A Week in the Rearview – week ending 9/26/08
In the headlines
A look at some of the market movers over the past week:
- The government’s proposed $700 billion bail-out hit some roadblocks, but went into the weekend showing renewed progress
- Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) announced plans to become traditional banks
- Japan’s Nomura (NYSE: NMR) agreed to purchase the Asia assets of Lehman Brothers
- Federal Reserve Chairman Ben Bernanke spent the first two days of the week testifying before Congress about the $700 billion bail-out plan
- Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) announced a $5 billion investment in Goldman Sachs
- The FBI started an investigation into some of the companies that have recently crashed, including Lehman Brothers and AIG (NYSE: AIG)
- US home values continue to fall
- The eurozone disclosed a second consecutive quarter of GDP contraction earning them the “recession” label
- General Electric‘s (NYSE: GE) finance division made sure that even GE hasn’t missed out on financial losses
- Washington Mutual (NYSE: WM) became the largest bank failure in US history
- Delta (NYSE: DAL) and Northwest (NYSE: NWA) shareholders approved merger plans that would create the largest airline in the world
Commentary
After a major display of stock market fireworks last week, the week started off with continued volatility. By Wednesday, the S&P 500 index had shed 5.5%. Though it was able to recover some ground on Thursday and Friday, the index still lost over 3% on the week.
We really didn’t have to look too far to figure out what caused all of the week’s volatility. The US Treasury Department, with the support of Ben Bernanke and the Federal Reserve, has presented a plan to use $700 billion from the Treasury to buy distressed mortgage and other credit assets from the US’s financial institutions. The idea of the plan is to provide a buyer and a source of pricing for what have become very illiquid assets.
This would hopefully allow financial institutions to shore up their balance sheets and begin lending again. At the same time, it is hoped that the distressed pricing that the government would be paying would allow it to collect anywhere from a major portion to even more than the original $700 billion outlay.
Despite the endorsements from Treasury Secretary Henry Paulson, Fed chief Bernanke, President Bush, and many prominent Democrats in Congress, a group of Republican Congress members expressed concerns late in the week and brought negotiations to a near standstill. The market meanwhile has been reacting primarily to the potential for these negotiations to continue and for a deal to be struck in the near term. Though there wasn’t a lot of clarity going into the weekend, negotiations seemed to at least be moving in the right direction.
Though the news of the Washington Mutual failure wasn’t lost in the shuffle, the announcement likely had little impact on investors’ sentiment. There were a few reasons for this. First, though the collapse of the bank was a clear negative, the fact that JPMorgan (NYSE: JPM) stepped in to buy the deposits and saved the FDIC from digging into its pockets was a bit of a balancing factor. It is also likely that investors were not particularly surprised by the collapse, as the bank and its stock have been struggling for some time now. In addition, investors hoping for a government deal to be struck may have seen this as an event that would make the passage of a plan even more urgent.
And finally, the $5 billion investment that Berkshire Hathaway made in Goldman Sachs may not have been ultimately as significant as the failure of Washington Mutual, but investors were clearly cheered by the news. In the face of a great deal of negativity though, it may not be surprising that a vote of confidence like this in a US financial institution by Warren Buffett — widely regarded as one of history’s greatest investors — would cheer the markets.
Looking ahead
As the month of September pulls to a close, we can look forward to a variety of important economic reports next week. Personal income and personal spending come out early in the week, as does The Conference Board’s reading on consumer confidence. Later in the week, though, we’ll also see the much more notable reading on unemployment.
Though Tuesday will mark the end of the third calendar quarter, third quarter earnings season won’t kick off until the following week, when Alcoa (NYSE: AA) reports results on October 7th. Despite the lack of formal earnings reports, though, we may end up seeing companies that are closing their books for the quarter start to inform investors of quarterly shortfalls.
But let’s get real, all the market cares about right now is the government’s bail-out package. It seems that a good deal of important recent news events have been taking place over weekends, so I wouldn’t rule out something happening before the beginning of next week. If it does not, though, we can fully expect that the market will continue to move in accordance with the perceived likelihood of a plan being passed, and being passed soon.
But should we be rooting for such a plan? I believe we should. When somebody is sick and suffering from an extreme fever, the first step to treating the patient is to bring down the fever so that you can treat the underlying illness without the patient dying. Right now the trouble in the financial sector of the economy is a very dangerous fever, and one that needs to be addressed before we do anything else.
In my opinion, though, the good news is that while the underlying economy may be sick, it’s far from broken and if we are able to quickly address the issues in the financial system we should be able to find our way back on track.
