A Look into the Financial Sector Maneuverings of 2008 and a Glance at the Future

A Look into the Financial Sector Maneuverings of 2008 and a Glance at the Future

The news wires have been abuzz in recent weeks by the upheaval in the financial sector. Over the past year the subprime mortgage problem has morphed into a global crisis that has rocked companies that have been long-held as the cornerstones of the financial industry. The U.S. government began to accept the need for large-scale measures in order to prevent the collapse of the U.S. financial market.

The first step in which the government began to intervene directly took place back in March when the Fed lent assistance to JPMorgan Chase (JPM) in its takeover of investment bank Bear Stearns. It is only over the course of the past several weeks, however, that the government’s intervention has escalated. On September 7th, the Treasury Department made a historic move and announced the indefinite takeover of mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE). Together, these two companies either own or guarantee nearly half of the U.S.’s approximately $12 trillion in home loans and are the nation’s largest suppliers of mortgage capital. After a week of extreme losses in the market, the news helped slow the pace of the market’s downside, but the fear remained that this was just the beginning of more widespread maneuvering in the financial arena in order to stay afloat.

Unfortunately, not everyone managed to stay afloat. Last weekend the New York Fed called an emergency session which convened to discuss the possibility of rescuing the rapidly sinking ship widely known as Lehman Brothers (LEH). Like the Titanic, Lehman was taking on water fast! Participants in the weekend session included representatives from the Federal Reserve, the Treasury Department, and executives from several Wall Street Banks, such as Citibank (C), JPMorgan Chase (JPM), Morgan Stanley (MS), Goldman Sachs (GS), and Merrill Lynch (MER). Despite rumors of a buyout possibility, Lehman Brothers (LEH) did not attend the meeting and came out of the weekend with the surprising announcement that it had opted to file for Chapter 11 bankruptcy. Barclay’s (BSC), which was one contender for an LEH buyout, later came out with news that while it declined to buy LEH outright, it would be purchasing LEH’s U.S. investment bank and capital-markets businesses.

Another surprising development over the past weekend was the deal struck between Bank of America (BAC) and Merrill Lynch (MER). BAC made a bid for MER for a proposed $29/share. It has closed on Friday at $17.05 and opened Monday morning at $21.02. With the deal still in the works, MER closed on Tuesday at $22.18.

The market did not react well to the weekend’s developments as panic spread over speculation regarding how deep the damage has spread and who would be the next to go under. On Monday the Dow Jones Industrial Average experienced its largest down-day since the 9/11 attack in 2001. It closed lower by 504 points for a loss of 4.4%. The S&P 500 posted a jaw-dropping 4.7% decline on the day, while the tech-heavy Nasdaq Composite came out with a “mere” 3.6% decline.

Following shortly on the heels of the LEH and MER news was another giant in the spotlight: American International Group (AIG). The world’s largest insurance company was well on its way down the same path taken by LEH earlier this week. Many had speculated that without outside assistance that it too would have filed for bankruptcy before the week’s end. The Federal Reserve disappointed many market participants on Tuesday when it left interest rates unchanged at 2%. Many had hoped to see them lowered and the Dow dropped 131 points following the announcement. News reports regarding the fate of AIG, however, began to provide the market some relief and the indices even managed to finish in positive territory.

Speculation grew that while the Fed failed to offer LEH a life vest, that the dire straits of AIG’s situation left it with little choice if it wished to avoid even greater fallout due to the widespread reach of this giant. Soon after the market closed the reports were confirmed. The central bank had put together an $85 billion loan package which involved the Federal Reserve taking over 80% of the company. The New York Times labeled the move “the most radical intervention in private business in the Fed’s history.” The estimated interest rate for the loan is 11.31%, which may shift somewhat based upon the LIBOR. It is to be repaid through the sale of AIG’s assets, which stood at about $1 trillion at the end of the second quarter, all of which would be pledged as collateral. AIG had peaked in December of 2000 at $103.69. It closed on Tuesday at a mere $3.75/share and was trading lower at $2.16 afterhours.

The foreign markets were largely positive following the news, but the react was not extreme. The U.S. index futures had also been trading higher, but pulled back in the early morning hours Wednesday.

On Tuesday the financial sector faired rather well given the recent uncertainty. After testing the upper end of the summer’s range on September 8th, the financial sector, represented by Select Sector SPDR XLF (Financial), began a sharp descent, but the action in the first half of the week exhausted the selloff and the sector was able to recover from a larger-than-average downside gap Tuesday morning. The session ended with 74 of the sector’s 87 stocks posting gains. It is currently poised to close Monday’s gap as well, but the overall market experienced similar action off the lows on the 5th and volatility will remain high as the month continues with more financial leaders making headlines. On a smaller scale, for instance, was the downgrade by Standard & Poor’s of Washington Mutual on Tuesday to junk status.

Nevertheless, given the current panic mode of the market, exhaustion action on the larger monthly time frames is now under way and stabilization into fall is within reach. Although many companies will continue to face continued losses, the momentum will slow with only the most aggressive or stubborn of participants remaining. For those that remember the larger market collapse which began in 2000, recall the great lengths it took for the market to begin to recover off lows. The financial sector at this point is quite similar to the downside exhaustion heading into March of 2001 in the Nasdaq Composite (shown in blue). As the crisis continues to unfold, the path towards recovery will likewise be a difficult one.

If you enjoyed this article, please drop by Toni Hansen’s website at http://www.tradingfrommainstreet.com/ or check out her Online Trading Education Course at http://www.swingtrader.net/. Don’t let the name fool you! It’s not just for swingtraders! You can also contact Toni directly at toni@tradingfrommainstreet.com.


Toni Hansen (http://www.tradingfrommainstreet.com/ and http://www.tonihansen.com/swingtrader.net) is one of the most respected technical analysts and traders in the industry with a high reputation for accuracy in both bull and bear markets. Her style of trading and market analysis transcends both time as well as market vehicles, making it attractive to investors and trader of stocks, futures, options, ETFs, and even the FOREX market. Toni is a frequent lecturer at trading clubs and industry expos. She is also a popular market columnist and is a repeat contributor to SFO Magazine. She recently co-authored High Profits in High Heels from Marketplace Books and SFO’s Personal Investor Series book Online Trading.