OTCPicks Penny Stock Blog

October 29, 2008

Feds Cut Interest Rate Half a Point

On Wednesday Oct 29, the Federal Reserve slashed a key interest rate by half a percentage point as it seeks to revive an economy rocked by the worst financial crisis in the better part of the last century. U.S. stocks dropped in the final minutes of trading on concerns that the Federal Reserve's sixth interest- rate cut this year isn't enough to rescue the economy.

The Standard & Poor's 500 Index lost 10.42 points, or 1.1 percent, to 930.09, one day after surging 11 percent. The Dow average slumped 74.16, or 0.8 percent, to 8,990.96. Three stocks gained for every two that fell on the New York Stock Exchange.

The central bank on Wednesday reduced its federal funds rate target, the interest banks charge on overnight loans, to 1 percent, a low last seen in 2003-2004. The funds rate has not been lower since 1958, when Dwight Eisenhower was president.

The cut marked the second half-point reduction in the funds rate this month. The Fed slashed the rate by half a point in conjunction with rate cuts by foreign banks back on October 8th.

This is the second day that most major indexes have been in positive territory. Tuesday ended with nearly a 900 point Dow gain, and today the Dow was up more than 200 points for part of the session but those gains were erased in the final minutes of the trading day.

In addition to the rate cuts, the Fed has been starting to pump billions of dollars into the U.S. banking system to help unfreeze credit markets. Congress passed on Oct. 3 a $700 billion rescue package to make direct purchases of bank stock and buy up bad assets as a way of getting financial institutions to start lending again. This week some of the first of those bank payouts began.

Earlier this week $125 billion was sent to nine of the nation's biggest banks. Other industries, including automakers and insurance companies, are also in talks with the administration to get bailout funds.

Oil Goes Up and the Dollar Goes Down

The price of oil rose Wednesday as the dollar retreated from recent highs and signs of strength in overseas markets tempered some concerns about waning demand. The interest rate cut by the Federal Reserve seemed to have little impact on oil prices as investors appeared to have already priced in the central bank's latest attempt at boosting the economy.

Light, sweet crude for November delivery rose $4.77 to settle at $67.50 a barrel on the New York Mercantile Exchange. Earlier in the session, oil rose more than $6 to trade at $68.91 a barrel. On Tuesday, the price oil settled at $62.73 a barrel, its lowest level in 17 months. The primary driver today of oil's rise is a weakening dollar which backed off of recent highs as international markets showed some signs of strength tempering concerns about waning demand.

Prices at the pump fell for the 42nd-straight day to levels not seen since March 2007. The national average price for a gallon of regular gas fell another 4 cents overnight to $2.589, according to a daily survey by the American Automobile Association.

Separately, a recent Department of Energy report showed that Americans are driving 5.6% less than last year. And a weekly MasterCard survey of gas purchases showed motorists consumed 6.4% less gas in the past week compared to a year ago.

U.S. Regulators Mulling Plan for Government Guarantees of Home Mortgages

U.S. regulators are supposedly working on a new program that could provide government guarantees for up to $600 billion of home mortgages to help prevent foreclosures and it might fall under the control of the Federal Deposit Insurance Corp and the U.S. Treasury Department. This program could provide guarantees for some 3 million at-risk mortgages. This program has not yet officially been announced, but the Treasury Department said on Wednesday that it is working with the FDIC and other policymakers on foreclosure-prevention measures but that no detailed plan has been reached.

The plan would supposedly provide federal guarantees to entice lenders to ease the terms of troubled mortgages which has been a problem as the credit crisis has deepened. Sources said that a program is likely to be announced in the next few days.

Good News, but Harsh Results

Wall Street got the interest rate cut it wanted, but markets turned higher then slid hard in the last minutes of trading on Wednesday. The major indexes ended the day mixed, with the Dow Jones industrials falling 74 points — only the third time in October that the blue chips had just a double-digit close.

September 22, 2008

This past week has seen an unprecedented events happening on Wall Street and a major rollercoaster ride in the stock market. This past week shook the foundations of the world financial system. A sharp slide in U.S. housing prices and a subsequent rise in delinquencies on home loans is the root cause of these massive losses on mortgage-backed bonds that in recent years have spread across the global financial landscape.

The financial crisis that began 13 months ago has entered a new, far more serious phase. Hopes that the damage could be contained to a handful of financial institutions that made bad bets on mortgages have evaporated this past week. Now increasingly big cracks have appeared in the system beyond the original problem -- troubled subprime mortgages -- in areas like credit-default swaps, the credit insurance contracts sold by American International Group Inc. and others. This led to a crazy week last week on Wall Street:

Here is a rundown of some of this past week's wild series of events:

1. Lehman Brothers declared bankruptcy on Monday.

2. Bank of America (NYSE: BAC) said it has agreed to buy Merrill Lynch & Co. Inc. (NYSE: MER) in an all-stock deal worth around $50B.

3. The Fed bailed out American International Group's (AIG) with an $85B infusion giving the government 80% ownership of the company.The Fed said if AIG were to topple, interest rates would have risen, lowering consumer buying power and stifling the already weakened economy and potentially inciting a panic by consumers.

4. The government activated a fund to protect money-market funds. President Bush authorized up to $50 billion that money-fund managers who pay a fee can tap into to prevent investors from losing principal.

5. On Thursday, the Fed joined other major central banks around the world to inject up to 180 billion dollar into global money markets. Meant to boost investor confidence and tighten the reigns on the crumbling credit crisis, the cash infusion did little to boost Wall Street’s mood.

6. Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke hatched a plan with congress members Thursday night to buy illiquid mortgage securities and auction them off later. The Bush administration asked Congress on Saturday for $700 billion to bail out firms burdened with bad mortgage debt, seeking extraordinary authority as it seeks to prevent meltdown in the global financial system.

7. Senior Bush administration officials pressed counterparts in Japan, Germany, Britain and other nations to set up similar plans for their own troubled financial firms

8. The SEC issued a temporary ban on short selling on 799 financial stocks. The ban runs through October 2 but the SEC may extend the ban if they feel it is necessary.

9. The SEC also eased rules to make it easier for companies to buy back their own stock shares. The idea is that buybacks can be an important source of liquidity during volatile times.

10. The Federal Reserve extended emergency lending procedures to allow commercial banks to finance purchases of asset-backed paper from money market funds. It also said it would buy short-term debt from Fannie Mae, (FNM) Freddie Mac (FRE) and the Federal Home Loan Banks.

11. Friday's volume was mixed. Bulked up by quadruple witching trading, NYSE trade swelled 14.7%. Nasdaq volume dropped 1.8%.

12. Gold has benefited from a wave of risk aversion that has hit the markets after U.S. investment bank Lehman Brothers filed for bankruptcy. The impact of the U.S. government's unprecedented $700 billion plan to bail out bad mortgage debt is expected to significantly weaken the dollar, and that means higher oil and gold prices. Bullion gained nearly 2 percent on Friday, but it was well off a high above $900 reached on Thursday when safe-haven demand for the precious metal heightened.

13. Oil tracked the stock market. It finished at $104.55 a barrel, up from $101.25 last week. But on Wednesday, it closed at $91.02, its lowest since February. Crude is now 29% off the high of $147.90 in July. Like gold, expect oil to rise due to the effects of a weaker dollar

To boil things down, the U.S. financial system is in a pretty pickle right now, and deleveraging is continuing to happen and will continue to happen for a while yet. Democratic lawmakers, who control both houses of Congress, said they hoped to approve the bailout quickly but wanted changes such as more oversight, limits on executive pay at participating firms, and assistance for homeowners.

On Monday investors will focus intently on testimonies by Federal Reserve chief Ben Bernanke, U.S. Treasury Secretary Henry Paulson and a speech by European Central Bank President Jean-Claude Trichet. Their comments will be scrutinized closely.

Also this week data is expected on the U.S. housing market, the euro zone services sector.

A sharp slide in U.S. housing prices and a subsequent rise in delinquencies on home loans is the root cause of these massive losses on mortgage-backed bonds that in recent years have spread across the global financial landscape. The problem is that the $700 Billion bailout does not really fix the root problem including falling real estate prices, foreclosures, and a glut in the housing market and credit so tight that most normal consumers won't have the credit rating and down payments available to start buying homes again to soak up the excess housing inventory and get new building going again. Oil is likely to go up again with the flooding of the market with U.S. dollars to fight the liquidity crisis and likely weakening of the dollar.

We are not out of the woods yet. Congress and the Bush administration and the Federal Reserve have not hammered out the final details of the $700B bailout plan. We will have to watch this week and see what the markets think about the Fed's bailout plan and if it instills confidence and calms the market. If not, it could be another ugly week.

September 17, 2008

In recent weeks mortgage rates have been dropping. This is great news for buyers, but only buyers with impeccable credit. Within the last week mortgage rates have dropped below 6% making it a great time to consider buying a house. But, the “Devil is in the Details” and the Devil in this case is finding a lender willing to loan you the money to buy.

Lenders do not want to take risk anymore. Taking excessive risk on sub-prime loans is what started this mess in the first place, so the pendulum is now swinging the other way where lenders have become very conservative and are requiring ever higher credit scores, larger loan down payments, and more stringent income verification checks.

More than three quarters of U.S. banks have tightened credit standards in the last 4 months and are now only lending to the most credit-worthy borrowers. According the Rankrate.com the average 30-year fixed-rate mortgage in the U.S. was 5.78 percent on September 15th, down .30% percent from a week earlier.

On Tuesday the Federal Reserve is scheduled to meet and many believe with the current meltdown in financial markets, the Fed. may lower its key interest rate to 1.75 percent from 2 percent which may reduce mortgage rates further.

Lehman Brothers Holdings Inc., the biggest underwriter of mortgage-backed securities, filed for bankruptcy on Monday. The implosion of the sub-prime market has snowballed in recent months and so far this credit shakeout has cost financial firms more than $500B in mortgage-related write-downs and losses and the shakeout is still continuing.

Some mortgage companies are going out of business. Since the beginning of 2007 over 100 mortgage related companies have shut down their lending operations, closed altogether or sold their businesses to get out of the mortgage market. Many of these lending companies packaged groups of loans as securities and demand for those mortgage back securities has completely dried up. Those mortgage backed securities and derivatives are the root cause of the financial market’s meltdown. There are currently somewhere around 9000 banks in the US and it is estimated that consolidation resulting from this credit crisis may cut that number in half in the coming years.

By tightening credit and lending standards, lenders are being more conservative and taking less risk, but this also has the unfortunate effect of limiting the ability of many first-time home buyers to enter the market. Fewer consumers can get loans, and housing inventory sits vacant for want of a buyer who can meet the more stingent qualification requirements.

Yesterday, the federal funds rate soared as high as 6 percent, triple the Fed's target, as banks hoarded cash. That spurred the Fed to pump $70 billion into money markets through repurchase operations, the most since September 2001.

To boil things down, the U.S. financial system is in a pretty pickle right now. There is a glut of houses on the market and prices are dropping. Banks and mortgage companies have tightened lending requirements because they have taken a beating on their previously more risky lending practices which started all of this. The government is trying to put sufficient funds into the system to maintain liquidity for lending, but it is going to take at least well into 2009 or longer for the financial markets to work their way out of this mess and for the housing markets to rebound.

September 15, 2008

Sunday, September 14th is already being called Black Sunday for Wall Street as troubled financial giants Lehman Brothers, Merrill Lynch and AIG were all desperately seeking lifelines for survival as frenzied behind-close-doors meetings happened around the clock. And today might well become Black Monday if the cloud of the current financial crisis does not lift.

U.S. financial stocks and markets are getting battered unmercifully today as worried investors react to the uncertainty and instability of the U.S. financial system happenings.

Today Lehman Brothers filed for bankruptcy protection. Long hours were put in over the weekend to find a Lehman buyer, but apparently a savior was not found and they are headed toward bankruptcy after all potential buyers walked away. They were spooked by the U.S. Treasury's refusal to provide any takeover aid, as it had done six months ago when Bear Stearns faltered and earlier this month when it seized mortgage giants Fannie Mae and Freddie Mac.

Bank of America (NYSE: BAC) said it has agreed to buy Merrill Lynch & Co. Inc. (NYSE: MER) in an all-stock deal worth around $50B. Hopefully BOA can absorb this Merrill acquisition and flourish. If BOA can pull it off, the good news is that they will now own one of the best and largest retail brokerages in the country.

Perhaps the biggest news is related to shares of American International Group (NYSE: AIG). AIG gapped down at the open more than 50%, and was down as much as 65%. AIG, hit by $18 billion in losses over the past three quarters from guarantees it wrote on mortgage derivatives, worked feverishly to put together a plan that would stave off rating downgrades, after Standard & Poor's threatened to cut the insurer's ratings on Friday. AIG is seeking a $40B bridge loan from the government to continue as they liquidate assets. They do not have long to find a solution as investors lose confidence and the stock continues to plunge.

Two weeks ago the government took over the mortgage giants Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) which was a shocking bailout by the government.

The downfall of these major independent Wall Street institutions comes around six months after the collapse of Bear Stearns and 14 months after the beginning of the credit crisis, sparked by bad mortgage finance and real estate investments.

A global consortium of banks, working with government officials in New York, announced a $70 billion pool of funds to lend to troubled financial companies. The aim of the bank consortium, is supposed to prevent a worldwide panic on stock and other financial exchanges as the government is signaling that it will not continued to bail out Wall Street, The government is saying that they are continuing to work on reducing financial market disruptions and minimize the impact of these financial market developments on the broader economy.

The housing crisis and sub-prime mortgage meltdown is the root cause of these financial troubles. Home prices have dropped on average 25 percent thus far, and some analysts are predicting that they could drop further before things bottom out and the market starts to firm up.

The credit crisis is slowing the broader economy as a whole. Credit gets tighter and banks make fewer loans. As a consequence, consumers start cutting spending. Economists have been saying for months we were, are or, will soon be in a recession. Every week it changes but if the base of our financial system does not stabilize, we could quickly slip into a full-blown recession by the end of this year and early next year.

It is way too early for investors to start thinking about playing a bottom in this market. There is still bound to be more shakeout ahead for some of the smaller players. It will be interesting to see whether this carnage in the financial markets will prompt the Federal Reserve to cut interest rates this week. The Fed has indicated that they would be vigilant against inflation and have indicated they might hold firm or raise interest rates to hold prices in check but inflation worries are probably less of a concern at the moment compared to the stabilization of the financial institutions around which our whole credit system is based.

It’s too early to tell when the worm will turn and things will stabilize and the bleeding will stop in the financial markets, but we will all be keeping a close eye on things.

Other Bank Stocks today:

American International Group (NYSE: AIG). Down 55%
Washington Mutual (WM): Down 19%
Wachovia CP (NYSE: WB): Down 21%
Merrill Lynch (NYSE: MER): Up 18%
Bank of America: (NYSE: BAC): Down 15.5%
Fannie Mae (NYSE: FNM): Down 15%
Freddie Mac (NYSE: FRE): Down 13%
Citigroup (NYSE: C): Down 12%