Daily Market Commentary for August 17, 2012
U.S. Transportation Secretary Ray LaHood said Friday that nearly $470 million in unspent 'earmarked' funds will be released to help states pay for transportation projects. (read more at Millennium-Traders.Com) http://www.millennium-traders.com/news/newscommentary.aspx
The University of Michigan-Thomson Reuters consumer-sentiment index released on Friday shows a preliminary rise in August reading of 73.6 from a final July reading of 72.3. The sentiment gauge covers how consumers view their personal finances as well as business and buying conditions and averaged about 87 in the year before the recession.
The Conference Board reported on Friday, that slow growth in the U.S. economy looks set to continue, as it reported that its leading economic index grew 0.4% in July. The index reportedly fell 0.4% in June and rose 0.3% in May, with both months a tenth of a percentage point worse than previously reported. The leading economic index consists of 10 components that together are designed to show turning points in the economy. Led by weekly jobless claims and building permits, seven of the ten indicators increased in July.
The U.S. Treasury Department announced on Friday a set of steps to expedite the winding-down of government-controlled housing giants Fannie Mae (FNMA) and Freddie Mac (FMCC). The move includes a measure that would require that their massive mortgage portfolios be wound down at an annual rate of 15% whereas they were previously required to be wound down by 10% a year. The Treasury said that the change will allow Fannie and Freddie to have its investment portfolios cut back to $250 billion four years earlier than previously scheduled.
Profits by lead underwriter Morgan Stanley (MS), for initial public offering of Facebook (FB) were distributed this week from a pool of about $100 million. A standard procedure in IPOs, Morgan Stanley made the money through a process known as stabilization. Stabilization works this way: If investors are selling the stock after the IPO launches, pushing the price lower, bankers can step in and buy shares at the IPO price in an attempt to keep it from falling below its issue price - serving to cover their short positions as well. If a short position remains on their books and the stock keeps falling, which was the case with Facebook, the underwriters can continue to cover their short positions by buying back shares at prices below the IPO price, netting a profit. If the stock only trades higher, the short position is covered when banks exercise what is known as an 'overallotment option' which consists of buying more shares from the newly public company at the IPO price. There is no risk to the banks - they don't lose any money - and the new public company makes more money when the overallotment is exercised. The amount issued to each underwriter was calculated based on their participation in the IPO with Morgan Stanley receiving the largest piece of the multi-million dollar pie. Underwriters are allowed to sell about 15% more shares of an IPO, than the total deal size to investors the night before a stock begins trading. The move creates a short position of shares sold that the banks does not actually own, and it can remain on the bankers' books for 30 days. The short position is created to allow underwriters to stabilize the stock in its early days of trading. After the opening day, Facebook began to drop allowing the bankers to move in and cover their short positions - at a profit. Due to the size of the IPO for Facebook - $16 billion that sold 421 million shares - bankers' additional short positions totaled nearly 63 million shares and allowed such a large profit potential.
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