Monday’s Market Recap: Stocks Give Up Gains After 4 Days Of Rally

The markets started off the session in full throttle, but by the time the closing bell sounded they had given back their gains.  The Dow Jones Industrial Average (^DJI) closed at 7,216.97, down -0.10% while the Nasdaq (^IXIC) and S&P 500 (^GSPC) closed down -1.92% and -0.35% respectively to levels of 1,404.02 and 753.89.

The market’s initial rally was formed in the banking sector after remarks from Federal Reserve Chairman Ben Bernanke on ‘60 Minutes’ last night that no large banks would go insolvent, although they may be dismantled in a controlled fashion.  Many investors took his comments as a sign that Citigroup (C) and Bank of America (BAC) may be in better shape than previously thought, especially after comments regarding the firms’ respective profitability last week from CEOs Vikram Pandit and Ken Lewis.

The major news today was related to the bailout of American International Group (AIG).  While no new funds were given to the hybrid insurance giant, the company did disclose who was on the other end of many of the credit default swap contracts in which they were losing money.  Traders are already beginning to call this the “Backdoor Bailout” as approximately $105B in lent government funds immediately left AIG upon arrival to pay counterparties, mostly other domestic financial institutions.

According to the most recent reports, Goldman Sachs (GS) received approximately $12.9B of these funds, while Bank of America, Citigroup, and Merrill Lynch also received vast sums of money.  Some are saying this bailout is actually killing two birds with one stone, but there are many criticisms.  Some nationalists within the United States are complaining the the foreign firms that were counter parties of AIG are indirectly receiving a bailout from the United States government while others are arguing that former Treasury Secretary, Henry “Hank” Paulson, only bailed out AIG because of his close ties with his former employer, Goldman Sachs, who coincidentally stood to benefit the most from this AIG bailout.  Bernanke stated last night on ‘60 Minutes’ that not bailing out AIG could have caused a worldwide financial meltdown that would have been irreversible.

The Organization of Petroleum Exporting Countries (OPEC) announced today that they would keep their targeted production quota steady until their next meeting, and oil prices somewhat unexpectedly rallied on the news.  Oil closed up $1.10 to $47.35.  Some of this gain can be attributed to the decline in the United States Dollar versus the basket of the other world currencies.

President Barack Obama and current Treasury Secretary Timothy Geithner announced a new program today aimed at assisting small businesses with more affordable loan terms.  Obama noted that roughly 70% of new job creation comes from small business and stated that his new program aims to increase liquidity in the secondary markets by roughly $15B dollars, while mandating that the 21 largest United States banks report monthly their lending numbers concerning small business loans.

Disclosure: The fund the author manages is long GS.

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