Archive for October, 2011
Is Morgan Stanley in Deep Trouble?
Posted by Jody Eisenman | Filed under Uncategorized
Another day and another drop in stock prices. The DJIA closed down over 250 points, with losses accelerating toward the end of the day. The S & P 500 closed below 1100 for a new 52 week low. Volatility continued to soar, with the VIX closing above 45. Once again, the financial stocks were hit hard. BAC, which got a huge investment from Warren Buffet, broke through 6 and closed at a new low of 5.53. GS and C also went to new lows. However, the real news in the financial sector belonged to MS.
Morgan Stanley has over 600 offices in 36 countries. They employ over 60,000 people. There have been rumors (which have been promptly denied) that the bank has massive exposure to European debt. The Credit Default Swaps can be an indicator of what institutional investors feel about the risk of default. CDS’s are basically insurance policies on a company’s debt. If the company defaults, a CDS holder would receive full value on their swap. It is important to note that unlike a standard insurance policy on a person, car or home, one need not own the underlying security in order to own the CDS. In other words, an investor could purchase a CDS on a security strictly on the bet that there will be a default. On that note, the CDS on Morgan Stanley have soared to levels previously seen around the time of the Lehman default. The cost to insure MS debt has leaped from 305 basis points on September 15 to 583 today. What that means is that it now costs a premium of 5.83% in order to insure. This is the highest of any US money center bank. Could MS be at the risk of default? I am a firm believer that after what happened with Lehman, where we came so close to financial Armageddon, the Fed will not allow a major bank to default. I believe that if it came down to it, the Fed would either bail them out or engineer a merger. However, there is no guarantee of anything. In the meantime, the level of investor apprehension especially in regard to the banks continues to soar. MS stock closed today at 12.47, close to its’ 52 week low.
Stocks Log Worst Quarter Performance in Years
Posted by Jody Eisenman | Filed under Uncategorized
In a fitting end to a rocky quarter for stocks, the DJIA lost 240 points Friday to close below 11,000. The S & P 500 currently sits at 1131, which is only 30 points away from the 52 week low. All told, the DJIA and S & P lost over 12% for the quarter, with the NASDAQ losing over 14%. Year to date, the S & P is down about 10%. One of the most disconcerting events for bulls is that when the market falls, it seems to take almost everything with it. Usually, there are areas which will buck the downtrend. However, this was not the case this past quarter. For example, commodity prices dove with low interest rates and the expectations of reduced demand. Spot gold lost $163, or over 9% for the month. Copper prices have plunged, with futures losing about 25% this past month. Steel and aluminum prices are down as well. USX (formerly known as US Steel) closed right around 22. The stock changed hands as high as 180 in June of 2008. Here is a link to an article detailing the ten worst sectors this past quarter.
One could say that the absence of the Fed’s QE3 may have led to heavy caution on the part of investors. However, I’m sure the lack of growth in the US and the European problems played a part. As has been the case for the last two months, volatility remains extremely high. The VIX closed just below 43, which is pretty close to its’ high for the year. We are about to enter earnings season, starting with Alcoa. Will it be enough to pull the market out of this decline?
