Saturday November 1, 2008
Navivest

Freedom Bank, which is based in Bradenton, Florida, was shut down yesterday, by the Commissioner of the Florida Office of Financial Regulation. The Federal Deposit Insurance Corporation (FDIC) was named receiver.

The FDIC has entered into a purchase and assumption agreement with Fifth Third Bank of Grand Rapids, Michigan and Fifth Third will assume all of the deposits of Freedom Bank.
The four branches of Freedom Bank will reopen on Monday as branches of Fifth Third Bank. Depositors of Freedom Bank will automatically become depositors of Fifth Third.

As of October 17, 2008, Freedom Bank had total assets of $287 million and total deposits of $254 million. Fifth Third agreed to assume all the deposits for a premium of 1.16 percent which works out to about $2.5 million. In addition to assuming the failed bank’s deposits, Fifth Third will purchase approximately $36 million of assets. The FDIC will retain the remaining assets for later disposition.

Freedom Bank is the 17th bank to be shut down this year, amidst a worsening credit crisis.

Tags: Bank Failure  Freedom Bank  Fifth Third

Tuesday October 28, 2008
Navivest

The S&P/Case-Shiller Home Price Index, which measures home prices in 20 U.S. cities, registered a drop of 16.6%, for the month of August 2008. In July, we saw a 16.3% drop.

The index has shown a decline in home prices every month for the past nineteen months. The good news is that the number for August was right in line with forecasts and not worse.

Of the 20 cities covered, two, Boston and Cleveland, showed an increase in prices, while Phoenix and Las Vegas showed the worst price declines, with a 31% drop.

The S&P/Case-Shiller Home Price Index is calculated monthly using a three-month moving average and published with a two month lag.

Tags: Home Prices  Housing Crisis  Case Shiller

The stock market fell to four-year lows in Thursday 10/08/08 trading, as concerns over the economy continues to spread and government efforts to help put a floor under the stumbling economy seem to not be working.

The stock market loss was broad-based, with all the major indices falling to five year lows.

The Dow closed down 678.91 points (7.3%), to close at 8,579.19, the Nasdaq closed down 95.21 points (5.5%), closing at 1,645.12 and the S&P 500 closed down 75.02 points (7.6%)to close at 909.92.

The list of casualties was extensive. Among the notable losers, Exxon Mobil saw its biggest drop in 21 years, losing 9 points to close at $68 and GM dropped to a 58 year low, losing 31% to close at $4.76.

Incredibly enough, it was exactly one year ago that the Dow hit its all time highs of 14,164.53.

Tags: Stock Market

The Federal Reserve, in a globally coordinated effort that also saw interest rates cut by the Bank of England, Bank of Canada, the European Central Bank and Sweden’s Riksbank, cut the U.S. federal funds rate 50 basis points to 1-1/2 percent.

While not part of the globally coordinated action announced this morning, China also cut interest rates, with today’s cut being the second time in just three weeks that it did so. China’s key benchmark interest rate now stands at 6.93%.

With the global economy in a downward spiral and stocks around the world in a free fall, the Federal Reserve undertook this action hoping it can help slow the fast growing economic malaise.

According to the Federal Reserve, “the Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures. Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months.

Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.”

With the global interest rate cuts, key benchmark rates in the participating countries now stand at 1.5% in the U.S, .5% in Canada, 3.75% in the Eurozone, 4.25% in Sweden and 4.5% in the United Kingdom.

The Federal Reserve also reduced its emergency lending rate to banks by half a percentage point and that rate now stands at 1.75% percent.

Tags: Federal Reserve  Interest Rates

The stock market underwent a broad based decline yesterday that saw the Dow lose 348.22 points or 3.22%, to close at 10,482.85. The Nasdaq lost 92.68 points or 4.48% to close at 1,976.72 and the S&P 500 lost 46.78 points or 4.03%, to close at 1,114.28.

Stocks fell on concerns that the economy was worsening and doing so at a rapid rate. As a result, even though the Senate overwhelmingly approved the financial rescue plan Wednesday night, it was not enough to spur a rally in stocks yesterday.

The House will be voting on the bill on Friday and if they approve it, it then becomes law. With yesterday’s decline which unfortunately might see some follow through early today on economic news, any good news will be welcomed by the market. So if the bill passes the house, we are still hopeful that stocks, led by the financial sector, will rally.

At this point, we are making the assumption that the bill will pass the House. Even those that are against the rescue plan have now seen that the economy needs some sort of boost and maybe this could help.

On Monday 09/29/08, after the first house vote that rejected the bill, the Dow Jones Industrial Average lost 777 points. To put it in perspective, the loss in stocks that day, represented a trillion dollars in lost equity or shareholders wealth. We got a rebound on Tuesday, but yesterday we saw stocks take another beating on concerns over the economy. So whether it is this rescue plan or another, something needs to be done.

Today, we will be getting unemployment numbers that will probably be worse than forecasted and those numbers will again highlight the precarious situation that the economy is in. Being that we will be getting those numbers at 8:30, before the vote, members of congress will also have that to digest before they vote on the bill.

We have been advocating going long on financial stocks or financial ETFs or maybe buying options on them this week on this blog, in anticipation of the bill passing. With the House of Representatives failing to pass the bill on Monday, we were a tad early. However, we will get a vote and hopefully passage of the bill, on Friday.

We don’t know what time the vote will happen, but stay tuned to the news. If it will be after the market close and stocks are trending down, wait until close to the end of the trading day and go long on select financials. If stocks ignore the unemployment numbers and start trending up, rebounding from yesterday, then traders could enter early.

Some financial stocks that we like and are currently long in anticipation of the vote are Zions Bancorp (ZION), Bank of America (BAC), Financial Select Sector Spider (XLF), Wells Fargo (WFC) and City National Corp (CYN). We also like the Proshares Ultra QQQ (QLD). If the spreads on the options on financial stocks are too wide, buy calls on these.

These are not long-term recommendation. If after the vote, we are lucky to see a strong rally in stocks, we take profits on these trades. If readers choose to buy options, go no more than the next two strike prices out and buy no options that have a spread between the bid and the ask of more than $0.75. Now keep in mind that this is too wide a spread under normal trading circumstances, but if we get a rescue plan rally, the gains should more than cover the spread.

Also, this could be a risky trade. Even if the bill is passed, there is a good chance that that old Wall Street mantra, “buy the rumor, sell the news” might kick in and we won’t see a rally. So only put up risk capital. But do try to have something in. If you were to buy the Proshares Ultra QQQ (QLD) October 48 or 49 calls for instance, and we see a decent rally, you should double your money.

Tags: Bailout Plan

The U.S. Senate on Thursday October 1st, passed by a vote of 75 to 25, the financial rescue plan, that will enable the government to buy troubled mortgage backed assets from financial companies in a bid to help slow the deteriorating economy.

The bill now goes to the House of Representatives, which on Monday 09/27/08, voted to reject it. That caused a broad-based massive decline in stocks, that saw the Dow Jones Industrial Average lose 777 points and shareholders incur a loss of one trillion dollars in their stock holdings.

The bill has been sweetened so that its more palatable to lawmakers in the House and it now has a better chance of becoming law. The House will vote on the bill on Friday 10/03/08.

Tags: Bailout Plan

Shares of UBS (UBS), Switzerland’s largest bank, are rising in European trading overnight after the bank held an Extraordinary General Meeting in which it told investors that it “expects to report a small profit for the third quarter, based on preliminary estimates.” This will be the first quarterly profit in over a year for UBS (UBS). UBS (UBS) also expects that “2009 will be an overall profitable year.”

The bank also reported that is has reduced its exposure to mortgage backed securities. These securities are weighing down the balance sheets of banks and other financial companies to the point where the U.S. is now working on passing a bill into law that will enable the government to spend upwards of $700 billion to buy these assets from the financial companies to help them weather the current credit crisis.

UBS will report its third quarter 2008 earnings on November 4th, 2008.

Tags: UBS Earnings

With the Dow dropping a historical 777.68 points yesterday because the house voted to reject the bailout plan, we may see lawmakers going into overdrive and working on trying once again, to get the bill passed as early as today.

Initially, it was believed it would take at least a couple days for lawmakers to address the situation again, as Monday evening was the start of the Jewish holiday Rosh Hashanah, which lasts for two days.

However even those lawmakers who were skeptical that the markets would see a precipitous drop if the bill was not passed, now understand that the economy is in a free fall, we need some sort of brakes applied and they need to act quickly.

On Monday 09/29/08, Citigroup (C) bought the assets of Wachovia Bank (WB) in a fire sale. While Vikram Pandit, Citigroup’s (C) CEO, extolled the deal in a press conference, which considering that they picked up $700 billion worth of assets for $2.2 billion (they immediately wrote down about $30 billion of those assets) it does seem to be, you still have to wonder how much prodding they got from the government.

In other words, this was a rescue plan albeit from the private sector, that was done to “prevent” the failure of another very large bank just four days after Washington Mutual (WM) became the largest ($307 billion in assets) U.S. bank to fail after it went under on Thursday 09/25/08.

And with the bank failures now getting larger in scope and happening more frequently and the FDIC having only $45 billion in the insurance fund that covers deposits (up to $100,000 per account) in federally regulated banks, it won’t take much for the fund to get wiped out and the FDIC will have to go hat in hand to congress.

Today, on the economic news front, we will be getting Chicago PMI, which measures manufacturing activity in that region, for September, as well as Consumer Confidence, again for September.

The numbers will be bad needless to say and the fragile state of the economy will continue to be a topic of discussion, especially now that we can add major bank failures to the discussion.

From a trading perspective, unless we get a technical bounce and there is a big rebound in stocks today, there will be little buying and until the bailout package gets passed, its possible we won’t see any meaningful rise in stocks. So the trading plan for today is to gauge market direction, trade according, that is go with the flow and take early profits.

Sitting on your assets today, is not a bad course of action and we would recommend getting in only on one of two conditions, if it looks like we will get either a big move in stocks, in which case you short if we are heading down, or you go long if we are getting a bounce, or congress will be voting today on the package, in which case, you go long.

Other than that, watch for what lawmakers are doing, and on the day we will be getting a vote, go long the markets by trading indices and ETFs that track the market, or buy call options on those instruments.

If we do get that bailout rally, look to lock in your profits within two to three days. The fundamentals of the economy are horrible and earnings season is around the corner to remind us of that. So stocks should be heading down further.

 Tags: Citigroup  Wachovia  Bailout Plan

In a deal that was facilitated by the government’s Federal Deposit Insurance Corporation, Citigroup (C) will acquire the banking operations of Wachovia (WB). Citigroup (C) will be paying $2.2 billion in stock for Wachovia’s (WB) assets.

According to the FDIC, the details of the deal are that “Citigroup Inc. will acquire the bulk of Wachovia’s assets and liabilities, including five depository institutions and assume senior and subordinated debt of Wachovia Corp. Wachovia Corporation will continue to own AG Edwards and Evergreen. The FDIC has entered into a loss sharing arrangement on a pre-identified pool of loans. Under the agreement, Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.”

Perhaps in a bid to avoid a panic situation as another bank goes under, the FDIC is making it a focus to point out that “Wachovia did not fail; rather, it is to be acquired by Citigroup Inc. on an open bank basis with assistance from the FDIC.”

Wachovia, which was one of the largest banks in the country, is the latest victim of the credit crisis. In a bid to grow into a money center bank with a national footprint that could offer every retail financial product to just about everyone, the bank went on an acquisition spree.

Amongst its purchases, was one of California’s largest mortgage lenders, Golden West Financial. Wachovia (WB) paid $24 billion for Golden West in May of 2006, at what turned out to be exactly the peak of the housing market. With the downturn in the housing market, and California being one of the hardest hit states, those mortgage assets, have led to Wachovia’s undoing.

Wachovia’s stock which closed on Friday 09/26/08 at $10, are indicated to open around $0.75.

Tags: Wachovia  Citigroup  Bank Failure

Members of congress are close to finalizing an agreement to implement a bailout plan that would buy bad asset-backed securities from financial institutions, in an effort to try and lessen the effects of the credit crisis, which has seen credit availability to both businesses and individuals almost freeze up, putting the economy in a downward spiral.

According to Speaker of The House Nancy Pelosi,  who announced the breakthrough just after midnight, Sunday morning, members of congress have settled ”our differences so we can go forward with a package to stabilize the market.”

Instead of the full $700 billion that has been bandied about, the funds will be issued in tranches. If the bailout plan is passed, $250 billion will be immediately available and a further $100 billion will be available if the president makes a request.

It is expected that a vote to approve the plan will come on Sunday.

Tags: Bailout Plan  Credit Crisis