ZAY Blog

For the past two days, we’ve witnessed one of what I would personally considered as the most hilarious jokes of the year unfolded on Wall Street.

Quick quiz to those of you who are reading this:

1. If a company that has not lost a single cent ever since it went public in 1999, and was labelled the most profitable firm in Wall Street, has reported a quarterly loss, how should the market react?

2. If the average of the analysts’ estimate of the loss is $3.73 per share, and the company ended up lost $4.97 per share, how should the market react (based on either the Arbitrage Price Theory that I am sure every single finance student would know, or simply your guts feeling?)

I guess the most common answer would be the decline in share price.

And that happened to Goldman Sachs yesterday.

And GS rallied 15% yesterday.

It was interesting to see how the helpless financial news reporters say about this. The editors in Bloomberg, after scratching their heads for hours, came up with the excuse that the performance was better than the most pessimistic estimate from an analyst in UBS AG, who was predicting $5.50 per share loss (I bet all those shorters want to beat the hell out of that guy now). (http://www.bloomberg.com/apps/news?pid=20670001&refer=&sid=a6ku8xZK62X0) New York Times, being more political, simply said that it was “in line” with analysts’ estimates (OK, perhaps my English is really bad, but do English-speaking community generally consider miss by 33% from average as “in-line”?)

And the story did not end here.

This morning, Morgan Stanley reported its quarterly loss.

And this time, the average from analysts was 34 cents per share loss, with no estimate more than $1.15, according to Bloomberg.(http://www.bloomberg.com/apps/news?pid=conewsstory&refer=conews&tkr=MS%3AUS&sid=aKpeqFFx_giU)

The results was $2.24 per share loss.

Interesting enough, the share of MS rallied as much as 9.14% at one point of time before closing at 2.3% rise.

Now the most interesting part came, as both Bloomberg and New York Times found themselves in a awkward position that they could no longer explain the reason for such spike.

And their strategy was simple: based on facts. They simply reported the loss with no analysis/explanations.

Newsflash: The bailout has officially died in the senate as of 11:03pm, as it could not find sufficient number of votes from the Republicans to pass the legislation. Oil have down more than 2 dollars in the past hour and US Stock Futures have gone down for more than 3% tonight.

There will be another dreadful Friday in Wall Street tomorrow, will there be any chance for SDS to hit 130 again?

By the way, it is already impossible to short GM stocks from my broker, and I suspect it should be the same for everyone else as well.

I don’t feel like looking at the market tomorrow, to be honest…

Well, not quite, there is still hope that the senate would bring it back to live some times later this week.

However, the collapse of Wachovia, the bank that could be saved if the loan programs have approved earlier, as well as the plunge of the major index around the world, clearly indicated that this is an issue that can not be waited…

How long will the politicians in Parliament Hill figure out that Americans do need to save Wall Street?

I am not saying the traders in Wall Street have done the right thing to use the money that they are not prepared to pay back, however, what is right and what is wrong no longer matters, because Wall Street is not only a financial hub of the world, it is, more importantly, the dominant factor of the US economy. If Wall Street fails, every ordinary American citizens would be affected, not just the traders or the investment bank executives.

Sometimes, I am wondering if democracy is really a great idea in time of crisis, because it is difficult to explain to every single individual (or even the majority) of the impact of certain things, not because general public are ignorant by any means, but rather we are specialize in different things.

For example, it is difficult to convince a farmer whose sole interest is to be able to sell the cattle he has raised that 2000 dollars from his tax money has to be given to the financial market.

He is probably really good with raising cattle, far better than the investment bankers could do, but that does not mean he could be educated enough to see the entire economy.

On the other hand, we can see that in the current milk-poisoning crisis, the Chinese government is spending taxpayers money to compensate the lose of the diary farmers.

This may be a somewhat authoritarian in the eyes of Americans, since every single Chinese citizen (or those who pay tax to the Chinese government at least) is basically paying for something that they have nothing to do with.

However, in this case, by ensuring the survival of the Chinese diary farmers, China has shown to the world that it is acting more responsibly, as well as more maturely, in time of crisis.

Which is very different from the irresponsible manner that the congressmen and congresswomen is showing ahead of the elections.

I was really thrilled to hear that the senate has finally approved the package to save the financial world.

I am not sure how much the collapse of Washington Mutual would have made those senators feel that they finally need to do some work rather than arguing all over the place to maximize their political profit, but the fact that the agreement was reached on Saturday midnight is really an assuring fact to know.

However, what we have seen so far is a really disappointing picture in the Asian market, with the financial stocks continue to decline.

Why is that so?

Because people no longer have any confidence in the US economy.

Sadly speaking, the financial market in US would not stop to deteriorate just  because of the 700 billion. In fact, some analysts claimed that the market needs as much as 5 trillion dollars in order to go through the current mess without getting hurt too much. Unfortunately, the fact that the rest of the world is reluctant in joining the US in saving the financial market means that it is very unlikely the government will be able to raise the fund.

On the other hand, even within the US government, as election approaches, no one seems to have that much interest in asking each US citizen to pay more than 2000 dollars to save the mistakes made by the Wall Street traders. Instead, they have promised tax reduction, which would means that the government would not be able to provide too much to save Wall Street.

However, what should we expect when the market opens tomorrow morning?

First, I think Wachovia is saved for now, after being treated as the next victim after Washington Mutual, therefore, we should see some good news for WB to bring the highly undervalued stock back a little.

Second news should be from the currency market, where we should see some advance in the US dollars as people are now confident that the wound would not be as large. On the other hand, the LIBOR and treasury should be a little lower as the financial institutions (even those non-US companies with large business presence in US) find themselves a little easier to borrow money to solve their liquidity headaches.

Let’s hope that this 700 billion dollars would really be able to give the investors some confidence, because…well, hope is all we have.