Tuesday, September 16, 2008

But I Thought the Fundementals Were Strong?


The Federal Reserve and Treasury Department continue to struggle to contain the fallout from an upheaval among the country's largest investment banks as they moved on to their next challenge -- engineering a $75 billion private rescue of the nation's largest insurance company.

We now are learning that American International Group, faces a cash crunch that grew more severe last night. Dow futures were already struggling due to AIG cash injection problems. Then Goldman Sachs came out this morning with news that their third-quarter earnings plunged 70 percent and revenue was lower than expected as the market slump sapped almost every business, knocking down its shares.

As investors digested the news, some economists worried whether Wall Street's troubles were spilling over into other parts of the economy, renewing pressure on the Federal Reserve to cut interest rates when it meets today.

Early this morning Dow futures were in positive territory until AIG financing problems were raised. When Goldman released this news, the futures dropped from around -40 to well over -130. Goldmand Sachs is one of those names that everyone knows, so for them to have any trouble is going to cause a ripple. They have been the darlings of Wall Street, Goldman Sachs, for instance, was asked by the Federal Reserve Bank of New York to help AIG, a $1 trillion-asset insurance company that serves 74 million consumers in 130 countries. That they missed their number by 70%, will make a jittery market even more nervous. Goldman and J.P. Morgan Chase are supposed to be the best performing and most stable players on Wall Street. JP Morgan J.P. is currently serving as AIG's financial adviser, has to seek support for a credit line of $70 billion to $75 billion that would involve multiple lenders, spreading the risk, according to two sources familiar with the discussions. They spoke on condition of anonymity because the talks were private.

Wall Street generally dislikes small misses, 70% shortfalls is not a small miss, this is the kind of news that often causes shocks to the market. The market is looking for anything positive to grab onto to keep it afloat so between the news from AIG and now Goldman, we could see another day of selling, forcing the Dow lower and creating even more concern about the direction of the economy.

Stocks' plunge yesterday showed that investors remained nervous. Shares opened lower but generally traded in the same range until the last hour of trading -- when a 300-point drop in the Dow became a 504.48-point rout, bringing it to 10,917.51, moving below the 11,000 mark for the first time since mid-July. The technology-heavy Nasdaq was down more than 3.5 percent, and the Standard & Poor's 500-stock index was down 4.7 percent.

The financial sector was among the hardest hit. Bank of America closed down 21 percent, while Wachovia fell 25 percent. Goldman Sachs and Morgan Stanley, the two remaining survivors of what were once Wall Street's Big Five, report quarterly earnings this week -- and closed down 12 and 14 percent respectively.

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