Welcome to another edition of Weekend Reading. First a look back at the week that just finished, then a look forward to the week ahead, and finally, some articles and papers worth reading.
We are deep in dangerous times. Last week was the worst week for the major markets in years, we are down more than 20% percent across the board for the year, and things looks like they will only get worse from here. The Dow ended the week down 7.3% percent, the S&P 500 fell 9.4% and the Nasdaq lost 10.8%.
Welcome to a synchronized global credit crisis, the likes of which we haven't seen since the Great Depression. Banks worldwide are hoarding cash in the face of weakening balance sheets, bank failures and an incredible demand from depositors for cash. The result: a complete breakdown in global financial markets, with trust nonexistent and the weakness now spread to the broader economy.
Where do we go from here? Last week's bailout will help trust a little and take some toxic items off broken balance sheets, but it is no panacea. It does little to address the root problem that too many banks are functionally insolvent. Before this crisis ends, we will almost certainly see the U.S. government making direct investments in failing major banks, explicitly picking favorites and partially nationalizing some slices of the banking system. In the interim, credit markets will function haltingly at best, and even solid borrowers will pay prohibitive rates. At the same time, the weakest borrowers will face spreads that put the viability of their businesses in question.There is, of course, a decent chance that we make a brief bounce off last week's despair. Markets have discounted a great deal of bad credit and consumer news, so in the absence of yet another surprise it would not be unusual to see equities run higher soon. Still, my general feeling is that is likely a short-term move before further weakness. Major damage is being done to the economy right now, and it will take a long time to work through, doubly so in the face of the deleveraging by consumers, corporates, financials and government that is taking place. Turning to economic news, next week is more or less empty. As for earnings news, next week will bring reports from Safeway (SWY), Yum! Brands (YUM), Costco (COST), Monsanto (MON) and, most importantly, General Electric (GE). Finally, here are some articles and papers worth reading: Editor's note: To access some of these stories, registration or a subscription may be required. Please check the individual links for the site's policy.
- Settlement day approaches for Fannie Mae (FNM)/Freddie Mac (FRE) credit default swaps on Monday. (Financial Times)
- List of upcoming hearings into credit crisis. (iGreed)
- Great Milken slide presentation on the mortgage meltdown. (Milken Institute)
- Deutsche Bank updates oil, gas price forecasts. (Oil & Gas Journal)
- The hottest banks for Private Equity are those that offer vanilla checking, CDs and lending services. (IDD)
- Shorting Companies That Restate Previously Issued Financial Statements. (Journal of Investing)
- Barron's talks junk bonds and cash-rich companies. (Barron's)
- Credit Crunch Takes Bite Out of McDonald's (MCD - Get Report). (Advertising Age)
- Cash-Thirsty Banks Swarm the Fed. (CFO.com)
- The depression of 1929 is the wrong model for the current crisis: 1873 is closer. (The Chronicle Review)
- James Grant thinks the Paulson bailout is more of the same bad medicine. (The Washington Post)
- Niall Ferguson on the credit crunch. (Time)
- How venture capitalists are trying to turn clean tech into the next big thing. (The New York Times)
- Third-quarter hedge fund winners and (mostly) losers. (New York Post)
- Details Emerge on GSEs' Takeover Triggers. (Inside Mortgage Finance)
- Economic weakness likely to lead to larger housing price declines than most expect. (IDD)
- This has to be a joke: GSEs Still A Good Thing, Lew Ranieri Says. (IDD)
- Despite David Einhorn's great Allied Capital (ALD) and Lehman bets, his performance has been dreadful in September. (Fortune)
- Will credit default swaps cause the next financial crisis? (Fortune)
- As many as 100 regional lenders will fail in the next year. (Bloomberg)
- How China could be dragged down by the credit crisis. (Bloomberg)
- Pressured to Take More Risk, Fannie Hit a Tipping Point. (The New York Times)
- IMF World Economic Outlook: Financial Stress, Downturns, and Recoveries. (IMF)
- Funds that have performed best in bear markets. (Forbes)
- Chinese capitalism is on a long march backwards. (The Economist)
- Hypo Real Estate nears collapse after rescue plan is withdrawn. (Telegraph)
- Rumors of a major immediate buy from the Paulson bailout fund. (New York Post)
- JPMorgan Chase (JPM - Get Report) 'brought down' Lehman Brothers. (Times of London)