Today is more about American International Group (AIG) than the FOMC announcement - not to downplay the rate decision. AIG's survival is critical to the financial system. The company has insured U$441 B of fixed income assets including U$58 B of subprime mortgages through the CDS (credit default swap) market. This book of business has lead to huge losses for the company overshadowing what is a very attractive insurance business. AIG's failure would create additional problems for the CDS market which is still trying to figure out how to settle CDS in which Lehman Brother was involved in. AIG's demise would drag the other global insurance companies such as Alliance, AXA, ING into the fold. This would lead to a substantial increase in writedowns which would have implications for the broader economy. If we do not see any positive developments on AIG heading into the close of trading today, the equity market will sell off heavily. If AIG does in fact file for bankruptcy protection, hold on to your hats.
Goldman Sachs (GS) is off sharply along with other financials despite reporting better than expected Q3 earnings. Earnings per share was U$1.81, beating analyst expectations by U$0.10. However, revenues were down sharply and ROE was only 7.7%. It appears we are moving to the end of an era of standalone broker/dealers. We expect Morgan Stanley (MS) and Goldman Sachs (GS) are likely to partner with other banks similar to the Bank of America/Merrill Lynch transaction. If there is one survivor it will likely be Goldman. It all comes down to trust and people trust Goldman. They appear to be getting most of the new business what little there is.
Washington Mutual (WM) was downgraded to junk status by Standard & Poor's. The rating agency took the rating on the largest Savings & Loan in U.S. to BB- from BBB-, three levels below investment grade. S&P cited the deteriorating U.S. housing market for its decision. S&P acknowledged that the company's deposit base appears stable.
U.S. equity futures are lower this morning and Canadian markets will open lower as commodity prices come under further pressure.
Other news items today include:
1. Last night Teck Cominco announced "Teck continues to work with its syndicate of lenders to complete the definitive documentation for its fully underwritten $9.8 billion bridge and term loan facilities in connection with the acquisition, and expects to have definitive financing documents in place before the Fording unitholder vote scheduled for September 30, 2008." I highlight this as Fording (FDG.un) was hit hard yesterday on fears that the financing could be in trouble. The rumour in the market is that 80% of the debt financing has already been placed.
2. The Bank of Canada announced yesterday that it is monitoring global financial markets "closely" and will assist as needed to keep the country's financial system working. "The Bank will provide liquidity as required to support the stability of the Canadian financial system and the functioning of financial markets".
3. SNC Lavalin Group has won a contract valued at C$500 million to build an airport in Benghazi, Libya. The contract for the airport includes construction of a new international terminal, runway and apron. The airport, to be completed in 2010, will serve five million passengers annually as a gateway to Libya's second largest city.
4. Sun Life Financial (SLF) has announced that it will have a charge in the third quarter from investments tied to Lehman Brothers Holdings. Sun Life has C$334 million in bonds and about C$15 million in derivatives contracts tied to Lehman. The company didn't estimate the amount of the charge.
5. According to Bloomberg, potash inventories controlled by North America crop-nutrient producers fell 21% in August to their lowest in at least 19 years, as a strike at three Canadian mines reduced output. Stockpiles fell to 556,000 tons last month from July and were down 33% from a year earlier. Production fell 17% to 810,000 tons in August from July.
6. BHP Billiton Ltd. has said that it expects commodity markets to remain volatile in the short term, but it is confident there will be continuing growth in demand in the long term. BHP Chairman Don Argus said "While we expect commodity markets to remain volatile in the short-term, we are confident that long-term market fundamentals should support growth in commodity demand and, therefore, our revenue." Commenting on demand from Asia, Argus said "I have no doubt that economic growth in the Asian region will slow at some point but if I look at China specifically, the slow down is concentrated in regions oriented to the light export sector."
7. BHP Billiton Ltd. has increased the estimated ore reserves at its Olympic Dam copper uranium project in Australia by 19%, as it continues to study an expansion that may cost at least $6 billion, according to Bloomberg. Total estimated ore reserves, comprising both proven and probable reserves, increased to 473 million tonnes compared to last year's estimate of 399 million tonnes. The increased reserves increases the estimated mine life to 43 years, up from last year's forecast of 36 years, according to the company. Proven reserves, rose to 221 million tonnes from 61 million tonnes a year earlier. BHP plans to complete an initial study on the expansion that would raise copper production to 730,000 tonnes per year from the current rate of 170,000 tonnes per year, and increase uranium production from 4,000 tonnes per year to nearly 20,000 tonnes per year.
8. UxWeekly reports that the spot price of uranium fell $2.50 to US$62.00/lb U3O8. The group noted that the price could continue to weaken in the near term as some sellers had pressing sales needs.
