Search Now

Recommendations

Monday, September 22, 2008

Stocks On Wall Street Ends Historic Week With Solid Gains


Fed Measures To Inject Liquidity In The Markets Helped To Restore Gaines

It was week of roller coaster ride for the investors on the Wall Street which took him on both high and low. Stocks on Wall Street rocketed higher on Friday, with the major stock indexes wiping out a week of shattering losses, as investors on Wall Street cheered the government's moves to kick-start credit markets as well as plans to move against short sellers.

The major averages moved to the upside in the final hour of trading, but they ended the day well off of their session highs. The Dow sealed the week by posting triple digit gain on Friday marking a perfect end to a volatile week. The Dow closed up 368.75 points or 3.4% at 11,388.44, the Nasdaq closed up 74.80 points or 3.4% at 2,273.90 and the S&P 500 closed up 48.56 points or 4% at 1,255.07.

Following the collapse of Lehman Brothers and the government's intervention into the AIG debacle earlier in the week, federal agencies stepped up to restore investor confidence.

Just one day ago central banks injected liquidity into global financial markets to help restore their functionality. Now, the Fed is looking to create an entity that will help financial firms shed their illiquid and distressed assets, many of which remain linked to risky subprime mortgages.

To move in that direction, Treasury Secretary Henry Paulson outlined his department's plan to establish a trust fund to absorb banks' bad debts, stating that, despite the cost taxpayers will have to bear for the fund, the alternative would have been far worse. Paulson said the most recent proposal would address the "root cause" of the financial crisis: mortgage-backed securities stemming from the housing crisis.

Meanwhile, the Treasury Department also established a temporary guaranty program for the money market fund industry, while the Federal Reserve Board announced two new enhancements to existing programs to promote liquidity.

The first initiative extends the realm of non-recourse loans at the primary credit rate to U.S. depository institutions and bank holding companies. The second initiative will allow the Federal Reserve to buy federal agency discount notes from primary dealers. These notes are short-term debt obligations issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

Markets were also encouraged by a ruling from the Securities Exchange Commission that put a temporary ban on short-selling certain financial stocks. Though the plan aims to protect certain securities and restore confidence, it has come under sharp criticism from market makers. Late in the session the Securities Exchange Commission staff announced it wants to implement certain exemptions to the rule.

The announcements helped financial stocks most. The sector closed the session 11.1% higher, extending the prior session's 12% advance. The financial sector concluded the week with a 7.4% gain.

Investment banks and brokers registered the largest gain in the sector gaining by 20.8%. The group rebounded as Morgan Stanley posted a 21% advance. Shares of Morgan Stanley hit a multiyear low yesterday amid ongoing fear of financial fallout and uncertainty surrounding the firm's future.

The firm continues to seek a strategic alliance to help it move forward. Reports continue to indicate its talks are most intimate with Wachovia Bank and the state-run China Investment Corporation.

Taking the weekly review where the stocks saw considerable weakness early in the week, the major averages rebounded in the last two days to close modestly higher. The Dow ended the week up 0.3%, while the Nasdaq and the S&P 500 posted weekly gains of 0.6% and 0.3%, respectively.

In other region markets, the stock markets across the Asian region rallied on Friday, mirroring Wall Street's strong gains overnight. Chinese stocks in Shanghai and Hong Kong surged more than 9%

The major European markets turned in standout performances as well, with the U.K’s FTSE 100 Index advancing 8.8%.

In the commodity trading, the crude oil surged again in afternoon trading on Friday and closed above $104 a barrel. Light sweet crude for October delivery ended at $104.55, up $6.67 on the session. Earlier, crude hit as high as $105.25.

The rebound more than erased the sharp drop towards $90 a barrel that crude saw earlier in the week. Crude climbed Friday amid government moves that pushed U.S. stocks sharply higher and halted fears of lower energy demand.

Crude oil closed also soared above $102 a barrel on Thursday but then dropped back below $100. The retreat came after the Energy Information Administration reported natural gas inventories were up 67 billion cubic feet in the week ended Sept. 12, which was more than expected.

Oil surged on Wednesday as EIA data that showed a fourth straight drop in weekly inventories. Crude oil inventories decreased by 6.3 million barrels in the week ended Sept. 12. Meanwhile, motor gasoline inventories decreased by 3.3 million barrels last week.

Crude oil dropped sharply on Monday and Tuesday and fell as low as $90.55. On Tuesday, Goldman Sachs cut its three-month crude oil to $115 a barrel, down from $149 and dropped its six-month outlook from $142 to $125. The firm also lowered its 2009 average price forecast to $123, down from $148. Crude oil plunged more than 5 percent on Monday to move below the key $100 level.

Looking ahead for the week, the Department of Commerce will releases its report on durable good orders report as well at its final reading on second quarter Gross Domestic Product. A weekly report on initial jobless claims, a report on consumer sentiment and a report on existing home sales will also give us an idea over the health of the economy.

Several Federal Reserve members will also be making appearances next week, including Fed Chairman Ben Bernanke, who will be testifying on the economy before Congress on Wednesday. Dallas Fed Bank President Richard Fisher, Richmond Fed Bank President Jeffrey Lacker, Chicago Fed Bank President Charles Evans, and St. Louis Fed Bank President James Bullard will be speaking throughout the week as well.