Global Market Comments for September 15, 2008
1) In last Friday’s newsletter I predicted that Merrill Lynch (MER) would be the next target for the cloud of locusts. I had no idea that it would be gone in a few hours! The scary thing is that Bank of America (BAC) was willing to pay $50 billion for MER, but not $1 for all of Lehman. A year ago, people were laughing at BAC as a bunch of stupid, boring bankers who didn’t ‘get’ complicated things like CDO’s , mark to model, derivatives, and credit default swaps. News of the deal knocked BAC’s stock down $5 to $28. Don’t expect anything more from BAC as they will be choking on both the MER and Countrywide acquisitions for a couple of years. Do expect raging bull statues and posters to start appearing at Bank of America branches everywhere. The Dow was down 500 points on the day, but could have been down 1,000 without this transaction.
2) I have no doubt that creditors of the bankruptcy estate will get most, if not all, of their money back. The Lehman bankruptcy is solely the result of mark to market accounting rules, where the markets ceased to exist. Fully current securities originally sold to investors at 100 were marked down to 20 or even zero, when their true value is probably closer to 60 or 80. The bankruptcy court will allow a quiet, ??orderly liquidation over a long period of time in private placement form, allowing realizations to get closer to their true values. The sale of Neuberger Berman and the European real estate division could raise $15 billion as early as next week. Barclay’s Bank, having passed on buying the whole company yesterday, is still trying to buy just the investment banking division on the cheap. However, creditors may have to wait years before they see their final checks.
3) The next domino to fall may be WAMU (WM), which may disappear by the end of the week. JP Morgan (JPM) is considering a take over bid. The stock traded down to $2 this morning, down 96% from last year’s peak.
4) AIG is now taking its turn on the ropes, its stock down 80% in a week. The company’s ten year bonds crashed from 95 to 60. It is trying to sell its car finance operation, its aircraft leasing unit, obtain equity capital from private equity firms or Warren Buffet, and procure a bridge loan from the Fed. The state of New York has offered $20 billion in short term loans.
5) China cut interest rates for the first time in six years. The government is having trouble restarting the economy after the Olympic shut down in the face of the new global recession.
6) Crude got as low as $94 today as the global recession spilled into the oil trade. Traders are using every tropical storm as a selling opportunity. Since crude hit $148, my short term downside target for crude has been the $60 handle, now not so far away.