Wednesday, October 29, 2008

Wall Street Rally - Fed in Focus; The New Most Valuable Company in the World - For Now...

U.S. stocks rose more than 10% on Tuesday, the second-biggest point gain ever for the Dow and S&P, after investors scooped up beaten-down shares on optimism that the Federal Reserve and other central banks will cut interest rates further.

Hopes for a rate cut grew at midday after a newspaper reported the Bank of Japan is considering lowering rates, further fueling hopes for a Fed cut after its latest policy meeting on Wednesday. Lower borrowing costs could help bolster corporate profits.

Japan's Nikkei newspaper report pulled the yen down more than 5% against the dollar, easing worries after a recent sharp rally in the Japanese currency that had slammed global markets.

Shares of capital-intensive companies such as telecoms posted the day's sharpest gains, including Verizon Communications - 14% and AT&T - 13%.

Big oil companies gave the Dow its biggest boost after BP reported a record quarterly profit beating expectations. Exxon Mobil and Chevron both rose more than 13%.

Shares of Boeing jumped more than 15% to $48.91 after the aircraft manufacturer came to a tentative agreement with its largest union to end a strike and stop revenue losses estimated at $100 million a day.

The Dow Jones jumped 889.35 points (10.88%). The S&P 500 surged 91.59 points (10.79%). The Nasdaq ran up 143.57 points (9.53%). It was the second-biggest point gain ever for the Dow and the S&P.

The yen's rally has forced an unwinding of the so-called "carry trade" -- a phenomenon of Japan's low interest rates, in which investors borrowed yen to finance investments in higher-yielding assets, such as U.S. stocks.

Wal-Mart's stock rose after the world's largest retailer stuck to its 2009 sales growth forecast, saying it will weather the economic turmoil now and could come out even stronger than its rivals when the economy rebounds. Wal-Mart shot up 11.1% to $55.17 on the NYSE.

The rally came despite a gloomy U.S. consumer confidence report that tumbled to a record low in October. Interestingly, in the report, the interest in buying a home went up about 0.5%.

Verizon ended at $31.65, up 14.6 percent, and AT&T finished at $27.61, up 13.2 percent, in NYSE trading.

In the oil sector, Exxon climbed 13.3 percent to $74.86, while Chevron soared 13.5 percent to $70.02. The big energy producers' shares gained even as U.S. oil futures slipped 49 cents to settle at $62.73 a barrel.

Whirlpool Corp tumbled 8.3% to $45.87 after the world's biggest appliance maker said it would cut 7% of its workforce and slashed its 2008 earnings outlook amid weakening demand.

Trading was moderate on the NYSE, with about 1.73 billion shares changing hands, below last year's estimated daily average of roughly 1.90 billion. Most of the volume came in the last hour of trading.

On Nasdaq, about 2.77 billion shares traded, above last year's daily average of 2.17 billion.

The New Most Valuable Company in the World - For Now...

LONDON -- Short sellers of Volkswagen scrambled for the exits on Tuesday, briefly making the European auto maker the world's largest company by market capitalization and raising worries about the banks that sold Porsche Automobil Holding the options to build its stake in the Beetle maker.

The short squeeze sent Volkswagen shares up as much as 93% on Tuesday, extending Monday's massive rally that sent VW's common shares up 250%. Volkswagen shares have been volatile over the past two months, leading to speculation that short sellers were desperate to cover positions. But covering activity took on renewed speed after Porsche announced over the weekend that it increased its equity stake in VW to 42.6% from about 35%, and more crucially, that it had options to buy another 31.5% of VW.

Porsche hasn't disclosed the strike price of the options but said that it will lock in gains between whatever the market price of VW when it exercises the option and the strike price. Porsche said over the weekend that it was acting, in part, because it was "clear that there are by far more short positions in the market than expected."

Porsche was able to build up its options position without detection because of relatively lax German disclosure rules that are due to be tightened next year.
The scramble for Volkswagen shares is particularly acute because its free float is estimated to be just over 5%, since Porsche holds VW shares either directly or indirectly that amount to 74% -- and the Lower State of Saxony, which is fighting both Porsche and the European Union to keep blocking control over VW, holds another 20%.

The massive gains for Volkswagen are raising worries whether funds which shorted the common stock will be able to survive -- and in turn about the banks that brokered the options and short sales transactions. Banks ranging from Goldman Sachs to Commerzbank came under pressure on Tuesday.

At its high on Tuesday, VW was worth 295 billion euros, or $367 billion, making it more valuable than Toyota Motor, Honda Motor, Nissan Motors, Daimler, Renault, Peugeot, General Motors and Ford Motor Co. combined -- not to mention the paltry 4.8 billion euro market cap of Porsche.

Exxon Mobil closed Monday with a market capitalization of $343 billion. Exxon shares have dropped about 30% this year as oil prices have plunged to the low $60-a-barrel level from $147.

The gains for VW come during a period of turmoil for Volkswagen. Volkswagen last week said nine-month deliveries edged up 3.9% to 4.8 million vehicles, picking up market share vs. rivals, but said it was concerned about the "marked deterioration in the situation for our industry throughout the world."

Sources: Reuters, Marketwatch

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