US stocks soared their most in 6 years as the US government looks set to help finance companies take illiquid mortgage debt off their books. UK shares are also on the up in early trading.
I woke up this morning to find the US market had jumped sharply higher. The Dow Jones Industrial Average soared 400 points or 3.9% and the Nasdaq rose by 4.8%. It was their biggest rise in 6 years.
Phew I thought.
I’m normally not the sort to cheer a rising market. Because I am a net investor in shares over the course of my working life, I want lower share prices today and higher share prices in the future.
But these are extraordinary times. We desperately need some stability in financial markets. We don’t need any more situations like we had with HBOS (LSE: HBOS) earlier this week.
That’s not to say those financial institutions that won’t be able to survive this great credit contraction shouldn’t be able to survive in their current form. If any company has bitten off more than it can chew, its executives and shareholders deserve to pay. It’s happening to HBOS right now.
The financial markets need time. They need calm to work things through. Now that the US Government effective owns American Insurance Group (LSE: AIG), with the financial might they bring to the table, an orderly sale and liquidation process can be undertaken.
Calm & Rationality Descends…For Now
Based on the jump on Wall Street last night, calm and rationality may just be descending on global stock markets.
But during the US trading session, there was anything but calm and rationality.
Take Morgan Stanley (NYSE: MS) for example. From its previous close of $21.75, at one stage during the trading session the shares were down as low as $11.70, a massive 46% fall. Being one of the last two remaining independent Wall Street investment banks, many traders were fearful of it being the next big financial institution to fall.
At its worst, the Dow Jones was down 160 points. From there to the end of the trading day, it jumped an astonishing 560 points.
Perhaps I shouldn’t say astonishing. In this market, as we’ve seen over the past few days, anything is possible.
Now if I’d been awake - I live in Australia - and seen the Dow Jones down 160 points and Morgan Stanley seemingly headed for oblivion, I might have been more than a little distressed. I even may have panicked and sold some of my shares, just to end the pain. Such is state of these markets that they can play funny tricks with your head, which ultimately can turn into costly financial decisions.
Morgan Stanley shares closed the day at $22.55, a steady but nothing spectacular 3.7% up on the day. Luckily I slept through the intra-day carnage.
The Obvious Solution: Sleep Through The Panic
Sleeping through it all was by far the best solution. It’s a salutary reminder that investors should mentally turn the stock market off in the short-term, because in the majority of cases, the daily movements of share prices bear little relation to the underlying value of the business.
It’s also a reminder of the need to remain calm and rational during these unprecedented times. This is not the market or the time to be indiscriminately selling. Riding through this storm is your best option.
So turn the market off. Stop checking your share prices on a minute by minute basis. In fact, as long as you’re confident in the underlying progress of the companies you own in your portfolio, you could happily go away on holidays for 3 months and come back to check your share prices then.
Why The Market Jumped
There were three main reasons for Wall Street’s huge jump…
Reason #1: By far the biggest reason was according to Bloomberg, US Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke will seek support from Congress for an agency to buy bad debt to address the deepening credit crisis.
“The two regulators, in talks with lawmakers late today, sought support for a plan to help financial institutions remove illiquid mortgage-related assets from their balance sheets. Congressional leaders said they intend to pass legislation within days.”
Reason #2: The US Federal Reserve has joined key European central banks in a move to inject more than US$180 billion into the global banking system in a bid to restore confidence in financial markets.
Reason #3: The US Securities Exchange Commission (SEC) and the UK's Financial Services Authority (FSA) introduced measures to curb short-selling. Here, the FSA have prohibited “the active creation or increase of net short positions in publicly quoted financial companies” from midnight last night for at least the next four months.
Hold Onto Your Hats – This ‘Aint Over Yet
It appears world stock markets might be in for a bit of fun today. Enjoy it whilst you can, because in this market, anything still can and will happen.
As for me, I’ll be happy to sleep through it all again. I’ve found it’s the best way by far to deal with this credit crisis.
Happy investing.
More: Lloyds Buys HBOS
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