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Thoughts on a Volatile Day


So many things happening in the financial markets today! Not that you could tell by looking at the closing prices of major stock indexes, which after a volatile session ended the day narrowly lower. (The Dow was down just 45 points and the S&P 500 off a routine 0.9%.)

1. M&A activity. For all the trouble that is out there, don’t let anyone tell you that “banks aren’t lending.” For one thing, American homebuyers are still getting mortgages at a historically low 6% interest rate.

For another, firms are still obtaining financing for huge multi-billion-dollar merger-and-acquisition deals. Among the headlines Monday: Anheuser-Busch Companies (BUD) agreed to be acquired by Belgian brewer InBev for $52 billion. Waste Management (WMI) launched a $6.2 billion bid for Republic Services (RSG).

Of course, it’s no coincidence that garbage and beer are two of the most stable industries out there. Banks may be avoiding risky industries, just as they’re clearly shunning homebuyers with lousy credit histories. But in both the mortgage and M&A markets, lenders with good credit histories can still get financing with relative ease.

2. Banks: Waking up to the possibility of bank failures

The failure of IndyMac Bank might have been anticipated, but apparently it really spooked investors today. It was almost like a delayed reaction, with bank stocks starting lower and then plunging by the end of the day. The S&P Regional Banks index dropped 8.77% and the S&P Diversified Banks index fell 7.34%.

Given the damage to banking stocks, it’s impressive that stocks only fell 0.9%. This suggests that, while investors panic about which bank could be next, they aren’t too worried about the non-financial sectors or even the broader economy. (Or at least that worries about the economy, corporate earnings, etc. weren’t made any worse by IndyMac’s news.) It also is a sign of how financial stocks represent a diminishing portion of the overall stock market’s performance.

3. All that attention on Fannie Mae (FNM) and Freddie Mac (FRE) was overblown.

Listening to the news over the weekend, sometimes it sounded like the entire mortgage finance system was in jeopardy. It wasn’t.

This morning, in the midst of this crisis, Freddie Mac was able to auction off $3 billion in debt, which points to a key distinction that many have missed.

Fannie and Freddie’s shareholders have every reason to be worried: A federal bailout need not protect their equity investments. Equity holders are always last in line when a business goes bankrupt.

However, there was never much doubt that the federal government would protect the GSE’s debt holders, and, by extension, the entire system supporting homeownership in the U.S.

As Bill Stone of PNC wrote today:

If the Federal Reserve and policy makers drew a line in the sand at Bear Stearns, they most certainly will do everything possible to prevent the failure of the GSEs. The combination of the implications for the housing market and the fact that many central banks, pension funds, and commercial banks hold GSE debt make it a veritable lock that they will not be allowed to fail.

If the stock market really thought Freddie and Fannie were about to fully collapse, the Dow would be down 1,000 points, not Friday’s 128.

4. Guess what I heard?

Many on Wall Street today are mocking the SEC’s threats to crack down on rumor-spreaders.

(Wait, I’m sorry: Regulators say the problem is “false” rumors. Though of course, one definition of a rumor is that you don’t know if it’s true or false.)

In a post titled “Is the SEC at war with the First Amendment?,” Peter Cohan takes aim at federal policymakers who spread their own fictions.

I’m a big believer in honest information exchange — but the SEC should apply that policy to those who lie about how great things are when they’re really falling apart as well. Unfortunately, that won’t happen because cheer-leading seems to be a requirement for holding high office.

He has a point.

But I also understand where the frustration about rumors comes from. It’s a huge disadvantage for individual investors who trade during the day.

Imagine if today you were an individual investor in Washington Mutual (WM). WaMu shares started the day lower, and then accelerated throughout the day and ended down a whopping 35%.

What caused the slide? A Lehman analyst’s gloomy report? Jim Cramer’s comments? Or rumors? WaMu later issued a statement reassuring investors that it has plenty of capital.

If there were less rumor-spreading, investors without Wall Street connections might have a better idea of whether fears are legitimate or pure speculation.

But maybe, instead of an argument against rumors, this is more of an argument against individuals being involved in trading stocks in the first place. Without institutional backing, is it really possible to stay on top of a crisis as it develops minute by minute? Put your money in an index fund and you can go switch off Cramer and watch the soaps. “Stop trading” indeed.


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