A nightmare on Wall Street
September 16th, 2008 by Cale McCulloch
Closing Data
| Dow Jones down 504 @ 0,917 | NASDAQ down 81 @ 2,179 | Gold up 22.5 @ 787 |
| Oil down 5.67 @ 95.5 | FTSE down 212.5 @ 5204 | Silver up .3 @ 11.135 |
| Copper down 186 @ 6983 | Lead down 89 @ 1845 | Zinc down 123 @ 1743 |
| Aluminum down 99 @ 2520 | Nickel down 1169 @ 18000 | Tin down 540 @ 19,000 |
Newspaper article text repeated below
A Nightmare on Wall Street
A night of Reckoning for the US financial System.
What Happened:
- The US Fed finally said “enough is enough” and declined to provide a backstop for potential buyers of Lehman Brothers. After a frantic weekend trying to find a buyer, Lehman Brothers, the 158 year old bank declared bankruptcy during Australia’s trading session (At 2.45pm AEST officially).
- Also over the weekend, as reported yesterday, Merrill Lynch found a buyer in Bank Of America (BOA). The most important aspect to be noted from last night was that the bid was for $29 a share (all scrip) – The stock failed to rally on what was essentially a 70% premium to Friday’s closing price. Even with last nights fall in BOA (approx 25%), there is still a substantial premium – so why was there no rally? Because there is simply no confidence in the US banks at the moment, and traders are pricing in further declines in the share price of America’s number 2 bank (BOA), or an inability to deliver on the bid.
- Fears about the ability of American International Group (AIG) to raise a reported US$49 billion to avoid a credit downgrade by Standard and Poors – this would allow counter parties to exit positions with AIG – and sources close to the AIG say that if this were to happen AIG would struggle to survive 72 hours
The Australian banks for the most part represent good value, with minimal exposures to the mess detailed above.
However, do not make the mistake of thinking that because the market is falling, everything is becoming good value. There are buying opportunities in the market, just as there are good stocks in your portfolio – but right now it’s critical you can tell the difference and take action to reposition your portfolio if needs be. Now is not the time to be holding onto losing positions that look as though they will continue to underperform. We are seeing good quality companies that represent excellent value – companies with less gearing, more stable balance sheets and a trusted management at the least - even at these levels they should stand you in better stead for the future.
Our view is that we will continue on this rocky road for some time yet, and what we will essentially see is the stronger companies begin to rise while the weaker will struggle. A classic example is the Australian banks, while they were all sold off yesterday, 3 of the Big 4 bounced well off their lows in the afternoon, while NAB continued to struggle. There is more of this to come.
Belt Up!
Quote of the Day: "Losing is part of the Winning Formula"
Contact your Freeman Fox Stockbroker on 07 3031 9960 or 1800 003 369 Ext 7.
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