Market Watch: 10/16

Recently, a big range of movements on the Dow has become typical. Last week saw the Dow move within a 1200-point range after the worst week ended lower by as much as 21%. Monday’s rally was easily wiped out by the two days that followed after hedge fund redemptions, lower economic figures reported and fear continue to surround the markets.

Today was another busy day. The Dow played within an 800-point range- from being down by as much as 400 points early in the day only to rally in the last hours of trading to finally settle higher by 401 points. S&P and Nasdaq expectedly followed suit with 4.25 and 5.50 percent increase, respectively. Interestingly enough, the VIX recorded another all-time high when it peaked at 81 points before settling at 67.61. It has a lot to do with the puts and calls that are being traded, and the contracts expiring within the next few days. It’s something I still have to educate myself a lot with.

The big move to the north today may be attributed to several things: poor economic reports on Philadelphia’s Fed report, Morgan Stanley’s John Mack’s first appearance since the crisis broke out, some better than expected earnings released today (details below), and the YHOO-MSFT deal’s emergence.

In an interview by CNBC’s David Faber, Mack admitted that: yes, banks indeed have been overly leveraged; yes, there is the need for a central clearing market for the derivatives that thrive on opacity; and yes, some of the money the US government will be injecting to their system will be used to deleverage. It was a rather comprehensive interview. He also went on to say that the ongoing crisis is something he had never seen before because of its global nature alongside the fact that credit markets have dried up. Watch more of it here.

The markets also faced earnings reports from various financial and non-financial institutions. As expected, banks released negative figures, although some of them beat market expectations.

Merrill Lynch reported a third-quarter net loss of $7.5 billion on Thursday resulting from write-downs and credit losses on complex debt securities. Loss of 5.56 per share is much lower than the 5.22 The sale of its 20% stake at Bloomberg earned the firm $4.3 billion of pretax gains and that definitely helped the slightly higher than expected earnings.

Citigroup similarly posted Q3 net loss of $2.82 billion, or 60 cents per share, compared with a profit of $2.21 billion, or 44 cents, a year earlier. It slightly beat analysts’ expectations of 70 to the red on revenue of $19.42bn. Actual number fell 23 percent to $16.68 billion.

Citigroup became the second US bank by assets, after JP Morgan which has assets worth $2.25 trillion compared to Citi’s $2.05 trillion.

Other numbers: JP Morgan Chase’s quarterly profit fell 84 percent to end at 6 cent per share vs 29 cents forecast. Wells Fargo reported net income of $1.64 billion, or 49 cents per share, from last year’s $2.17 billion, or 64 cents; an EPS of 34 cents PS was expected.

A couple of tech stocks also came out with reports. IBM released an EPS of $2.05, 2 cents higher than expected. The higher revenue, which stood at $25.3bn was partly a result of 8% increase in the global tech and business services arm of the firm. Google, on the other hand, had a much higher earnings of $4.92 vs. 4.76 forecast. This is in lieu of more than 80% share on web searches and increased earnings from its online advertising business AdSense.

An interesting piece of information I got today relates to the Fed’s balance sheet. It rose to $1.80 trillion by as much as $882bn. Commercial banks borrowing moved up by $3.8b to $101.9bn while investment banks has so far taken $133.9bn in the latest week, up by $11bn. A big chunk of all the borrowings apparently came from the last several weeks since the bail out plan was released. The more detailed break down of the $882bn increase is as follows:

  • Term Auction Facilities- $263bn
  • Investment Banks- $133.9bn
  • Money Market- $122bn
  • Discount Window To Banks- $101.8bn
  • AIG- $82.8bn
  • Bear Sterns- $29.5bn

And this is how things work: The Treasury issues securities to the public, in effect collecting cash, which is then passed on to the Fed. Now the Fed loans this to the banks in exchange of mortgage-backed securities and other troubled assets with collateral. When banks lend out, voila, the money is back to the public.


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