 96% for the week.
Berkshire Hathaway’s Warren Buffett announced his plans to inject $5 billion into Goldman Sachs’ through a purchase of preferred stock. In addition, Berkshire received warrants to buy $5 billion of Goldman Sach’s common stock, with a 5-year term to be exercised at $115/share. Berkshire Hathaway Class A finished down 8.2% for the week, while Goldman’s stock managed to stay positive, up 6.3% for the week. Buffett’s investment in Goldman Sachs will account for a 10% stake in the firm
**Buffett also supports the $700 billion government bailout plan proposed by Treasury Secretary Henry Paulson and backed by Federal Reserve Chairman Ben Bernanke.
** Shareholders of Wm Wrigley Jr. voted to approve the $23 billion takeover by Mars Inc., a deal which is being partly financed by Buffett.
Morgan Stanley agreed to sell a 20% stake or approximately $8.4 billion to Japanese bank Mitsubishi UFJ Financial Group. The deal comes after Morgan Stanley and Goldman Sachs (GS) announced their intentions to convert to traditional bank holding companies. The deal will allow to obtain a greater presence in the U.S. banking sector, shoring up its second deal with an American financial firm since its first $3B acquisition of California retail bank, UnionBanCal (UB), in August. Shares of MS dipped 9% for the week, while MTU’s American Depository Receipts advanced 8.7%.
The Federal Aviation Administration and shareholders approved the merger between Delta and Northwest Airlines in a deal that will result in the world’s largest airline with annual revenue of more than $35 billion, a total headcount of 75,000 employees, and airline fleet of 800 aircraft. The deal is expected to face completion in late December. Shares of DAL and NWA lost altitude, both falling 15% or more for the week despite a pullback in oil prices.
Pharmaceutical giant Bristol-Myers Squibb sweetened its offer for Imclone Systems , by raising its take-over bid to $62/share from July’s $60/share offer. A hostile bid emerged on September 10th, when Imclone announced that an undisclosed company had proposed a more attractive offer of $70/share for the firm. Shares of IMCL rose 5.8%, while BMY finished almost flat or down 0.8% for the week.
McAfee the provider of anti-virus software said it plans to acquire the Internet Security company Secure Computing Corp. for $465 million, representing a 27% premium of the firm’s previous closing price of $4.52. The move will allow McAfee to strengthen its position in the network-security market, as it is already the world’s second largest security software maker, with Symantec (SYMC) holding first place. Shares of Secure Computing Corp rallied 23.45% on Monday on merger news, while McAfee’s stock fell 4.2%.
Other Market Moving News:
- General Electric lowered its third quarter and full-year guidance and depicted lower gains due to the credit crunch. GE also announced the suspension of stock buybacks, and stated it will not increase its dividend for the first time since 1970. The new measures will allow GE to maintain its AAA credit rating, and boost liquidity. Consequently, GE’s stock finished down 5% for the week.
- Deutsche Telekom’s mobile carrier T-Mobile USA revealed on Tuesday its touch screen G1 smart-phone that will operate on Google’s (GOOG) Android operating system. The G1 presents great competition against rival Apple’s iPhone since is slightly cheaper, selling for $179 compared to $199 for the iPhone. Both Google’s stock and DT’s American Depository Receipts fell 4% and ~1% for the week, despite reports of new products.