Tuesday, January 20, 2009

Roubini: "systemic banking crisis"; Obama: "the time has come"

As Washington, DC became a grand celebration with the inauguration of Barack Obama, the 44th President of the United States of America, a far different mood was spilling out of the stock exchanges and broker/dealer offices of Wall Street.

The juxtaposition of moods and emotions could not be more stark between the Capitol and the Big Apple. While Obama was reminding us of the nation's greatness, Wall Street was dealing with the current reality of a systemic banking failure. Speaking in Dubai, New York University Professor Nouriel Roubini, who has been one of the leading voices predicting the global financial crisis, said that US banks are "effectively insolvent," adding that total financial losses could reach the staggering sum of $3.6 Trillion.

There is no doubt that the economy will be the stiffest challenge presented to the newly-minted President. Obama, in close contact with the congress, is already working on a financial rescue package which will total over $800 billion in tax breaks and incentives over the next two years. Whether the medicine spooned out by Washington will cure the sick patients of Wall Street is still suspect. The wheels, however, will turn, for better or for worse, and business will continue, in whatever form it takes.

As President Obama made his way to the Capitol to take his oath of office, markets around the world were reeling. The Dow Jones Industrials quickly sank below 8100, the fourth consecutive session in which it has declined beyond that mark. The catalysts for the decline were the same as they have been throughout: the banks and financial institutions that continue to write down massive, unpayable debt, begging for help from stunned legislators while destroying investor confidence and trust in markets.

So it was that the new president was greeted with a massive loss on US equity markets, which ended the session with the worst losses of the new year.

Dow 7,949.09, -332.13 (4.01%)
NASDAQ 1,440.86, -88.47 (5.78%)
S&P 500 805.22. -44.90 (5.28%)
NYSE Composite 5,058.0601, -329.44 (6.11%)

Advancing issues were overwhelmed by decliners, 5655-833, one of the most lopsided showings in months, even though the past few months have been nothing but an endless string of declines in the broad markets. New lows arched ahead of new highs, as expected, 328-18, expanding both the number of new lows and the margin of lows to highs. Volume was once more light, considering the loose selling all around, but, as mentioned in earlier posts, smaller volume figures are more or less going to be a fixture for some time to come. Small investors have been spooked, hedge funds are largely out, and big brokerages (are there any left?) have trimmed their positions significantly.

NYSE Volume 1,718,511,000
NASDAQ Volume 2,014,633,000

On the commodities side, oil, which began a new futures contract today (March), gained from the closing February contract, up $2.23, to $38.74. Gold rebounded sharply, adding $15.30, to $855.20, while silver slipped on profit-taking, down 4 cents, at $11.18.

Up this week are tech heavyweights - Apple, eBay, Google, AMD, and others - reporting 4Q earnings. Of particular focus is eBay, which seems to have lost a lot of momentum lately, due to CEO John Donahoe's commitment to "disruptive thinking," the idea that eBay must change to grow, or, in his own words, "create a vision of the future so people could let go of a very successful past." Apparently, Mr. Donahoe never heard of IIABDFI (If it Ain't Broke, Don't Fix It) before embarking on changes (like tripling fees in some categories) that have resulted in vociferous complaints and a mass exodus of mid-to-small sellers.

The movement of sellers has been so abrupt that one site, Bonanzle, has gone from zero to just under 1 million listings in about six months time. Other niche and general sites have experienced enormous growth during Donahoe's tenure. Ebay reports after the close on Wednesday. Look for the first of many disappointing quarters. The stock should sink to under $10/per share (currently hovering around $13-14) in short order (no pun, nor hint, intended).

If today's action was any indication, President Obama's task is not going to be an easy nor a pleasing one. Rescuing an economy that has been buffeted by years of abuse and neglect will take time to repair. This is not a condition which will be cured overnight. And, as the President has been reminding us, it's likely to get worse before it gets better. How much worse only time will tell.

No comments: