Stocks Rally on Writedowns

Stocks rallied today as UBS [[ubs]], Switzerland’s largest bank announced a further writedown of $19 billion and that its chairman will resign. It also announced that it would be raising a further $15 billion in capital. This, along with the strong demand for Lehman Brothers’ [[leh]] convertible shares offering, convinced the stock markets that the worst could be over, and that banks will be able to survive the crisis. All of this and a further writedown of $3.9 billion from Deutsche Bank [[db]], pushed the S&P 500 (^GSPC) to have its best first day of the 2nd quarter since 1938.

What a day like today shows is that what might otherwise seem like bad news can be interpreted as good news under certain market conditions. Imagine what would have happened to UBS stocks a year ago if they would have made an announcement of a similar writedown, but today writedowns seem to be the order of the day and investors are looking to get them out of the way so that banks can continue “business as usual”.

Investors might want to ask themselves though if that might be a little over optimistic, or if the economy will recover as soon as they would like it to. A particular case in point is the statement from Deutsche Bank saying their writedown is due to worsening market conditions. So at least for them, the market isn’t improving as they would have hoped.

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