7.18.08

   07.18.08

    The week certainly began on an unsettling note, as the financial sector plummeted 6% Monday, marking its biggest loss in more than eight years.

That decline was noteworthy for a couple of reasons.  First, it occurred amid concerns that IndyMac's failure was a harbinger of many more bank failures.  Secondly, it came despite a plan announced by Treasury Secretary Paulson that essentially turned an implicit guarantee of the debt of government sponsored enterprise Fannie May (FNM) and Freddie Mac(FRE) into an explicit one.  

In brief, the Paulson plan was intended to shore up confidence in the idea that neither Fannie Mae nor Freddie Mac would be allowed to fail.   The three main tenets of the plan were as follows:  1) a provision for a temporary increase in the line of credit the government sponsored enterprises ("GSEs") have with Treasury (2) temporary authority for Treasury to purchase equity in either GSE and (3) providing the Fed a consultative role in the new GSE regulator's process for setting capital requirements.

Furthermore, both GSEs would have the ability to borrow from the discount window at the Federal Reserve if need be.

The plan caused quite a stir since Paulson was basically asking for a blank check to ensure this funding backstop would be successful in helping the GSEs fill their vital role of providing financing for the U.S. mortgage market.  Debt holders certainly liked the implications of the backstop plan, but equity holders did not due to concerns about possible dilution from a government purchase of the equity and/or the potential that the equity would ultimately be wiped out.

After a one-month drop, stocks were able to post a solid rebound this week. With concerns over the banking sector still lingering, the main indexes moved lower Monday. They continued to drop Tuesday morning, undercutting their recent lows, before a sharp drop in oil prices helped stocks move back up. By mid-afternoon, the Nasdaq Composite was sporting a 1.7% gain, but a late-day pullback caused the index to close flat. Wednesday's session saw the major averages score big gains, with the S&P 500 closing 2.5% higher. The rally was triggered by a sharp rebound in financial stocks and lower oil prices, as crude dropped to under $135 a barrel, losing $10 in just two sessions. On the economic front, consumer prices jumped 1.1% in June but the core CPI, which excludes food and energy costs, only rose 0.3%. With oil prices shedding another $5 a barrel Thursday, stocks were able to continue their ascent, also helped by better-than-expected earnings reports from financial bellwethers JPMorgan Chase and Bank of America. with Microsoft and Google both missing their earnings targets after the close, tech stocks were set for a rough session Friday. Indeed, the Nasdaq 100 lost 1.63% on the day, but the S&P 500 was able to fare much better, closing with a slight gain instead.

For the week, the Nasdaq 100 , S&P 500 and Russell 2000 respectively gained 0.07%, 1.73% and 2.39%.

            The week ahead will give some answers as to the direction of the market from here on.

             It could be a very telling week. For now, we are still holding 100% CASH.

Till next time

 MTA Staff