News / US Equities

US Financial Market Woes By Fitz Aclan September 17, 2008

Just as the markets were absorbing the implications of the “Paulson Bailout” of Freddie Mac and Fannie Mae, the markets took another hit. This time, Lehman Brothers, one of the US largest investment bank, filed for bankruptcy protection. It stands to be the largest write-off in history unless a white knight comes in to infuse capital into the beleaguered bank.

Before filing for bankruptcy, it was reported that the bank was having problems with liquidity and finding a firm bidder to shore up its attempt to recapitalize.

As a result, the price of Lehman declined 94 percent since the subprime crisis last year.

Because of this, the US Treasury and the Fed have been actively brokering for investors in the investment bank in order to calm the financial markets. Most investors now fear that several notable US financial firms such as Citigroup and AIG might be next on the chopping board.

The movement in the equity markets is a clear reflection of this uncertainty as the markets were buffeted by increased volatility. This is particularly so among emerging markets such as the Philippines which have also declined during the period.

As of the time of this writing, it appears that Barclays, UK’s third largest bank, is interested in bidding for Lehman. But the UK bank wants to make sure that a “cap” in terms of projected mark to market losses in the mortgage exposure of Lehman will be part of the deal.

In either case, whether its Barclays or another institution, the markets are sure to calm down once a resolution to this crisis is arrived at. This should be good for the markets in the near term.

Still, the biggest issue in everyone’s mind is the slowing US economy as investors are once again keeping the tabs on the jobs data on a weekly basis to get a firmer gauge on the state of the US economy.

Right now, there isn’t any significant turning point that could tell us the market is on its way to reversing. The only tipping point that I can see which could result in reversal of fortune for the markets not just in the US but globally is an extremely successful resolution to the Lehman issue.

It is likely that the local equity market may still tread the lower support levels at the 2,600 support area although there is now a minor support at the 2,630 level. The key resistance level is still 2,800 which needs to be broken to confirm a reversal on a technical basis.