House passes stabilization package; Citigroup cries foul

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• The economic stabilization bill passed Congress on Friday. Those hoping for a rally were greatly disappointed as stocks sold off during the last hour or two of trading. The problem is that the crisis is having a real impact on the consumer. Spending is dropping as people decided to preserve capital in unison with the banks that are supposedly no longer lending or at least lending less than previously. It is a vicious spiral that will have lasting effect on the economy. Those comparing the economic slowdown to the 2001 recession are now worrying that the current state will be longer and deeper. The big difference is the consumer will lead us downward this time around. Unfortunately I think that assessment is most likely.
• Wells Fargo (WFC) swooped in on Friday and delivered a definitive purchase agreement to Wachovia (WB) that valued the company at $7 per share. The deal was all inclusive and did not involve any government funding. Crying foul, Citigroup (C) immediately threatened litigation. They have every right to do so. Although the move by WFC may appear to be in the best interest of employees, shareholders and US taxpayers there are legitimate reasons for favoring C. The WFC deal games the system and unfairly takes advantage of the goodwill that C brought to the table in the original deal. With WB on the brink of insolvency, C set the floor and provided loans to stabilize WB. IRS rule changes during the week and movement in Congress on the bailout allowed WFC to come in at a higher price. Word out this morning suggests that WB will be split up between the two banks. What a mess!
• Asian and European markets dropped last night in concert with moves in the U.S. on Friday. Taking little solace in the $700 billion bailout, foreign markets plunged anywhere from 4.25% in Tokyo to 4.85% in France. Russian markets fell 7% in the first 20 minutes of trading. The concern of course is an economic slowdown that would greatly impact world trade. Specifically, it would appear that the U.S. does indeed lead the world and what happens here will have an effect elsewhere. Look for exports to drop and shipping to fall precipitously as a result.
• U.S. futures are down around 2% across the major indexes in the pre-market. There was plenty of negative news over the weekend including stories of restaurants and malls all reporting less traffic. Anecdotal evidence of a consumer pull back in spending should be of great concern to all investors. Corporate profits will be greatly impacted be less spending here in the U.S. Valuations as a result will be pressured until it becomes clear how long the pull back will persist. Investors are hoping the Federal Reserve steps in with a big interest rate cut. If conditions deteriorate further we may get a 1% cut in Federal Funds. Will any cut be enough to change sentiment?
• The commodity trade continues to collapse. Oil prices dropped below $90 per barrel in early trading today. There will be talk of OPEC setting up production cuts to stem the tide, but the cartel is powerless in this type of speculative collapse. We are moving back to equilibrium as the oil trading pits de-leverage as other markets are doing. I have a target of $80 per barrel and I am considering dropping that to $60 given the rapidity of the move lower.

by The Freshman |  10/06/08  |  Stocks: C, WB, WFC,