Thursday, February 14, 2008

Rampaging Bulls Bent on Suicide?

– Posted in: Current Touts

As if preparing for a spectacular suicide, stocks once again rampaged higher, blithely ignoring yet one more glaring sign that the financial system is falling apart. The Dow settled up 179 points on the day, seemingly oblivious to a distress flare fired into the sky by Citigroup. The beleaguered banking giant told the Associated Press that about $6 billion of mostly municipal debt auctions for which it had been the lead underwriter had failed the previous day. This came on top of a half-dozen other similar offerings in the auction-rate securities market that had failed prior to Tuesday. Auction-rate securities (ARS), a $250 billion market, serve effectively as a money-market vehicles for corporations, pension funds and other institutional investors. The actual securities ' long-term bonds and preferred stocks whose interest rates are reset at short intervals ' have long been treated as cash equivalents. However, the resets are typically at 7, 28, 35 or 49 days, and a precipitous price decline between adjustments can create very significant losses for corporate investors. Bristol-Myers Squibb, for one, took a $250 million charge earlier this month on auction-rate securities in which it had invested $811 million. Other ARS losers named in a recent Merrill Lynch report included 3M, Foundry Networks and Texas Instruments. However, thousands of companies use auction rate securities, so the problems that have shown up so far could be just the tip of the iceberg. The Psychotic Three If such developments were weighing heavily on the financial sector yesterday, they had little apparent impact on the broad averages. The psychotics in particular ' Apple, Google and Research In Motion ' all soared, with gains, respectively, of 3.5 percent, 3 percent, and 5.5 percent. Even the financial stocks managed to eke out small gains by day's end. Citigroup, for one, closed up 8