The final hour finished down big on high volume with the Dow off 504 points and the S&P 500 down 59.
Just look at the volume on the S&P futures going into the close (below)…this tells us everything we need to know about the market right now…that there was a panic to get out and get out now. The highest volume of the day came with the strongest move down. There’s more to come.
We are in a very serious financial panic/crisis right now, and I am quite alert to the prospect of a complete failure of the interbank settlement system that could result in a systemic bank failure.
Here are the main features of today that I have kept my eye on.
1) The market thought badly of the Bank of America shotgun wedding with Merrill Lynch. Initially BAC dropped but MER went up, which was OK, as these were offsetting moves. Then BAC lost ground all day, finishing down a hefty 20%, while MER, which finished right where it started the day, for no gain. The honeymoon was over before the preacher had even finished saying the vows.
2) The Federal Reserve had to toss the largest amount of cash into the system since 9/11/01, to help bring the interbank lending rate back down to its target range.
Sept. 15 (Bloomberg) — The Federal Reserve added $70 billion in reserves to the banking system, the most since the September 2001 terrorist attacks, to keep bank borrowing costs low after the bankruptcy of Leman Brothers Holdings Inc.
Fed funds traded as high as 6 percent, or 4 percentage points above the central bank’s target rate for overnight loans between banks, according to ICAP Plc, the world’s largest inter- dealer broker. The margin is the greatest since Bloomberg began tracking the data in 1998. The rate dropped to as low as 1.75 percent after the Fed added the temporary reserves.
Another measure of bank stress is the so-called TED spread, which measures the difference between treasury bond yields and the rate at which banks will lend to each other. That advanced by a whopping +48% today and hit a recent high of 217 basis points. This is crisis territory.
3) AIG, one of the largest insurance companies in the world, went down in flames today with their stock plummeting nearly 60%. AIG is caught up in a derivative disaster of gigantic proportions and the rumors swirled all day. First they were rumored to need $30 billion. Then they were said to need $40 billion, a request that had been rejected by the Fed. Then Buffet was said to be in talks with them. Then Buffet left the talks empty handed only an hour or so later. Then, at 3:34 pm, the newswires were reporting that AIG was seeking a $75 billion lending facility. At the same time, it was reported that the Feds were asking Goldman, JPMorgan Chase to lead AIG lending. In short, a complete mess. If AIG blows up, this could easily take the system down.
4) And through all of this, who is going to take over poor, lonely Washington Mutual (WM)? At the close of business today, $1.78 would buy you a 5 lb bag of kitty litter – or one share of WM. It is now in penny stock territory, indicating that it is over for WM. All that’s left is the crying. If I had money there…well, actually, I wouldn’t.
by blackrott