The DOW was up 936 points today as investors were pleased with the global efforts by governments to inject capital into their financial institutions. Rumors of a meeting in Washington at 3pm with our esteemed Secretary of the Treasury and a handful of CEO's from major financial institutions lead to a second leg up in the markets in the last hour. Speculation was rampant about what was going to be said at that meeting.
Tonight some details have been released. The government is investing $125B (out of the $700B bailout fund) in 9 top tier banks, They are Wells Fargo, JP Morgan, Citigroup, Goldman Sachs, Morgan Stanley, State Street, Bank of NY, and Merrill Lynch. The complete terms are not available but it looks like the government will buy a 5% preferred in these institutions and receive warrants to buy common stock. This may dilute common shareholders if the banks cannot buy back the warrants but this is a major commitment by the government to restore confidence in the financial sector.
What should investors do now? The market will clearly rise again tomorrow morning as the investment community will love this deal. However, we should not lose sight that the economy will have an overriding affect on stock prices. Stocks have been beaten down in the last year and great companies with strong cash flow and little debt burdens over the next few years might be heading into their own new bull market. On the other hand, some economically sensitive companies may report really disappointing earnings and keep a lid on their stocks. As we said a few days ago, the overall market may have hit a bottom on Friday but it will now be a stock pickers market after the current euphoria subsides.
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