OTCPicks Penny Stock Blog

September 22, 2008

Oil prices were up more than $25 a barrel today as investors became unsettled about the government's $700B bailout plans. This was the biggest one day price surge ever for oil. The Fed is going to have to auction off a truely huge amount of Treasurys to fund this gigantic financial industry bailout. This is going to cause the dollar to get hit and start to weaken against other currencies.

The Dollar and Oil are in kind of an inverse relationship where Oil rises when the Dollar falls and visa versa. This also hold true for precious metals as a weak dollar causes a monetary flight to the safe havens of commodities.

Light, sweet crude for October delivery jumped as much as $25.45 to $130 a barrel on the New York Mercantile Exchange before falling back to settle at $120.92, up $16.37. The November crude contract, which became the front-month contract at the end of Monday's session, was trading at $108.69, up $5.94.

Monday's rally broke crude's previous one-day price jump record of $10.75 which was set back in early June. The Nymex temporarily halted electronic crude oil trading after prices breached the $10 daily trading limit but resumed seconds later after the daily limit was increased.

Gold prices also shot up more than $44.30 to settle at $909 an ounce, extending last week's flight to gold and precious metals. Other safe-haven commodities also rallied and will likely continue to rally as investors remain uncertain about the economy and what the Fed's bailout of the banking industry will mean to the value of the Dollar. There's a renewed scramble for commodities because of a general weakness in the dollar and the perception that the bailouts will cause the dollar to sink even lower.

Crude has gained about $30 in a dramatic four-day rally that has at least temporarily halted oil's steep two-month slide below $100. It is very conceiveable that oil could return to the July record high of $147 per barrel very soon. Right now it's fear and anxiety driving investor's activities and they are turning to tangible assets such as oil, gold, and other precious metals as a safe haven to ride out the storm..

A weak greenback was a catalyst for the commodities boom of the past year, and analysts said large investment funds were expected to pour money back into the sector as the dollar weakens yet again due to the government's bailout and what that is undoubtedly going to do to the dollar.

So, commodities look like they will be a great sector to invest in over the next year as the Fed. prints a lot of funny money to pay for this bailout! Consumers look to pay more at the pump again as $4 per gallon might look cheap really soon.

September 22, 2008

This past week has seen an unprecedented events happening on Wall Street and a major rollercoaster ride in the stock market. This past week shook the foundations of the world financial system. A sharp slide in U.S. housing prices and a subsequent rise in delinquencies on home loans is the root cause of these massive losses on mortgage-backed bonds that in recent years have spread across the global financial landscape.

The financial crisis that began 13 months ago has entered a new, far more serious phase. Hopes that the damage could be contained to a handful of financial institutions that made bad bets on mortgages have evaporated this past week. Now increasingly big cracks have appeared in the system beyond the original problem -- troubled subprime mortgages -- in areas like credit-default swaps, the credit insurance contracts sold by American International Group Inc. and others. This led to a crazy week last week on Wall Street:

Here is a rundown of some of this past week's wild series of events:

1. Lehman Brothers declared bankruptcy on Monday.

2. Bank of America (NYSE: BAC) said it has agreed to buy Merrill Lynch & Co. Inc. (NYSE: MER) in an all-stock deal worth around $50B.

3. The Fed bailed out American International Group's (AIG) with an $85B infusion giving the government 80% ownership of the company.The Fed said if AIG were to topple, interest rates would have risen, lowering consumer buying power and stifling the already weakened economy and potentially inciting a panic by consumers.

4. The government activated a fund to protect money-market funds. President Bush authorized up to $50 billion that money-fund managers who pay a fee can tap into to prevent investors from losing principal.

5. On Thursday, the Fed joined other major central banks around the world to inject up to 180 billion dollar into global money markets. Meant to boost investor confidence and tighten the reigns on the crumbling credit crisis, the cash infusion did little to boost Wall Street’s mood.

6. Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke hatched a plan with congress members Thursday night to buy illiquid mortgage securities and auction them off later. The Bush administration asked Congress on Saturday for $700 billion to bail out firms burdened with bad mortgage debt, seeking extraordinary authority as it seeks to prevent meltdown in the global financial system.

7. Senior Bush administration officials pressed counterparts in Japan, Germany, Britain and other nations to set up similar plans for their own troubled financial firms

8. The SEC issued a temporary ban on short selling on 799 financial stocks. The ban runs through October 2 but the SEC may extend the ban if they feel it is necessary.

9. The SEC also eased rules to make it easier for companies to buy back their own stock shares. The idea is that buybacks can be an important source of liquidity during volatile times.

10. The Federal Reserve extended emergency lending procedures to allow commercial banks to finance purchases of asset-backed paper from money market funds. It also said it would buy short-term debt from Fannie Mae, (FNM) Freddie Mac (FRE) and the Federal Home Loan Banks.

11. Friday's volume was mixed. Bulked up by quadruple witching trading, NYSE trade swelled 14.7%. Nasdaq volume dropped 1.8%.

12. Gold has benefited from a wave of risk aversion that has hit the markets after U.S. investment bank Lehman Brothers filed for bankruptcy. The impact of the U.S. government's unprecedented $700 billion plan to bail out bad mortgage debt is expected to significantly weaken the dollar, and that means higher oil and gold prices. Bullion gained nearly 2 percent on Friday, but it was well off a high above $900 reached on Thursday when safe-haven demand for the precious metal heightened.

13. Oil tracked the stock market. It finished at $104.55 a barrel, up from $101.25 last week. But on Wednesday, it closed at $91.02, its lowest since February. Crude is now 29% off the high of $147.90 in July. Like gold, expect oil to rise due to the effects of a weaker dollar

To boil things down, the U.S. financial system is in a pretty pickle right now, and deleveraging is continuing to happen and will continue to happen for a while yet. Democratic lawmakers, who control both houses of Congress, said they hoped to approve the bailout quickly but wanted changes such as more oversight, limits on executive pay at participating firms, and assistance for homeowners.

On Monday investors will focus intently on testimonies by Federal Reserve chief Ben Bernanke, U.S. Treasury Secretary Henry Paulson and a speech by European Central Bank President Jean-Claude Trichet. Their comments will be scrutinized closely.

Also this week data is expected on the U.S. housing market, the euro zone services sector.

A sharp slide in U.S. housing prices and a subsequent rise in delinquencies on home loans is the root cause of these massive losses on mortgage-backed bonds that in recent years have spread across the global financial landscape. The problem is that the $700 Billion bailout does not really fix the root problem including falling real estate prices, foreclosures, and a glut in the housing market and credit so tight that most normal consumers won't have the credit rating and down payments available to start buying homes again to soak up the excess housing inventory and get new building going again. Oil is likely to go up again with the flooding of the market with U.S. dollars to fight the liquidity crisis and likely weakening of the dollar.

We are not out of the woods yet. Congress and the Bush administration and the Federal Reserve have not hammered out the final details of the $700B bailout plan. We will have to watch this week and see what the markets think about the Fed's bailout plan and if it instills confidence and calms the market. If not, it could be another ugly week.

September 17, 2008

In recent weeks mortgage rates have been dropping. This is great news for buyers, but only buyers with impeccable credit. Within the last week mortgage rates have dropped below 6% making it a great time to consider buying a house. But, the “Devil is in the Details” and the Devil in this case is finding a lender willing to loan you the money to buy.

Lenders do not want to take risk anymore. Taking excessive risk on sub-prime loans is what started this mess in the first place, so the pendulum is now swinging the other way where lenders have become very conservative and are requiring ever higher credit scores, larger loan down payments, and more stringent income verification checks.

More than three quarters of U.S. banks have tightened credit standards in the last 4 months and are now only lending to the most credit-worthy borrowers. According the Rankrate.com the average 30-year fixed-rate mortgage in the U.S. was 5.78 percent on September 15th, down .30% percent from a week earlier.

On Tuesday the Federal Reserve is scheduled to meet and many believe with the current meltdown in financial markets, the Fed. may lower its key interest rate to 1.75 percent from 2 percent which may reduce mortgage rates further.

Lehman Brothers Holdings Inc., the biggest underwriter of mortgage-backed securities, filed for bankruptcy on Monday. The implosion of the sub-prime market has snowballed in recent months and so far this credit shakeout has cost financial firms more than $500B in mortgage-related write-downs and losses and the shakeout is still continuing.

Some mortgage companies are going out of business. Since the beginning of 2007 over 100 mortgage related companies have shut down their lending operations, closed altogether or sold their businesses to get out of the mortgage market. Many of these lending companies packaged groups of loans as securities and demand for those mortgage back securities has completely dried up. Those mortgage backed securities and derivatives are the root cause of the financial market’s meltdown. There are currently somewhere around 9000 banks in the US and it is estimated that consolidation resulting from this credit crisis may cut that number in half in the coming years.

By tightening credit and lending standards, lenders are being more conservative and taking less risk, but this also has the unfortunate effect of limiting the ability of many first-time home buyers to enter the market. Fewer consumers can get loans, and housing inventory sits vacant for want of a buyer who can meet the more stingent qualification requirements.

Yesterday, the federal funds rate soared as high as 6 percent, triple the Fed's target, as banks hoarded cash. That spurred the Fed to pump $70 billion into money markets through repurchase operations, the most since September 2001.

To boil things down, the U.S. financial system is in a pretty pickle right now. There is a glut of houses on the market and prices are dropping. Banks and mortgage companies have tightened lending requirements because they have taken a beating on their previously more risky lending practices which started all of this. The government is trying to put sufficient funds into the system to maintain liquidity for lending, but it is going to take at least well into 2009 or longer for the financial markets to work their way out of this mess and for the housing markets to rebound.

September 15, 2008

Sunday, September 14th is already being called Black Sunday for Wall Street as troubled financial giants Lehman Brothers, Merrill Lynch and AIG were all desperately seeking lifelines for survival as frenzied behind-close-doors meetings happened around the clock. And today might well become Black Monday if the cloud of the current financial crisis does not lift.

U.S. financial stocks and markets are getting battered unmercifully today as worried investors react to the uncertainty and instability of the U.S. financial system happenings.

Today Lehman Brothers filed for bankruptcy protection. Long hours were put in over the weekend to find a Lehman buyer, but apparently a savior was not found and they are headed toward bankruptcy after all potential buyers walked away. They were spooked by the U.S. Treasury's refusal to provide any takeover aid, as it had done six months ago when Bear Stearns faltered and earlier this month when it seized mortgage giants Fannie Mae and Freddie Mac.

Bank of America (NYSE: BAC) said it has agreed to buy Merrill Lynch & Co. Inc. (NYSE: MER) in an all-stock deal worth around $50B. Hopefully BOA can absorb this Merrill acquisition and flourish. If BOA can pull it off, the good news is that they will now own one of the best and largest retail brokerages in the country.

Perhaps the biggest news is related to shares of American International Group (NYSE: AIG). AIG gapped down at the open more than 50%, and was down as much as 65%. AIG, hit by $18 billion in losses over the past three quarters from guarantees it wrote on mortgage derivatives, worked feverishly to put together a plan that would stave off rating downgrades, after Standard & Poor's threatened to cut the insurer's ratings on Friday. AIG is seeking a $40B bridge loan from the government to continue as they liquidate assets. They do not have long to find a solution as investors lose confidence and the stock continues to plunge.

Two weeks ago the government took over the mortgage giants Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) which was a shocking bailout by the government.

The downfall of these major independent Wall Street institutions comes around six months after the collapse of Bear Stearns and 14 months after the beginning of the credit crisis, sparked by bad mortgage finance and real estate investments.

A global consortium of banks, working with government officials in New York, announced a $70 billion pool of funds to lend to troubled financial companies. The aim of the bank consortium, is supposed to prevent a worldwide panic on stock and other financial exchanges as the government is signaling that it will not continued to bail out Wall Street, The government is saying that they are continuing to work on reducing financial market disruptions and minimize the impact of these financial market developments on the broader economy.

The housing crisis and sub-prime mortgage meltdown is the root cause of these financial troubles. Home prices have dropped on average 25 percent thus far, and some analysts are predicting that they could drop further before things bottom out and the market starts to firm up.

The credit crisis is slowing the broader economy as a whole. Credit gets tighter and banks make fewer loans. As a consequence, consumers start cutting spending. Economists have been saying for months we were, are or, will soon be in a recession. Every week it changes but if the base of our financial system does not stabilize, we could quickly slip into a full-blown recession by the end of this year and early next year.

It is way too early for investors to start thinking about playing a bottom in this market. There is still bound to be more shakeout ahead for some of the smaller players. It will be interesting to see whether this carnage in the financial markets will prompt the Federal Reserve to cut interest rates this week. The Fed has indicated that they would be vigilant against inflation and have indicated they might hold firm or raise interest rates to hold prices in check but inflation worries are probably less of a concern at the moment compared to the stabilization of the financial institutions around which our whole credit system is based.

It’s too early to tell when the worm will turn and things will stabilize and the bleeding will stop in the financial markets, but we will all be keeping a close eye on things.

Other Bank Stocks today:

American International Group (NYSE: AIG). Down 55%
Washington Mutual (WM): Down 19%
Wachovia CP (NYSE: WB): Down 21%
Merrill Lynch (NYSE: MER): Up 18%
Bank of America: (NYSE: BAC): Down 15.5%
Fannie Mae (NYSE: FNM): Down 15%
Freddie Mac (NYSE: FRE): Down 13%
Citigroup (NYSE: C): Down 12%

September 11, 2008

Presidential election years are typically good for stocks despite which party wins the Oval Office. There are a few interesting barometers of what might happen in November in looking at history and the statistics of what has happened in the past during election years. A few of them are correct a fairly high percentage of the time.

One indication that is pretty reliable is the movements of the stock market in the 3 months leading up to the election. An up market during the 3 months leading up to the election typically leads to the incumbent party winning the election. A down market during the 3 months leading up to the election generally sees the challenger to the incumbent as the winner.

September 8, 2008

The cyclical patterns of the stock market predictably create the “summer doldrums,” where trading volume diminishes in the warmer months, as traders take vacations, enjoy the beach, and spend time with their kids. We like to call it Disneyland season.

Now that summer is over, the kids are back in school and the long vacations now just seem like a fading memory, does this mean increased stock market volume is just around the trading corner? Does the saying, “sell in May and buy in November” still hold true?

September 8, 2008  

Wind and solar energy stocks are on the rise on Wall Street. Oil’s dramatic rise in the first half of 2008 was a wake-up call as to the need and the potential of alternative energy sources. Historically the problem with solar and wind as alternative energy sources was that oil was so cheap it was not cost effective to pump lots of money into alternative energy research and production plants. As the world economies grow accustomed to oil’s triple digit prices, the investment in wind and solar energy research and production becomes more practical. And over time, the increasing efficiency of wind turbines and solar panel technologies also makes those technologies more attractive.

September 7, 2008

The price of oil has skyrocketed in 2008 and even back into 2007. Considering that oil prices are pegged to the dollar, the fluctuating value of the US dollar has played a significant role in oil prices. When the US dollar depreciates, international oil producers – who all sell their barrels in US dollars – see their profits suffer from the currency conversion. Subsequently, to offset this reduction, oil producers inflate oil prices accordingly – which is for the most part what we have witnessed in 2008. There more to oil prices than just the strength or weakness of the dollar, but they do correlate to a great extent.