Commentary: Yen crosses stabilise following a heavy selling. US equities closed falt and the Nikkei was down by 1.38%. The Aussie, USD and EUR rallied against the Yen as investors took profit on risk trades on short covering. The previous support levels are now considered the key sell levels as the market is selling in to any rallies.

Data due today:

06.00 GMT – German Consumer Price Index exp 0.4% for June

06.00 GMT – German Consumer Price Index YoY exp 0.1% for June

06.00 GMT – German Trade Balance exp Euro 9.0 Billion for May

06.00 GMT – German Current Account exp Euro 3.7 Billion for May

06.00 GMT – German Imports exp 0.8% for May

06.00 GMT – German Exports exp 1.5% for May

08.00 GMT – ECB Monthly Report for July

08.30 GMT – U.K. Visible Trade Balance exp Deficit Gbp 6.75 Billion for May

08.30 GMT – U.K. Total Trade Balance exp Deficit Gbp 2.85 Billion for May

11.00 GMT – BOE Rate Announcement exp No Change at 0.5%

12.15 GMT – Canada Housing Starts exp 130,000 for June

12.30 GMT – U.S. Initial Jobless Claims exp 603,000

14.00 GMT – U.S. Wholesale Inventories exp -1.0% for May

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In return, the state will receive preference shares that pay annual interest of 8%. Still no mention of what the taxpayers’ will receive in return, other than the bill of course! The government will also get warrants giving it an option to buy ordinary shares that will take its stake in the banks to 25%.

The credibility of Ireland’s banking system is torn apart following corruption allegations at the nationalised (since last year) Anglo Irish Bank. The amount of financial assistance the state has given to support the banking sector has put significant strain on its finances.

Ireland’s CDS spreads are now the highest in the Eurozone, exceeding the so-called PIGS (Portugal, Italy, Greece, Spain) and even wider that the newest entrants Slovenia and Slovakia. CDS contracts are usually traded for protection and the higher the credit default swap spread the higher the perceived risk by the market. Ireland is now seen as more likely to default by the market than the aforementioned PIGS and therefore a higher fee is being charged in order to protect against this event.

The expansion of the balance sheets of Aaa-rated governments as a result of large-scale state interventions to support local industries – also referred to as the “socialisation of risk” – has prompted Moody’s Investors Service to tackle the question of whether government debt is still the ultimate sanctuary for investors.

The wide-scale “risk socialization” that began more than a year ago – with governments deploying their balance sheets and raising public debt – is now reaching historic proportions. Poor earnings and weak economic data cemented negative sentiment and trends in January and early February are as bad as or worse than November-December, suggesting that the first quarter of 2009 is going to be worse than the last quarter of 2008.

The world economy feels as being in free fall, looking for a bottom that it can’t yet see. The Search for Honest Earnings Reports will be the longest ever… and is likely to resemble the Search for the Meaning of Life.

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Manufacturing shut downs: GM halted production of the Volt and is also planning to idle 20 other plants for up to one month. Ford has extended its holiday shutdown period by at least a week. Chrysler has announced that it will extend the annual two week shut down to a minimum four week shut down starting today.

President Bush stated he wanted to avoid a “disorderly” bankruptcy, but also that he was concerned about putting good money after bad and that he hadn’t made up his mind on a plan. Analysts continue to view the most likely result as some form of monetary aid to keep the auto makers afloat to the new year when it becomes the problem of a new administration, with an ‘orderly’ bankruptcy filing sometime in Q1 looking more likely.

Chrysler finance may temporarily stop lending: according to a letter to Chrysler dealerships with the CEO of Chrysler Financial, Chrysler will be forced to halt lending in the near term of Chrysler dealers continue to tap credit to finance the purchase of new vehicles at the current rate.

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 Woolworths has more than 800 stores across the UK and employs around 25,000 people according to a company’s statement.

Woolworths is expected to be sold at the nominal price of £1, but if you own it don’t think you can sell it as the stock was yesterday suspended for the second time this week. The stock has lost more than 90% of its value since the beginning of the year. It had already fallen by 62 percent in 2007.

Although it’s true the consumer economy got bad enough, fast enough, Woolworths’ executives should have no excuse. Robert James McDonald, Chief Financial Officer, has made no comments so far and the questions remains if he will do so as analysts find it hard to explain the strategy of ‘doing-nothing-until-there-is-nothing-left-to-do’…

Why?
While 25,000 are agonising for their jobs, let’s have a look at the facts behind Woolworths’ bankruptcy.

- Credit market freeze. Banks’ ability to lend has been restricted massively, but more importantly their willing to lend is close to zero. This is basically still the case, despite global government efforts to revive the economies by injecting cash, providing all sorts of guarantees, printing new money, etc.
- Spending drop-off. Consumers squeezed to the penny by rising living costs, are holding tight to their money postponing any cash outflows until they feel safer. Consumer confidence reached record lows in Europe, US, and Asia and so sales have plunged
- Debt. More Debt. Too Much Debt. Of course any economically viable company should be flexible enough to cope with lower levels of demand and be able to finance its way out of an economic downturn. But not a company that is already carrying debt 16 times more than its current worth in the market. Woolworths’ current market capitalization is not even enough to pay the (debt) interest costs which amount to £18.6 million.

The market outlook is pretty gloomy at the moment and will remain such for the rest of 2009 and possibly for the first half of 2010. Companies such as Woolworths’ that have taken on too much debt are inevitably going to find it difficult to refinance themselves. This is not a prediction, but a fact.

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Up until last week, all European countries were acting like ostriches, closing their eyes and ears to the real economic problems. Most observers and market participants thought that the European leaders hadn’t actually realized that they had a problem in the first place…

Iceland’s banking industry collapsed last week and the government was forced to nationalize three banks Kaupthing Bank, Glitnir and Landsbanki Islands in the space of three days. The three banks together represented 76% of the ICEX 15 Index’s value, fact that partially explains why the index is practically valueless.

Telegraph reported that Icelandic Prime Minister, Geir Haarde, is blaming the UK government and has threatened to sue them for using antiterrorist laws with the excuse to protect British deposits in the failed Icelandic banks. These moves, said Mr Haarde, have worsened the situation for the already troubled market and led to the unnecessary collapse of Iceland’s largest bank, Kaupthing.

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A friend was asking me the other day, how they decided to ban short selling (naked) on certain financial stocks to protect them and whether this could be extended to a whole market if in danger.

I found the question interesting to say the least, but now that the prophecy has been fulfilled, I am petrified. Of course I tried to answer the question as best I could, but not even in my wildest dreams would I have thought that this is an actual possibility that we are talking about.
Of course, this has happened before in the past – all trading activity stops when a certain stock exchange is under considerable economic and political (most often!) stress to protect investors and companies alike from a sheer downfall, but not this….

Four emerging markets have closed today their stock exchanges: Russia, Indonesia, Ukraine and Romania. The stocks of the aforementioned stock exchanges have suffered substantial losses over the past few days, marking their worst performing week in about twenty five year time. Egypt (CASE 30 Index) is very likely to follow their example, as the index plummeted by 14% on two consequent days.

Statistics

Russia’s Micex Index has lost almost 67 percent of its value from the beginning of the year, whereas its dollar-denominated RTS bourse is said it will stay shut indefinitely.

Ukraine’s PFTS Index has lost 72 percent of its value year to date.

Romania’s Bucharest Bet Index has lost 63 percent of its value this year.

Indonesia’s LQ45 Index, a capitalisation-weighted index of the 45 most heavily traded stocks on the Jakarta Stock exchange has lost over 52 percent of its value this year. Stock trading at the Indonesian Composite Index was halted at about eleven o’ clock this morning, when it had already plunged by more than 10 percent.

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The Dow Jones index fell almost 7%, losing 777.68 points and is now standing at 10365.45, as investors became frenetic and rushed to sell their positions.

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The downfall of the fourth largest US investment bank is causing further turmoil in the international markets on this replicate of Black Monday, since it proves that the credit crunch crisis is not history as some analysts and governmental bodies are trying to convince us. This is the crisis, we live and breathe in it, and it’s definitely not yet over.

The discussions that Lehman’s management board had with potential buyers were in vain, as the US government avoided offering any kind of guarantees or financial support as it has done with Bear Stearns- fearing further criticism about its practices and the inflated bill taxpayers are called to pay whenever the government decides to save or ease the sale of a company.

Lehman Brothers was founded in 1850 by three Jewish immigrants from Germany.

The price stock plummeted by 81% at the Frankfurt stock exchange, trading at 69 cents, when in the beginning of the year it was trading above 90 dollars. This is the biggest ‘bomb’ in the US banking history, as Lehman has a debt account of $613 billion.

Bank of America’s move to buy out Merrill Lynch is also a product of the credit crisis, as Merrill Lynch would most likely have had the same fate with Lehman Brothers and Bear Stearns; joining more than ten banks that have not survived the 2008 credit crunch crisis.

Merrill Lynch stock price climbed by 40%, at 23.94 dollars, when Bank of America lost 4.80 dollars, now trading at 29.94 dollars.

In the meanwhile, investors are also worried by the fact that the biggest US insurance company AIG is seeking to raise capital as a matter of urgency to avoid a credit rating downgrade, which would irreversibly damage the company’s credit trustworthiness. Its stock has fallen by 26% and is now trading at $9.03.

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However, the scenario is still open to negotiations, as we have not seen anything concrete. Some people talk about liquidation, and some about nationalization of the two largest US mortgage companies. What strikes as a far more likely scenario to me are government guarantees of certain securities or preferred stock repayable to their great benefactor, the US government.

The shares of the two mortgage companies have plummeted in the past weeks, Fannie May’s share price lost almost 94% of its value year on year, marking a new record low of $4.40 yesterday, in New York Stock Exchange composite trading. Last time the stock was selling at similar levels was in Jan. 11, 1989. Freddie Mac’s stock has declined 95.1% year on year, marking a record low of $3.20 today.

The agencies now need to refinance $225 billion of senior debt by the end of September. But investors are getting increasingly worried and might not opt to include the two agencies debt in their portfolios. The big fall in both companies’ share prices indicates how badly the investors want to see Washington articulate some details of any potential government bailout, as the general sentiment is that the US government’s involvement will focus primarily in protecting bond holders (debt), and not equity holders.

Fears that the two mortgage giants will no longer be able to function are shared by both analysts and investors, as this is an issue that would probably cripple the US housing market which is already on crutches.

On the other side of the ‘battlefield’, it seems that the US government is not as fond of the nationalization scenario for the two agencies, as the UK government was in the case of Northern Rock; hence Treasury is already in the process of developing other safer options to be used if a market seizure forces them to interfere.

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Several office transactions have fallen through because of the tightened credit markets and the rising cost of debt. What a deadly combination. We now live in a different world, both us consumers and as investors. Previously, it was a virtuous circle of freely availably credit; that has passed. Now, the main driver behind the reduction in availability of debt is the fears of a long-lasting recession paired with high inflation rates across the globe.

Although we are bound to see some further deterioration, as more and more construction projects are having trouble raising finance and building deals are literally falling apart, analysts agree that this is just part of the economic cycles that financial markets go through.

It’s obvious that consumers are not yet persuaded that prices have bottomed out, although commercial properties such as offices, warehouses, and shops have already lost 18% of their value in the last year, according to Investment Property Databank Ltd.

Rent prices have dropped in the City, London’s main financial district, in May by 1.3%. Rents should be expected to bottom out when banks and other financial institutions in the City of London are done with their staff reduction plans, that will obviously reduce demand for office space and buildings.

On the other hand, this will trigger a further rise in unemployment and another blow to consumer’s confidence making it highly unlikely for home sales volumes to improve this year.

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