Tuesday, September 30, 2008

Putting window dressing on a dead cat.

Stocks enjoy a dead cat bounce. Credit Markets just dead, dead, dead.

“The money markets have completely broken down, with no trading taking place at all,” said Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt. “There is no market any more. Central banks are the only providers of cash to the market; no one else is lending.”

The problems in the credit markets could threaten the broader financial system. But for the moment, investors were placated somewhat by the rise in stocks, with the Standard & Poor’s 500-stock index, a broad measure of major companies, up 5.2 percent. It is not unusual for stocks to show signs of recovery in the hours after a significant rout. (aka Dead Cat Bounce) In the last several decades, the S.& P. has dropped by more than 6 percent on only a handful of occasions. (It fell by almost 9 percent on Monday.) On average, the index has rallied by 3.5 percent the next day, according to data from Citigroup.

Investors may be hoping that Congress will head back to the negotiating table and pass a revised bailout bill by the end of the week, a notion advanced by President Bush in a televised statement on Tuesday before markets opened in New York.


"Several measures were taken to calm investors Tuesday. But injections of money into the markets by central banks failed to dampen a hoarding mentality among financial institutions. Analysts and economists have pointed to the problems in the credit markets as posing a more serious threat to the health of the economy, at least in the short term, than the recent declines in stocks.

But in the public eye, the Dow Jones industrial average is the most visible gauge of the economy’s condition. Some analysts hope that a silver lining of Monday’s sell-off will be an increased urgency among lawmakers to pass a revised bill."

“While some policy makers don’t understand exotic funding markets, they definitely understand what nearly 1,000 points off the D.J.I.A. in one day’s time means,” Michael T. Darda, chief economist at the research firm MKM Partners in Greenwich, Conn., wrote in a note to clients on Tuesday morning."


The European Central Bank lent banks 190 billion euros, or $273 billion, for a weeklong period after initially estimating that it needed to drain 40 billion euros from the system. It also lent banks $30 billion for one day at a marginal rate of 11 percent, almost six times the Fed’s 2 percent benchmark interest rate. The Bank of Japan pumped another $29 billion into credit markets, its third intervention of this scale since the collapse of Lehman Brothers earlier this month. In Tokyo, Asia’s largest market, the Nikkei 225 fell 4.1 percent to close at a three-year low of 11,259.86 points. The benchmark index in Hong Kong closed up by less than 1 percent, while Australia ended down almost 4.4 percent after falling more than 5 percent during the morning.

Window dressing

Traders said that so-called "window dressing," or last-minute portfolio tweaking by money managers before they send out quarter-end statements to clients, added momentum to the market. So did a rush of buyers attracted by bargains following Monday's drop, a typical phenomenon after any big market decline. But above all, the prospect of an unprecedented government intervention in America's financial markets continued to loom large.

"We have calmer heads today assessing where the market should really be," said strategist Jim Paulsen, of Wells Capital Management in Minneapolis. "It looks like the odds of [a rescue package] passing before the end of the week are probably pretty good. If that's the case, then the risk of being on the sidelines when it goes through is probably as bad as anything you face on the downside at this point," with Monday's big market drop in the rearview mirror.

Pay no attention to the man behind the curtain...

On a more worrisome note, the cost of borrowing dollars overnight in the interbank market world-wide surged following Monday's bailout rejection in the U.S. House. The move heightened market participants' concerns about the creditworthiness of counterparties amid a spate of recent bank failures. "We are facing a systemic crisis of confidence in the global financial system that is pushing us increasingly closer to a complete meltdown," said Marco Annunziata, chief economist at UniCredit in London.

Are things starting to fray around the edges? Regional banks are coming under pressure and the largest Chevrolet dealer in U.S. files for Chapter 11. (The 89 year old Bill Heard dealership out of Atlanta._

In court papers, Mr. Heard said falling new-car sales led to its decision to go out of business and begin liquidating in bankruptcy court. High gas prices, the downturn of the U.S. economy and the reluctance of some auto lenders to extend credit to customers have caused new car sales to plummet, prompting a "financial liquidity crisis" at Bill Heard dealerships.

Genworth says it may spinoff mortgage insurance business.

Genworth shares have slumped 75% this year on concern about losses at its mortgage insurance business. As the mortgage-fueled credit crisis has deepened in recent weeks, Genworth stock has been crushed, losing 60% of its value in the past month.

Genworth also said it has borrowed $79 million in the commercial paper market, down from $158 million earlier this month. The commercial paper market usually allows companies to borrow money cheaply over short period of time. But some parts of this market have frozen in recent weeks as the credit crisis deepens. That's sparked concern that some companies may struggle to refinance their short-term debt. Genworth also highlighted more than $800 million in cash and cash equivalents at the holding company and almost $4 billion in cash and cash equivalents in its operating companies.

Genworth is exposed to a lot of the companies that have collapsed in recent weeks, including Fannie Mae
and Washington Mutual. Genworth's exposure to these companies totals roughly $630 million, according to data disclosed on the insurer's Web site. This includes senior and subordinated debt, preferred stock, credit default swaps, securities lending and guaranteed investment contracts.

Sonic gets their credit spigot cut off by GE Capital.

Actually, on Thursday, Stephen Vaughan, CFO of Sonic Corp (Nasdaq: SONC), told Dow Jones that franchisees of the drive-in chain have been notified by GE Capital's franchise finance arm that it will temporarily stop financing new loans to Sonic franchisees. This is bad for a franchise like Sonic Corp that greatly depends on franchisee growth to increase its bottom line.