It was a difficult day yesterday to make money as the markets open up 3%. So after the rescue of Bear Sterns and the bailout of the GSE’s, the market now turns its attention to finding the next weakest link in the financial system. The two most likely candidates seem to be Washington Mutual and Lehman Brothers, who both fell heavily on a huge up day for financials. But after a rescue and a bailout, have the coffers run dry? Next time will it just be a bust?

Note also yesterday the underperformance of tech stocks, particularly the semi conductor sector and overnight softness in Asian markets.

Today’s Market Moving News

• Overnight Federal Reserve President Fisher commented on the GSE bail-out, stating that the Fed examiners determined Fannie and Freddie’s capital to be of low and poor quality. He expects a very weak US economy over the next several quarters. Recall that he is probably the most hawkish member of the current FoMC.
• US consumer credit expanded by the smallest amount in July since Dec 2007. A sign that the US consumer may be throwing in the towel or that lending standards have tightened?
• OPEC sources are saying overnight that supply is likely to be cut as this stage with prices now close to reflecting fundamentals. Not good news coming at the start of the hurricane season and fresh fuel for the oil bulls? The real problem for the US is that due to hurricanes, the Gulf of Mexico will never live up to its promise to be a mother lode of US domestic oil production.
• UK BRC sales fell 1% in August despite heavy discounting in the shops.
• In Germany, benchmark setting union IG Metall are seeking a 7-8% pay rise. The highest in 16 years. The ECB will not be amused.

Merrill Lynch’s and Lehman Brother’s Trading Operations Valued at Zero by Market

We have noted before that a possible sale by Lehman of a stake in its asset management operations probably valued the rest of the firm at close to zero.

Now Bloomberg is running with this story too:
“Lehman’s market capitalization of $11.2 billion is almost equal to the value of its asset-management arm, which includes Neuberger Berman. That leaves its main business of trading stocks and bonds as having little worth. The numbers are similar for Merrill Lynch: Take out its retail-brokerage and asset- management businesses, and the investors’ valuation of the rest of the third-biggest U.S. securities firm is zero.”

Lehman’s have put-off their Q3 results by 2-3 days. All the above underscores my point, repeatedly made here that this calls in to question the whole business model of the US Investment/Broker banks.

As an aside and on a smaller scale this phenomenon can be seen in the Ireland with Irish Life & Permanent where the current share price attributes very little worth to it’s banking arm.

Washington Mutual’s (WaMu) Problems

You will be Reading a Lot more about this thrifty bank shortly methinks:
“The problem is very simple. They made a lot of bad loans and they are absorbing high levels of loan losses. The solution for their problem is to find some mechanism for reducing the bad loans. That can’t be done by a new CEO,” said Richard Bove, banking analyst with Ladenburg Thalmann & Co

Bove’s comments remind me of former IMF chief economist Ken Rogoff’s comment on US banks last month:
“We’re not just going to see mid-sized banks go under in the next few months. We’re going to see a whopper; we’re going to see a big one, one of the big investment banks or big banks”.

Equities

• Talk of a possible merger / takeover of Belgium’s Fortis bank and BNP Paribas of France.
• Tullow Oil has reportedly discovered oil at their Kigogole-1 well in Uganda. This is the fifth successive discovery by the Irish oil exploration company in the region in the past five months.