A Week in the Rearview - week ending 3/14/2008
In the headlines
A look at some of the market movers over the past week:
- Countrywide Financial (NYSE: CFC) found itself the subject of an FBI investigation
- Rumors of liquidity problems at Bear Stearns (NYSE: BSC) turned out to be the real thing
- Health insurers dropped as WellPoint (NYSE: WLP) cut its earnings projections
- The markets had their best gain since 2003 when The Federal Reserve announced a plan to add more liquidity to the financial markets
- A Wall Street Journal survey suggested that the US is already in a recession
- Oil prices fluctuated a bit on recession fears, but stayed well above $100
-
Treasury secretary Hank Paulson talked about tightening mortgage standards in the future
- Gold was high as the dollar suffered
- Southwest Airlines (NYSE: LUV) canceled flights and grounded 38 of its planes for maintenance
- Carlyle Capital, a Carlyle Group fund, found itself in $17 billion worth of hot water
- Standard & Poor’s said financial company write-downs on subprime loans could be nearing an end
Commentary
What a week! Early in the week some commentators were abuzz with the idea that the Federal Reserve’s newest liquidity injection plan would spell the end of the current financial troubles. Economic worries very quickly crept back into the picture though, and by Friday the markets were plunging on the news that JPMorgan (NYSE: JPM) would be providing a Fed-sponsored bailout for Bear Stearns. And all this despite S&P’s prediction that much of the subprime write-downs had already taken place.
The plan that The Fed announced early in the week is significant because it differs from the actions it has taken previously. The plan offers up to $200 billion in borrowings to banks on a 28-day term (versus the standard overnight loan). It’s notable that The Fed will accept agency mortgage backed securities as well as non-agency AAA/Aaa mortgage backed securities as collateral for the loans. Potentially even more notable, though, is the fact that this was not a unilateral action taken by The Fed — the announcement came in conjunction with similar announcements from the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank.
Most of the early week optimism stemming from that move was wiped clean by the end of the week though. Bear Stearns, which has had some of the worst struggles of all the investment banks since the credit crunch began, found that by the end of the week its liquidity had dried up to such a point that it was at the brink of meltdown. The company seemed to blame early week liquidity rumors as being self fulfilling and conspiring to dry up its liquidity sources. Though the stock is about half of what it was earlier in the week, the company is still alive for now after JPMorgan funneled funds from The Fed to Bear.
Looking ahead
The problems at the end of the week easily out-shouted the positive notes from earlier in the week. With a market that tends to be very short sighted this is not all that surprising — the Bear Stearns situation is very immediate and very dire. I fully expect that this won’t be the last slug of terrible news we hear from a financial institution and I doubt that Bear Stearns will still be a separate entity by year end.
However, The Fed is keeping its wheels turning and the plan announced earlier this week should be a significant step. While the excitement was immediate, the effects of the plan aren’t — the loan auctions under the plan won’t begin until March 27th. Further, The Fed’s next meeting is this coming Tuesday and it is expected that it will try to further jostle the markets loose by lowering rates further.
Of course we don’t want to simply heap hope on The Fed. While there are very real concerns in some areas of the economy, the US’ long term prospects still look solid. Looking even better is the ongoing booming growth globally which will not only lead to gains for investors in overseas companies, but will benefit the US and those US companies that do business around the world.
Are we at a bottom right now? That’s a call that nobody has been able to make reliably. What’s for sure, though, is that markets are lower now, and investors that keep socking away savings in well diversified investments will benefit over the long term.
