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 MARKET REPORTS |
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Markets
Now central banks are buying investment banks?
March 26, 2008
Clifford Bennett, Chief Economist, Sonray Capital Markets
The Bearn Stearns bargain purchase by JPMorgan Chase, or is it a rescue by
the Federal Reserve Bank, actually it is a bit of both. Yes the bid price is
higher, now right up there at about 10% of the company’s value a month ago,
but is still clearly of major concern to the Fed.
To get a handle on just how
bad things are, and the degree to which the US banking system was
threatened by the demise of Bear Stearns, the Fed is actually investing 29
billion dollars in a joint venture structure with JPMorgan Chase which will
support the sales of some 30 billion of worst case sub-prime assets.
The joint
venture, with JPMorgan Chase putting up the first 1 billion, (after all they
are buying a defunct business for a couple of billion), will remain in place for
10 years, and any, if any profits, will go to the Fed!
So the Fed is now investing in investment banks and doing so through a joint
venture with another investment bank, with the whole process managed
outside of the Fed by a private asset management group, BlackRock. The
people at BlackRock must be ecstatic.
While I mentioned some time ago, that the financial history books in 100
years from now were sure to note the entering of sovereign funds into the
purchasing of US investment banks as a possible major change in modern
markets, this latest scramble by Bernanke to cover all the bases at any cost,
is far more significant. It really is the greatest “red flag” of modern times.
Equity Markets: Yet again the markets are clutching at straws, trying to find
the definitive turning point for the recovery from recent woes. Yes, we are
getting a reasonable rally, but step back and it is clear we are merely, for
the moment at least, bouncing within a bearish consolidation phase.
US home sales were up 2.9% in February, but median prices were down
8.2% from a year ago, meaning the volume of money flowing to new home
purchases continues to decline. We must remember the worst of US home
prices, and the worst of sub-prime defaults are yet to even occur. US
equity markets must still be deemed cautious at best, for the time being.
Technically a close above Dow Jones 13,100 is required to reinstate a bull
market, while a move above 12,800 would be an early warning signal.
The US dollar has had a very strong run. My view remains that this is a
bounce in a massive bear market. Confirmation of a return to the favoured
weak USD scenario would be signalled by a recovering EUR 1.5480 AUD .9120.
More articles from this edition of CompareShares:
Investing: Defensive stocks that analysts are targeting
Trading: Random trades lead to random results
Sectors: Analyst puts buys on two energy stocks
Commodities: Should you worry about higher oil?
Advisor Lounge: Rent out your home without paying tax
Markets: Now central banks are buying investment banks?
Commodities: Opportunities arise from gold price plunge
Disclaimer: This recommendation has been issued on the basis that it is only for the information and exclusive use of the particular person to whom it is provided by Sonray Capital Markets Pty Ltd ABN 18 104 482 993, AFSL 231151. These recommendations are current as at the date of issue. Past performance is no guarantee or reliable indication of future results. Trading in derivatives may involve a high degree of risk and significant loss, and is appropriate only for persons who can assume risk of loss in excess of funds deposited. This recommendation is of the nature of general information only and must not in any way be construed or relied upon as legal, financial or professional advice. No consideration has been given or will be given to the individual investment objectives, financial situation or needs of any particular person. The decision to invest or trade and the method selected is a personal decision and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of any investment for your circumstances. Although the information in this recommendation has been obtained from sources considered and believed to be both reliable and accurate no responsibility is accepted for any opinion expressed or for any error or omission that may have occurred herein.
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions. |
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