The biggest (bear) rally in seven decades, seen through reality lenses

Oct. 13 (Bloomberg) -- U.S. stocks staged the biggest rally in seven decades on a government plan to buy stakes in banks and a Federal Reserve-led push to flood the global financial system with dollars.

The Standard & Poor's 500 Index rebounded from its worst week in 75 years with an 11.6 percent advance, its steepest since 1939, and the Dow Jones Industrial Average climbed more than 936 points. Morgan Stanley soared 87 percent after sealing a $9 billion investment from Japan's Mitsubishi UFJ Financial Group Inc. Alcoa Inc., General Motors Corp. and Chevron Corp. climbed more than 20 percent each as all 10 industries in the S&P 500 added more than 7 percent.

Let's try to contrast a little bit this news with a bit of reality:

  • The Fed and the US government flood the world with valueless USD and the result is a drop of 3% of the price of Gold.
  • A mega-market rally where even bankrupt companies like GM rise +36%. At the end of the day, what matters for GM is to sell cars, right? But to whom? Are the American citizen any more solvent than they were yesterday? It seems like all of the sudden, investors forgot about the real estate crash, foreclosures, tent cities, and woke up in Wonderland.
  • Morgan Stanley, see below.
Morgan Stanley

Morgan Stanley's 12 month Ending 2007-11-30 income available to common shareholders was 2,495 million USD.

No UFJ-Mistubishi takes 21% of the shares (by diluting the current shareholders) and has a 10% guaranteed yield with their preferred shares for $9 billion USD. This makes a yearly income of 900 million USD that won't be available to the current shareholders.

This is 36% of their income, provided that it remains at the 2007 levels, which is more than unlikely. This is about 15% of the 2006 6,316 all-time-record of the Morgan Stanley.

On the news, Morgan Stanley's stock rose +87% and has now a market cap of $19 billion.

So basically, common shareholders just rewarded UFJ-Mistubishi with an instant gratification of +87% for diluting them, and they are now happy to hold these shares which are unlikely to perform well, and which are far more risky than they used to be because after bond holders, it's UFJ-M which will be served next.

The contrast is surprising when you notice that UFJ-M required to have:
  • preferred shares
  • 10% yield
  • priced at 10$ each
And then that the market thinks that this is a fantastic deal:
  • common shares
  • very likely to get a 0% yield for the foreseeable future
  • priced at 18$ each
My opinion is that Morgan Stanley is a nice short-sell. But I will hold for now, as I am sure that short selling will be banned again in a matter of days...

Other points of interest today:

- The (official) US dept, which hit $10 trillion on the 30th of September 2008 was at $10.266 trillion on the 9th of October 2008, that is a 2.66% increase in 10 calendar days. Annualize that and you will see how close we are from hyper-inflation.

- Mish - shares my opinion Big Robery Plan sorry, I ment, the the Rescue Plan:
To stimulate lending, the bailout plan will attempt to recapitalize banks. The method of recapitalization is best described as robbing Taxpayer Pete to pay Wall Street Paul. In essence, money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed.

All this talk about Strategy, Implementation, Recruitment, Procurement, operations, compliance, and other details masks the essence of the plan.

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