Thursday, October 9, 2008

Market Update - Financial Crisis

An update on the last couple of deadly weeks.

I think the Freddie and Fannie mac news provided the much needed jolt to everyone unaware of the financial turmoil. The Government did step in with a bailout.

The signboard "Lehman for Sale" was already put up on Wall St. but unfortunately there were no buyers which started the stocks free fall. Unfortunately, Lehman could not raise capital and did not make it as even Bernanke and Paulson kept there hands off. In the meanwhile, Merrill Lynch was sold to Bank of America, Wachovia to Wells Fargo and WaMu to JP Morgan Chase. With the big investment giants + banks going down under the panic kept on escalating.

The crisis grew bigger as AIG was kicked out of the Dow. It got an infusion of cash from the Fed for a 80% stake to stay afloat and avoid the catastrophic collapse. However, this raised substantial fears of the financial sector leading to massive sell off.

In the midst of all this the foreclosures continue to climb while new home construction falls. The $700 billion big bailout plan failed to clear the House initially but cleared the hurdle during a second chance. Berkshire Hathaway and Warren Buffet showed confidence in Goldman Sachs and GE and poured in $5 billion and $3 billion respectively which I think helped tremendously. The endorsement helped both companies to raise more capital.

The coordinated rate cuts yesterday didn't help much as the credit markets still remained tight. Fed chief Bernanke has offered a dismal outlook on the economy. The Dow and Nasdaq continue to sink and companies forecast a tough next quarter and issue warnings.

Imagine this. The DOW was at its all time high exactly one year back in October 2007. It has dropped 4000 points just in the last 4 months. It was hovering around 11,000 about 2 weeks back to close at 8,579.19 today.

Hopefully the economic downturn gets reversed soon.

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