Things didn’t look pretty this morning as the selling pressures from yesterday spilled over to today. We got awfully close to testing Monday’s lows (lowest prices before Fed’s $200B announcement), but never broke through them. There were three major causes of the early morning selling: 1) talk of Carlyle Capital going under because creditors were making claims on their assets, 2) liquidity concerns at Bear Stearns, and 3) weak retail sales data.
Carlyle Capital failed to meet $400M+ worth of margin calls related to mortgage-backed securities and its investors began to claim their assets while they still have some value. The company also announced it defaulted yesterday on $16.6B worth of debt. As stock and home prices continue to decline, Carlyle said they expect an additional $97.5M worth of margin calls (Source: Bloomberg.com).
Bear Stearns (BSC) fell 7.5% to $57.00 because investors are uncertain the company has enough capital to remain solvent. Massive amounts of put options (bets that the stock price will decrease) with a $25 and $30 strike price were traded today, basically signaling traders believe the stock price will be cut in half by next Friday (when these options expire). If one of these companies is having problems like this, who knows how many other companies are experiencing the same thing (Source: Bloomberg.com)?
February retail sales declined 0.6%, and excluding autos sales declined 0.2%. Last week, many retailers reported monthly same-store sales and the numbers were not too great, so this number reported today is not too big of a surprise.
Stocks made an abrupt reversal at 10am after S&P announced they see write-downs related to sub-prime mortgages coming to an end soon. The company increased its write-down forecast to $285B from its previously estimated $265B, but the end is “now in sight” (Source: Bloomberg.com). The company also said “the positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation write-downs of sub-prime” related securities” (Source: Fortune.com, CNBC.com).
In my opinion, this statement doesn’t mean too much. S&P missed the beginning of this whole sub-prime mess and they have been behind the curve ever since. I don’t see how they can estimate write-downs will come to an end given that the credit ratings of the mortgage and bond insurers are still uncertain. When housing prices bottom, then I’ll believe the write-downs will come to an end.
In other news, the Dollar sunk to new all-time lows and gold futures briefly traded above $1000. Everyone knew gold was going to trade at $1000, now it will be important to see where we go from here. You have to realize we didn’t “break through” $1000, rather we just “touched” it. This is something that happened to oil late last year and it traded sideways for some time before recently “breaking out.” Oil futures hit $111 as the Dollar continued its slide.
- Morgan Stanley downgraded GM and Ford and predicted weak sales in 2009
- Morgan Stanley also downgraded AIG to “equal weight”
- February foreclosures were up 60%
- Chrysler is shutting down production for 2 months this summer
- According to Bloomberg.com, futures show that there is an 86% chance the Fed will cut rates by 75 basis points next Tuesday
- Initial jobless claims remained steady at 353K
Tomorrow, the CPI data will be reported. Everyone knows the number is going to be bad and it is already priced in to stocks. So, if we get an unexpectedly tame number, I foresee a big rally. If the number is really bad, we’ll probably just drift lower throughout the day into the close just like we have the past few Fridays.
DJIA 12,145.74 +35.50 (+0.29%)
Nasdaq 2,263.61 +19.74 (+0.88%)
S&P 500 1,315.48 +6.71 (+0.51%)
NYSE Volume 5,083,948,000
2-Yr Bond 1.63% unch
10-Yr Bond 3.56% +0.07
30-Yr Bond 4.47% +0.07
Crude Oil (Apr) 110.33 +0.41
Nat Gas (Apr) 10.230 +0.219
Gold (Apr) 993.80 +13.30
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