Great Indian bailout planned for markets

Great Indian bailout planned for markets  

Cheaper Credit, More Funds For AAA Companies

With liquidity becoming the immediate priority of the government, it is looking at a slew of measures to make more funds available to the credit market and there are strong indications that banks may be nudged to lend to companies with good credit track records.
    Official sources told STOI that a further cut in the cash reserve ratio (CRR), a reduction in interest rates, a ‘ban’ on reverse repo are some of the options being looked at to augment liquidity, while a ban on short selling is being considered as a way of curbing bearish sentiments in the markets.
    It is also learnt that a proposal to dilute mark-to-market norms for banks is being seriously considered. Such a step, which has already been taken in the US, essentially allows banks to pretend that their assets have the same value at which they were bought rather than the current market value. Thus, they are able to avoid providing for the losses that would accrue if they actually valued them at current levels.
    In addition to these measures, banks might be informally told that they should lend to corporates with AAA ratings. This is because of the fear that restoring liquidity to banks will serve little purpose if they continue to remain wary of lending.
    In the aftermath of the global financial meltdown, banks and financial institutions have turned ultra-conservative in lending. “What purpose would it serve if the banks remain tight-fisted,’’ said a bank functionary monitoring the tight credit situation.

    The cut in CRR would effectively mean that banks need to maintain a smaller proportion of their reserves with the RBI, thus releasing more funds for them to lend. Similarly, the central bank foregoing the option of reverse repo would mean that it will not soak up money from the banks by borrowings, which again would leave them with more loanable funds.
    While these two measures are aimed at boosting liquidity, the proposal to cut interest rates is aimed at making credit available at reasonable rates for corporates. RBI had successively hiked interest rates as inflation rose and though price rise remains an important concern for the government with elections looming, there is now a strong view in the government to focus on restoring liquidity right now.
    The government also feels the need to address the volatility in markets. Hence, the idea of banning short selling. Short selling, in which investors sell shares without possessing them, is already banned in the US, Italy and China to check the market downslide.

 ON THE ANVIL

  • Banks to be goaded to lend to AAA-rated companies so that their expansion plans don’t get stymied
  • RBI to stop using reverse repo to mop up funds from banking system
  • CRR could be cut further to add to banks’ liquidity
  • Interest rates might be reduced to make credit cheaper
  • Mark-to-market norms might be diluted to help banks avoid loss provisioning
  • Short-selling in stock market could be banned to curb bearish sentiments

Rich nations roll out five-point rescue plan

The United States and six of the world’s other richest nations agreed on Friday on a five-point plan to rescue the financial industry.
    The G-7 nations agreed that the enormity of the crisis called for a global response, US President George W Bush said after the talks.
    He also warned individual nations against taking action that could hurt others. It has been a disastrous week for markets around the world, a week that has seen trillions wiped off the value of shares.
    The plan, among other suggestions, asks nations to take decisive action and use all available tools to prevent “important’’ institutions from failing; unfreeze credit and money markets and ensure that banks and other institutions have broad access to liquidity and funding; and ensure that banks can raise enough capital from public and private sources to re-establish confidence and kickstart lending to individuals and businesses.
    Treasury officials said the US might embark on direct injection of capital into banks in the next two weeks. But Bush cautioned that results would take time. “The benefits will not be realised overnight,’’ he said.
    The discussions focused on the growing likelihood that the US and major European countries would have to partially nationalise their banking systems. Such a step would have been unlikely in many countries even a week ago, but the swiftness of events is forcing officials to throw out decades of conventional wisdom about how free markets should operate.

Market Outlook 08 Oct 2008

We are in Recession and we need to accept that, its not a normal bear phase its recession but remember one point always – rallies of a bear market are far more intense than normal and can eat up all yours Stop Losses of shorts the same as corrections of a bull market
  • Nifty Resistance At 3630 next 3818 can come, Support At 3536 Next target 3133

  • Short Unitech sl 112 (discloser: our paid members already shorted at higher levels) target 88-82

  • Short Educomp target 2200 short term

  • Moserbaer can crash 30-40% in short term

Last Session overview 

Today’s movement in the Nifty was not totally unexpected. It was to be expected that the P-notes issue being eased and the CRR slash would lend a helping hand to the Nifty, which did happen because the Nifty opened with an upward gap of about 125 points. But the overall sentiment being negative, it was also to be expected that the market would eventually lose its way and come down, and that also did happen because at one point during the day the Nifty was down by as much as 50 points. But a final surge that lasted about an hour and a half took the Nifty back up to make it close with a gain of 4 points, thus making a doji for the day. (A doji, as explained in all previous newsletters, is a day where the opening price and the closing price is the same or is very close to each other. Such a candle has a non existent body but has a lower shadow and an upper shadow, the exception being gravestone dojis and dragonfly dojis where one of the shadows is also missing.) The BSE Sensex, not having the luxury of having 50 stocks in its composition and not having gainers like National Aluminium, Reliance Power, SAIL, Tata Communications and Zee Entertainment, closed about 106 points in the red.

World markets continue to be negative. Asian markets remained weak, European markets were, more or less, flat but the American and Latin American markets continue to trouble us. The Dow Jones, at the time of writing, was trading 290 points in the red while the Nasdaq Composite was almost 75 points down. Crude oil was trading at almost the same levels – $88 a barrel while the rupee versus the dollar is now touching almost 48. Gold continued to remain good – after a jump of $33 an ounce yesterday, it has gained another $24 today, obviously as demand for a safe haven increased and on speculation that the central banks may slash interest rates.

The Week That Broke Wall Street

A shocking series of events that forever changed the financial markets

Sunday – Trouble Brews

News that Lehman Brothers was on the brink of collapse and scrambling for a buyer first surfaced on Friday. But by Sunday, there were still no suitors for the 158-year-old investment bank, and bankruptcy seemed inevitable. Indeed, just after midnight, in Monday’s early hours, the firm officially announced its intention to file for Chapter 11. Equally as staggering, just hours after reports surfaced that Bank of America broke off talks to buy Lehman, BofA unleashed the news that it would pay $50 billion to scoop up Merrill Lynch, another iconic Wall Street name. As if that weren’t enough, American International Group, the nation’s largest insurer, said that it planned to sell some of its troubled assets in order to raise cash and boost investor confidence. Concerns about the credit crisis grew increasingly dire, even though the government had already pledged to backstop Fannie Mae and Freddie Mac up to $200 billion just one week ago, and months earlier engineered JP Morgan’s purchase of Bear Stearns with a $29 billion guarantee. But it looked like that wouldn’t be enough, so Sunday afternoon the Federal Reserve, along with 10 banks, announced a $70 billion pool of funds to aid troubled financial firms. The U.S. central bank also loosened its lending restrictions.

Monday – The Collapse

As traders sold off stocks on the weekend’s sour news, rumors began to circulate that AIG was struggling to raise enough capital to fend off a downgrade. As a result, New York Governor David Paterson bent intra-corporation lending rules, allowing the company to loan itself $20 billion from a subsidiary. In the worst day on Wall Street in seven years, the Dow Jones Industrial Average tanked more than 500 points after Lehman Brothers’ epic collapse and the buyout of Merrill Lynch. By Monday night, AIG was in fact hit with a downgrade, as Fitch bumped the insurance group down a notch. With $1.1 trillion in assets and 74 million clients in 130 countries, investors feared AIG’s collapse would severely hurt consumers and further tighten already strangled credit. Also Monday, news cropped up that the nation’s largest savings bank, Washington Mutual, was in search of a white knight.

Tuesday – The Fed Steps In

Stocks saw another sharp drop on Tuesday morning as worries mounted that the financial system was broken beyond repair. Investors poured money into bonds, and the yield on the benchmark 10-year Treasury note fell to a 5-year low. Next, several rock-solid money market funds began to falter, dipping below the $1 per share benchmark. Meanwhile the Fed was scheduled to meet on Tuesday afternoon. Wall Street analysts, who just a week ago expected the Fed to hold rates steady, began to anticipate a rate cut. But the central bank chose not to succumb to panic and unanimously decided to hold rates steady at 2%. Markets cheered the decision, and the Dow jumped 140 points at the close. After the bell, British bank Barclays agreed to buy up $2 billion worth of Lehman’s brokerage assets and real estate holdings, and Morgan Stanley reported better-than-expected earnings. But the big news came later that night when the government announced that it would stage a staggering $85 billion bailout of AIG, and take an 80% stake in the company.

Wednesday – Another Free Fall

Investors gave an enormous thumbs-down to the AIG news, sending stocks plummeting, while traders piled funds into safer havens. Gold rose $70, a new record. Oil rose $6, its second-largest jump ever. And the yield on the three-month Treasury sank to 0.02%, the lowest level since 1940. The Dow dropped 450 points by the end of the day, dragged down by bank stocks in a tail-spin. Despite reporting better-than-expected results, Goldman Sachs shares dipped below $100 a share for the first time since 2005. Morgan Stanley took a tumble as well, as rumors circulated that it would merge with troubled bank Wachovia. Many Wall Street analysts blamed the stock market’s collapses on so-called "naked" short sellers, who short stocks without ever buying the security. Subsequently, the U.S. Securities and Exchange Commission stepped in and banned naked short selling.

Thursday – The Bailout

With a crisis on its hands, the Fed convinced five other central banks around the world to invest a total of $180 billion in global financial markets. Meanwhile, AIG was tossed out of the Dow Jones Industrial Average and replaced with food giant Kraft. The stock market soared towards the close of the session, with financial stocks rebounding. The Dow added more than 400 points on rumors that an even more extensive federal bailout of the banking industry was in the making. Investors cheered these early reports that the Treasury would create an independent federal agency to take bad loans off of bank balance sheets. Late Thursday night, Treasury Secretary Henry Paulson met with Congressional leaders to hammer out the details of a large-scale bailout.

Friday – The Confidence Boost

As Wall Street eagerly awaited the details of Secretary Paulson’s plan, the SEC took what it called "emergency action" Friday morning and temporarily banned investors from short-selling 799 financial companies. The Treasury also said it would insure up to $50 billion in struggling money market fund investments at financial companies, guaranteeing that the funds’ value will not fall below the standard $1 a share. The Fed also said it would make unlimited funds available to banks to finance purchases of asset-backed commercial paper from money market funds. In a press conference, Treasury Secretary Paulson outlined the government’s plan to put up hundreds of billions of dollars to help stem the crisis, saying "the financial security of all Americans … depends on our ability to restore our financial institutions to a sound footing." Later, President Bush held a separate press conference, flanked by Paulson, SEC Commissioner Christopher Cox and Fed chief Ben Bernanke, saying it was "essential" that the government step in to save the economy. Investors cheered the moves, sending stocks soaring throughout th e day.

Although the U.S. government had set various bailouts in motion to the tune of roughly $1 trillion, investors finished the week with renewed confidence that Wall Street may be broken – but not beyond repair.