New Financial Website. Try it Now!

Friday, October 17, 2008

BetOnMarkets Afternoon Report

After an opening plunge that saw the FTSE hit it’s lowest level for five years, UK shares have at least managed to rebound to trade above the lows of last week. The catalyst yet again is the deep malaise in the banking sector. The markets started with the shock announcement that UBS and Credit Suisse were in need of urgent funds. It hardly got better as the day progressed with US financial firms releasing some ugly earnings figures. Merrill Lynch reported its fifth straight quarterly loss and Citigroup reported a $2.8 billion loss. UK financials are mixed at best as it is reported that Lloyds TSB is lobbying to be able to pay its shareholders dividends. With much of the sentiment and credit worthiness of a financial shares tied to their share price, it is little wonder that UK banks are keen to be able to maintain a dividend payment of sorts. UK banks have hardly moved upwards since the announced bail out plan, not least because the plan cut off the income element that had attracted many to invest in the banks over the last few year. A dividend income provided some comfort to shareholders hit by falling share prices, now this is gone, UK banks appear even less attractive than they did before the bailout even though they are technically safer entities.

There is also the fact that not a penny of the billions promised by the UK and US government has actually landed in the bank’s accounts yet. At a time when cash is king, the banks are still lacking, albeit temporarily.

Many are drawing parallels with the great depression era around 1930. It is interesting to note that the last time the Dow Jones dropped by 7.5% or more three times in a single month was 1929. Then, as now there were big falls followed by snap rallies, followed by further selling. Anyone thinking that this couldn’t get any worse might want to take a look at the performance of the Dow after it recovered off the 1929 November lows. After rallying to 300 over then next 6 months, the Dow subsequently rolled over and dropped a massive 84% to 50. While this may not happen this time, it is worth considering that a fall of this magnitude has happened before.