Another yo-yo session in major North American markets on Friday as stocks struggled to find direction, but by the end of the session, North American stock markets closed the day in the black. Strength in the energy sector and recession resistant companies led gains (McDonald’s). While some ‘words of comfort’ from Britain’s Barclays Bank late in the day helped financials cut losses that had driven the market lower earlier.
As expected the banking sector was in the spotlight throughout the day after a new $20 billion government capital injection for Bank of America revived worries about the fate of the financial sector (if BofA needs help with their Merrill Lynch acquisition how many more banks are still in line waiting for more assistance?). Citigroup also announced plans to split itself into two units, this so called ‘good bank/bad bank’ model has been used in other instances. You may have heard the term “don’t throw the baby out with the bath water” before. The good bank is the “baby” that will “survive” and it will “survive” and then you “throw” all the “junk” into the bad bank and “watch it die” (which is the heart of capitalism and a moral hazard – a prerequisite to resolving all these issues).
Since September we have seen unprecedented levels of volatility as investors struggle with what is happening. Barclays said it expected next month to report pretax profit for 2008 “well ahead” of analysts’ estimates. Barclay’s comments came a few hours after its shares had plummeted by 25% in European trade (on whispers). This morning the sector continues to struggle ‘oversees’ as the Royal Bank of Scotland is expected to post a loss around 8 billion pounds and require additional capital.
The Toronto Stock Exchange (TSX) Composite Index advanced by 0.46%, the Dow Jones industrial average advanced by 0.84%, the Standard & Poor’s 500 Index advanced 0.76% the Nasdaq Composite Index advanced by 1.16%.
Stocks still lost about 5% last week in the United States (half that in Canada) after an initial strong start to 2009 but stocks remain approximately 10% to 15% ahead of their respective “bear” market low in November. Markets in the United States will be closed today for the Martin Luther King Jr. Day holiday, a day before the inauguration of President-elect Barack Obama.
According to Reuters, last Friday marked an end to the stock market’s run under the administration of President George W. Bush. The S&P 500 lost more than 35% of its value since the day Bush took office in 2001, wiping out more than $4.6 trillion of investor wealth during his 8 year presidency. By contrast, under his predecessor, William Clinton, the S&P tripled, gaining more than $9 trillion. Bush is the first president since Richard M. Nixon to preside over a net fall in stocks during his term.
Despite the tactics surrounding the financial sector, investor worries persisted over the health of the sector and whether banks will need to raise more capital as they struggle to deal with the credit crunch and global economic slowdown. However, it is clear that Central Banks and governments do not want to allow another bank to go bankrupt nor do they want to build a bridge to nowhere (at some point this has to get fixed).
Expect the 2nd half of the $700 billion Trouble Asset Relief Program (TARP) to be spent differently then the 1st half. In the U.K., the government announced that they are guaranteeing toxic assets and giving the Bank of England unprecedented power to buy securities. The plan will increase the cost of bailing out the nation’s banks by at least 100 billion pounds ($147 billion $U.S.). The announcement sent the pound lower against the euro and the dollar (spend too much and your currency deprecates).
There is a little bit of optimism and confidence back in the market today after a hard week – likely attributable to bargain hunting. Stocks are up this morning in Europe by about a percent while stocks are up globally by about 0.5%. Canadian stocks will have some headwinds with the price of commodities off a little this morning but tomorrow the Bank of Canada is widely expected to cut interest rates by a further 0.50% (but their comments will be closely reviewed because the bank must keep cutting interest rates until the economy bottoms). Tomorrow will be interesting as the official transition of power will materialize on Capitol Hill as President-elect Barack Obama secures power.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
