Let’s Do The Twist (Financial Week in Review, 9/19-9/23)
As of Monday, stocks and commodities have begun to recover from last week’s brutal fall. When trading closed yesterday, the major U.S. indexes had regained about one third of last week’s losses. Gold, silver, and copper, all of which had been riding out a four day losing streak, also began a slow but steady recovery. Last week’s losses in equities prompted a sell off of gold and other commodities in an effort to raise cash, but it appears the panic is over for the time being. As the dollar weakened, gold re-emerged. Gold is currently trading at $1,671.00 per ounce, silver at $33.30. That’s up from yesterday’s gold price of $1,655.00.
On Monday, the Dow Jones climbed 272.38 points (2.53%) to 11,043.86, the Nasdaq gained 33.46 points (1.35%) to 2,516.69, and the S&P gained 26.52 points (2.33%) to 1,162.95. Financial sector stocks, which were hit hard last week by Moody’s downgrade, also ticked upward on Monday.
On Wednesday, September 21st, gold was commanding $1,766.10 per ounce in after-hours trading. The silver price was $38.70.
Also on Wednesday, Moody’s downgraded the debt ratings of Bank of America, Citigroup, and Wells Fargo – three of the top banks in the U.S. Moody’s cited the unliklihood of another round of taxpayer bailouts in the event of bank failure as a deciding factor in the downgrade, saying that the government is “more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled.”
Bank of America, already bruised and battered by mortgage-crisis fallout and its ensuing litigation, took the brunt of it. Moody’s downgraded the bank’s long-term deposits and both their long- and short-term debt. The holding company was reduced from A2 to Baa1 for long-term debt, and from Prime-1 to Prime-2 for short-term debt. Long-term deposits sunk from Aa3 to A2. Bank of America’s debt insurance costs rose following news of the downgrade. BOA’s shares also lost more value in comparison with the other institutions.
Citigroup, by contrast, had only their short-term debt downgraded to “Prime-2.” Wells Fargo received a downgrade to deposits and its holding company’s senior debt was lowered one place from A1 to A2.
LET’S DO THE TWIST: FED GOES RETRO
Those swingin’ cats at the Federal Reserve are going retro with a vintage policy. “Operation Twist,” the reintroduction of a policy first implemented in the 1960s, is the long-awaited Fed action in lieu of QE3.
Operation Twist will boil down to the sale of some $400 billion in short-term U.S. Treasuries in exchange for an equal amount of longer-term bonds. The exchange will begin in October of 2011 and end in June 2012. The aim of the policy is to keep interest rates low on mortgages and loans to entice consumers and businesses to spend and borrow. The Federal Open Market Committee voted 7 to 3 in favor of the action, with the three dissenting votes coming from regional bank presidents Richard Fisher of Texas, Charles Plosser of Pennsylvania, and Narayana Kocherlakota of Minnesota. It is, by most assessements, a very conservative intervention which would be most beneficial to homeowners.
It definitely wasn’t a boon to the markets. Stock prices sunk after the Fed’s announcement that interest rates would remain unchanged and that Operation Twist had been given the green light. For investors hoping for a more aggressive action, it was an expected disappointment.
The Dow Jones industrial average fell 284 points, or 2.5%. Out of the 30 blue chip stocks in the index, 29 were negative at closing. The S&P 500 dropped 35 points, just under 3%, and Nasdaq composite was down 52 points, or 2%.
Read the Federal Reserve Statement at:
