Market rally Close 848.42 WOW

The close: Deja vu?

RTGAM

You have to feel sorry for the United States on a day like Friday: U.S. authorities made the bold moves to steady the teetering financial system, and yet U.S. stock market indexes lagged most of the rest of the world.

Not that the gains were slight, by any stretch. The Dow Jones industrial average closed at 11,388.44, up 368.75 points or 3.4 per cent - more or less erasing the horrendous losses earlier in the week. The broader S&P 500 made a similar rebound, closing at 1254.98, up 48.47 points or 4 per cent. Last Friday, before the current bout of financial mayhem struck the market, the index closed just below 1252.

But those gains were mere noise compared to what happened elsewhere, where investors took off their hard hats and danced on their heads. In Canada, the S&P/TSX composite index closed at 12,912.13, up 847.56 points or just over 7 per cent - the biggest percentage gain since 1987.In the U.K., the FTSE 100 rose 8.8 per cent. Brazil's Bovespa stock index rose 9.5 per cent and Hong Kong's Hang Seng index rose 9.6 per cent.

The interesting part about the U.S. rally was that although it was widespread, it was nowhere near as widespread as other rallies during the year. For example, it is not unheard of to see all 30 stocks in the Dow rise during a rally. On Friday, though, there were actually 7 stocks - or 23 per cent of the index - that were left out.These laggards included Wal-Mart Stores Inc., Procter & Gamble Co., Johnson & Johnson, Coca-Cola Co. and Microsoft Corp.

It seems as though investors turned their backs on highly profitable firms in favour of those whose future was uncertain just a day ago. Among stocks in the S&P 500, Morgan Stanley rose 20.7 per cent, Wachovia Corp. rose 29.3 per cent and Washington Mutual Inc. rose 42 per cent.In Canada, financial stocks also did well. Royal Bank of Canada rose 7.2 per cent, Toronto-Dominion Bank rose 9.6 per cent and Bank of Nova Scotia rose 5.6 per cent.

But bigger gains were made by materials stocks: Barrick Gold Corp. rose 12.3 per cent and Agrium Inc. rose 13.4 per cent. Among energy stocks, Suncor Energy Inc. rose 14.3 per cent and Canadian Oil Sands Trust rose 17.5 per cent after the price of oil surged to $104.55 (U.S.) a barrel, up $6.67. Where have we seen that price before? Ah yes, last week.

Market rally due to short-selling ban: Sprott

JOHN PARTRIDGE
Friday, September 19, 2008

Eric Sprott thinks most of the massive rally in world equity markets is due to temporary bans on short sales of financial services stocks already imposed by U.S. and European regulators.
“I suspect most of today's rally is because of the change in the short-sale rule,” the hedge fund manager said Friday in a telephone interview. Canada's key market regulator continued to deliberate whether to follow the lead of Britain's Financial Services Authority, the U.S. Securities & Exchange Commission and other regulators.

“You can see what stocks went up the most: they're financial stocks,” said Mr. Sprott, who heads Sprott Asset Management Inc. in Toronto, acknowledging that his firm has had “to take a bit of a hit here.”
Short-sellers borrow and then sell stocks in the belief that their prices will fall, enabling them to go back into the market later and replace the borrowed shares at lower cost and pocket the difference as profit.

However, the temporary bans have forced practitioners back into the market to cover their positions by buying up the stocks they have sold, thus driving up the prices demand for those shares.

Many market players and observers have blamed massive short-selling for decimating the stocks of several U.S. financial industry pillars, pushing them to the brink of insolvency.
In an emergency order issued late Thursday, the SEC said recent market conditions have made it concerned that short-selling of a wide range of financial stocks “may be causing sudden and excessive fluctuations of the prices of such securities in such a manner as to threaten fair and orderly markets.”
“Such price declines,” it added, “can give rise to questions about the underlying financial condition of an issuer, which in turn can create a crisis of confidence, without a fundamental underlying basis.”

The move against short-sellers is just one of an array of measures taken by the U.S. government and central banks and market regulators around the world as they seek to stave off the worst financial crisis since the Great Depression. Central banks have pumped tens of billions of dollars into the banking system and Washington has unveiled plans to help banks shift bad real-estate loans off their books as well as moving to protect the value of money-market funds.
Whether or not the Investment Industry Regulatory Organization of Canada (IIROC) plans also to impose a temporary ban on short sales was still unclear as Friday wore on.

The matter is still “under discussion,” Paul Bourque, IIROC's senior vice-president of enforcement, policy and registration, said in a mid-morning telephone interview, reiterating a statement he made before the opening bell.

Mr. Bourque's comment was echoed by Jean St-Gelais, the head of Quebec's securities regulator, the Autorité des marchés financiers. “We have to see if we have a problem in Canada, first,” he said after speaking to a conference on corporate governance and financial markets in Montreal.
The key is to co-ordinate efforts with the various regulatory organizations around the globe, he added. “Everyone right now is looking to take quick action but without improvising,” he said.
However, Mr. Sprott, who opposes the clampdown, figures Canadian regulators are almost sure to follow suit.

“They're on the team, aren't they, with the U.S. and the U.K.?,” he said. “The authorities are changing the rule book because the rules aren't working for them. I'm disappointed that they have had to go so far.”

“Legitimate” shorting of financial stocks is “a portfolio technique to support you in difficult financial markets, which we are in for sure,” Mr. Sprott added.

The hedge fund chief also said, however, that he firmly supports bringing back the so-called uptick rule, a 69-year-old regulation that the SEC dropped in July 2007.

Under this rule a short sale could be made only after an uptick, or rise, in the price of a stock, which meant that shorts could not pile into a stock in an unbroken freefall. The SEC felt the rule was a constraint on market liquidity and did little to prevent market manipulation. But critics say the removal of the rule has left the market a more volatile and risky place.

Mr. Sprott agreed. “I don't know why people got rid of that rule, it just seems ridiculous,” he said. “I'd like to see that enforced.”

As IIROC continued its deliberations, at least six Canadian banks and insurers whose shares trade in New York as well as in Toronto have already won at least partial protection against the shorts by being included on a list of about 800 financial services stocks covered by the 10-day ban imposed by the SEC. They are: Royal Bank of Canada, Bank of Nova Scotia, Manulife Financial Corp., Sun Life Financial Inc., Fairfax Financial Holdings Ltd. and Kingsway Financial Services Inc.

Meanwhile, Switzerland's stock exchange issued what it called “reminder” to its members Friday that so-called naked, or uncovered, short-selling is not allowed and said it will monitor the situation strictly. In a naked short transaction, a trader sells shares before actually borrowing them.

Mr. Sprott dismissed the rules against naked shorting most jurisdictions have long had on the books as a “joke,” because regulators have simply failed to enforce them. “I think the naked shorting of Canadian stocks has been quite significant,” he added.

The SWX also warned market players that “the spreading of rumours of a nature that violates the applicable rules of conduct is also forbidden.”

However, it also said that covered shorts, where the trader has actually borrowed the shares, “remain fundamentally permissible.”

As it happens, the volume of short-selling on the Toronto Stock Exchange has been declining since peaking at a total of just under 1.43 billion shares on March 31. As of Sept. 15, the total number of shares sold short on the exchange had fallen to just over 1.2 billion.

As well, fortnightly figures compiled by the exchange show that no bank or other financial services stock has cracked the list of the top 20 largest short positions on the exchange since July 31, when Canadian Imperial Bank of Commerce came in at No. 20.
The perennial leaders include such companies as Nortel Networks Corp., Rogers Communications Inc., Research in Motion Ltd. and Bombardier Inc.

However, I-Shares Canadian S&P/TSX 60 Index Fund took over the top spot with the largest short position as of Sept. 15, up from sixth largest at Aug. 31.

With files from reporters David Parkinson in Toronto and Bert Marotte in Montreal
© Copyright The Globe and Mail

Market gain a 21-year high on on financial rescue plan

Market gain a 21-year high on on financial rescue plan, but investors not out of woods yet 14 minutes ago TORONTO — North American stocks ended one of the most tumultuous weeks in their history with a massive bounceback Friday, propelling Canadian share prices to their biggest rally since the 1987 market crash. After falling into a bear market earlier, the Toronto Stock Exchange gained more than 850 points as investors welcomed a U.S. government plan to bail out troubled Wall Street banks to ease the global credit crunch. The surge of just over seven per cent on the TSX produced the biggest one-day percentage gain on the Canadian market since the post-Black Monday crash of Oct. 21 1987, when shares soared nine per cent two days after an 11 per cent drop. On Wall Street, the Dow Jones industrials rose nearly 370 points, on top of a 400 point gain the day before. "This is going to be remembered as a historic week in equity markets," said George Vasic, equity strategist and chief economist at UBS Warburg. With massive swings in stock prices every day this week, investors managed to break even at the end of the trading day Friday. However, brokers pocketed big trading commissions because of the huge volumes on Wall Street and Bay Street markets. In the U.S., a new government ban on short selling, or placing bets that a stock will fall, likely added to the huge Dow rally. "A big chunk of this is scaring all the shorts to cover their bets," said Joe Battipaglia, market strategist at Stifel, Nicolaus & Co. Most of Friday's investor optimism was fuelled by a series of sweeping steps taken by the U.S. government to prop up the world's biggest and most influential financial system. Key measures included rescuing banks from billions of dollars in bad debt and a ban on short selling, or placing bets that a stock will fall. Treasury Secretary Henry Paulson, speaking about the rescue plan, said a bold approach is needed to remove troubled assets from the books of financial firms. He offered few details, but said he would work on the plan through the weekend with congressional leaders. For much of the last two months, the financial world has been gripped by fear that the credit crisis sparked by millions of defaulted U.S. mortgages was not only not subsiding, but getting much worse. Danger bells were sounded with the government bailouts of mortgage giants Fannie Mae and Freddie Mac and insurer American International Group. Those fears were brought to a fever pitch by the collapse of Lehman Brothers Holdings, the fourth-largest U.S. investment bank, on Monday. For the Toronto market, that meant a big slide that took it down nearly 20 per cent over two months and put it into a what traders call a bear market, or a period of prolonged stock selloffs. When central banks began to step in on Thursday, injecting billions of dollars into the global financial system, traders took heart and North American markets began to groggily recover. Friday's big leap - the TSX soared almost 850 points, or seven per cent, while the Dow gained close to 370 - was further sparked by higher oil prices and a U.S. and European crackdown on short selling, where traders borrow stock and sell it, bet the price will take a big dive, buy it up when it gets cheaper and pocket the difference. Short selling can cause a company's stock price to drop dramatically and was blamed for eroding share values in investment and commercial banks. Canadian regulators were mulling a similar move. But Norm Rothery, chief investment strategist at Dan Hallett and Associates, said the interventionist steps taken by the U.S. government could hurt the market in the long run. "My view is this is a short-term salve that's been put on the market, but it bodes poorly for the longer term," said Rothery. "The scale of government intervention is very high, and people will now have to adjust to it." He said halting short selling could inflate stock prices, making them unreliable, which could in turn "prolong the downturn." The markets will likely stabilize on the steps taken by the U.S. government, but Rothery said he remains "moderately bearish" on concerns the financial woes on Wall Street aren't fixable by government alone. "Unless they're willing to wander out and buy up everyone's mortgages and to prop up real estate prices, you're holding a rear-guard action on the market," he said. "It's a good attempt but I think the problem is too big for them." Vasic said he expects the regulatory steps to even out some of the volatility seen this week. "Now that (investors) presumably have, or will have, some clarity on the magnitude of potential risks, they can remove a lot of the what-if scenarios they had been fearing," he said. "The worst fears are off the table, but now we can return to the ongoing cyclical fears we had previously." He added that the spike seen Thursday and Friday is a short-term trend that will be halted by ongoing economic uncertainty in global markets. "We don't think this is the beginning of a new V-shaped recovery in equity markets because there's still too much ground yet to cover," he said. Meanwhile, Prime Minister Stephen Harper again asserted there is no need for Canadians to fear financial instability. "I have to reiterate ... the Canadian financial system is very strong," he said, speaking in Farnham, Que. "The balance sheets of the Canadian financial system are very strong. The core banks and insurance companies in this country are in, for the most part, very good financial shape." "We don't anticipate any crisis in the Canadian financial system." His U.S. counterpart, President George Bush, sounded a similar, though more cautious, note. "In the long run Americans have good reason to be confident in our economic strength," Bush said as his administration announced it will move to safeguard assets in money market mutual funds. But the cost of the U.S. bailout plan "will be enormous, darkening the U.S. fiscal picture in an environment where there is already plenty of concern over rising deficits and the integrity of the Fed's balance sheet," noted Scotia Capital currency strategist Steve Malyon.

Market gain a 21-year high on on financial rescue plan

Market gain a 21-year high on on financial rescue plan, but investors not out of woods yet
14 minutes ago

TORONTO — North American stocks ended one of the most tumultuous weeks in their history with a massive bounceback Friday, propelling Canadian share prices to their biggest rally since the 1987 market crash.

After falling into a bear market earlier, the Toronto Stock Exchange gained more than 850 points as investors welcomed a U.S. government plan to bail out troubled Wall Street banks to ease the global credit crunch.

The surge of just over seven per cent on the TSX produced the biggest one-day percentage gain on the Canadian market since the post-Black Monday crash of Oct. 21 1987, when shares soared nine per cent two days after an 11 per cent drop.

On Wall Street, the Dow Jones industrials rose nearly 370 points, on top of a 400 point gain the day before.

"This is going to be remembered as a historic week in equity markets," said George Vasic, equity strategist and chief economist at UBS Warburg.

With massive swings in stock prices every day this week, investors managed to break even at the end of the trading day Friday. However, brokers pocketed big trading commissions because of the huge volumes on Wall Street and Bay Street markets.
In the U.S., a new government ban on short selling, or placing bets that a stock will fall, likely added to the huge Dow rally.

"A big chunk of this is scaring all the shorts to cover their bets," said Joe Battipaglia, market strategist at Stifel, Nicolaus & Co.

Most of Friday's investor optimism was fuelled by a series of sweeping steps taken by the U.S. government to prop up the world's biggest and most influential financial system. Key measures included rescuing banks from billions of dollars in bad debt and a ban on short selling, or placing bets that a stock will fall.

Treasury Secretary Henry Paulson, speaking about the rescue plan, said a bold approach is needed to remove troubled assets from the books of financial firms. He offered few details, but said he would work on the plan through the weekend with congressional leaders.
For much of the last two months, the financial world has been gripped by fear that the credit crisis sparked by millions of defaulted U.S. mortgages was not only not subsiding, but getting much worse.

Danger bells were sounded with the government bailouts of mortgage giants Fannie Mae and Freddie Mac and insurer American International Group.
Those fears were brought to a fever pitch by the collapse of Lehman Brothers Holdings, the fourth-largest U.S. investment bank, on Monday.

For the Toronto market, that meant a big slide that took it down nearly 20 per cent over two months and put it into a what traders call a bear market, or a period of prolonged stock selloffs.
When central banks began to step in on Thursday, injecting billions of dollars into the global financial system, traders took heart and North American markets began to groggily recover.
Friday's big leap - the TSX soared almost 850 points, or seven per cent, while the Dow gained close to 370 - was further sparked by higher oil prices and a U.S. and European crackdown on short selling, where traders borrow stock and sell it, bet the price will take a big dive, buy it up when it gets cheaper and pocket the difference.

Short selling can cause a company's stock price to drop dramatically and was blamed for eroding share values in investment and commercial banks.
Canadian regulators were mulling a similar move.

But Norm Rothery, chief investment strategist at Dan Hallett and Associates, said the interventionist steps taken by the U.S. government could hurt the market in the long run.
"My view is this is a short-term salve that's been put on the market, but it bodes poorly for the longer term," said Rothery.

"The scale of government intervention is very high, and people will now have to adjust to it."
He said halting short selling could inflate stock prices, making them unreliable, which could in turn "prolong the downturn."

The markets will likely stabilize on the steps taken by the U.S. government, but Rothery said he remains "moderately bearish" on concerns the financial woes on Wall Street aren't fixable by government alone.

"Unless they're willing to wander out and buy up everyone's mortgages and to prop up real estate prices, you're holding a rear-guard action on the market," he said.
"It's a good attempt but I think the problem is too big for them."

Vasic said he expects the regulatory steps to even out some of the volatility seen this week.
"Now that (investors) presumably have, or will have, some clarity on the magnitude of potential risks, they can remove a lot of the what-if scenarios they had been fearing," he said.
"The worst fears are off the table, but now we can return to the ongoing cyclical fears we had previously."

He added that the spike seen Thursday and Friday is a short-term trend that will be halted by ongoing economic uncertainty in global markets.

"We don't think this is the beginning of a new V-shaped recovery in equity markets because there's still too much ground yet to cover," he said.
Meanwhile, Prime Minister Stephen Harper again asserted there is no need for Canadians to fear financial instability.
"I have to reiterate ... the Canadian financial system is very strong," he said, speaking in Farnham, Que.
"The balance sheets of the Canadian financial system are very strong. The core banks and insurance companies in this country are in, for the most part, very good financial shape."
"We don't anticipate any crisis in the Canadian financial system."
His U.S. counterpart, President George Bush, sounded a similar, though more cautious, note.
"In the long run Americans have good reason to be confident in our economic strength," Bush said as his administration announced it will move to safeguard assets in money market mutual funds.
But the cost of the U.S. bailout plan "will be enormous, darkening the U.S. fiscal picture in an environment where there is already plenty of concern over rising deficits and the integrity of the Fed's balance sheet," noted Scotia Capital currency strategist Steve Malyon.

Debt plan, U.S. short-selling curbs lift spirits

Debt plan, U.S. short-selling curbs lift spirits
Tony Munroe and Will Waterman

Friday, September 19, 2008
HONG KONG/LONDON — — A radical U.S. plan to mop up toxic mortgage debt and a spreading ban on short-selling drove bank stocks up as much as 40 per cent on Friday as urgent talks over rescue takeovers in the sector continued.

As the authorities brought out the big guns to tackle the financial crisis, U.S. investment bank Morgan Stanley continued talking to Wachovia Corp. and other banks about a merger, while discussing a possible increased investment from China's sovereign wealth fund, sources familiar with the plans said.

British lender HSBC Holdings walked away from a $6.3-billion deal for control of Korea Exchange Bank, fuelling speculation it may be turning its attentions to one of its embattled rivals in the West instead.

And the Eurozone's largest bank, Spain's Santander, declined to comment on a media report it was eyeing Bank of Ireland, which has been pummelled by a property market slump at home.
After Britain's Financial Services Authority imposed a four-month ban on short-selling financial stocks on Thursday, the U.S. Securities and Exchange Commission followed suit on Friday with an immediate ban for an initial 10 days. French regulator AMF said it was also talking to other Eurozone regulators about market dealings, leading to expectations that the shorting ban would snowball.

Meanwhile, the world's central banks redoubled their efforts to lubricate the seized up money markets. Japan, Australia, India and Indonesia pumped in $42-billion after the U.S. Federal Reserve co-ordinated a $180-billion package a day earlier.

In Europe, there were signs that the stress was easing. The cost of borrowing dollars overnight fell back towards the Fed's 2 per cent target, and three-month borrowing costs slid. The Bank of England offered $40-billion to banks, but only half of it was taken up.

Thursday's proposals by Washington to draw the poison from banks' mortgage assets and the first of the short-selling bans had an immediate and dramatic effect.

U.S. stocks clocked their biggest percentage gain in six years late on Thursday, powering a rally in the dollar and pushing oil prices higher, and on Friday Asian and European markets picked up where New York's left off.

The price of gold and government bonds, traditional safe havens in times of turmoil, both slipped back.
U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke plan to work through the weekend with Congress on a plan to deal with the toxic bank assets that have been choking the financial system for a year.

"This is a more substantial and systemic solution than the ad hoc interventions we have seen in recent days," said Dariusz Kowalczyk, chief investment strategist at CFC Seymour in Hong Kong.
"At present confidence is the most important factor, and this will only be maintained if the rescue plans are delivered on both sides of the Atlantic," said Andrew Turnbull, senior sales manager at ODL Securities.

Stock markets did not wait for details.
The MSCI index of regional shares excluding Japan was up 7 per cent, and Tokyo stocks ended up 3.8 per cent. The Shanghai index roared 9.5 per cent higher after the Chinese government stepped in with a reform package to halt a 69 per cent slide from last October's record high.
In Europe, all the continent's major markets jumped in early trade. The pan-European FTSEurofirst 300 was up 6.3 per cent, while some of Europe's biggest banks, UBS, HBOS, Lloyds TSB and Royal Bank of Scotland were up between 29 and 47 per cent.
Sovereign wealth fund China Investment Corp, Morgan Stanley's largest shareholder, with a 9.9 per cent stake it bought for $5 billion in December, was in talks that could see its stake climb to as much as 49 per cent, sources familiar with the matter said.
Beijing is wary of adding to its Morgan Stanley holding, given that its existing holding is carried at a steep loss — the whole bank was only worth $24 billion at Thursday's close. An unidentified CIC official told the Xinhua news agency that an increase in the stake would face U.S. political obstacles.
Sources familiar with the plans said Morgan Stanley's parallel discussions with Wachovia began Wednesday night with a proposal from Wachovia CEO Robert Steel to Morgan Stanley CEO John Mack and have since reached a more formal stage.
Morgan Stanley declined to say it was in talks, but a spokeswoman confirmed it was "focused on solutions" to address its falling stock price.
A U.S. fund to deal with bad mortgage-related assets would be similar to the Resolution Trust Corp, which was set up to clean up bad debts from the savings and loan crisis in the late 1980s at a $400 billion cost to taxpayers.
"We talked about a comprehensive approach that will require legislation to deal with illiquid assets on financial institutions' balance sheets," Mr. Paulson told reporters.
According to two Congressional aides, he has been shopping around a plan to create the fund.
Rep. Barney Frank, who is chairman of the House Financial Services Committee, said there was concern that establishing a formal entity to buy the assets would take too long.
"I think it will start to provide a floor to asset values and allow institutions to work through this in a systematic manner. They won't have to rush into the arms of suitors to avoid collapsing," said Haag Sherman, co-founder and managing director of Salient Partners in Houston.
In addition, New York's Attorney General Andrew Cuomo began a wide-ranging probe into possible illegal short-selling in the stocks of Wall Street firms such as Morgan Stanley and rival Goldman Sachs Group Inc.
At one stage on Thursday, Morgan Stanley's stock dropped as much as 42 per cent and Goldman as much as 25 per cent, adding to several days of huge declines that have wiped out tens of billions of dollars of market value. However, after news of the moves by authorities in the U.S. and Britain, they were both trading higher in after-hours trade.
Investors are questioning whether the investment banking model is doomed after the bankruptcy filing earlier this week of Lehman Brothers Holdings Inc. and the proposed sale of Merrill Lynch.
There has even been speculation that Goldman, the most powerful investment bank and once seen as untouchable, may be in need of a partner, possibly a retail bank.
Copyright © 2002 Bell Globemedia Interactive.