TSX has second worst day in a year

I told you it looked ugly!

The TSX Composite Index shed 487 points today, closing at 12,147. This represents a drop of 3.86%, which is the second worst drop that the market has had since today last year. The only drop bigger than that in the last year was on January 21, 2008, when the market dropped just over 600 points. It is hovering extremely close to its 52 week low as well, which conveniently also fell on that nasty January 21st date, at 12,132.

Since August 28, only several days ago, the index has slid 11.66%, or 1,603 points. Even uglier is the 3 month figure. Since June 9, 2008, it has lost 2,814 points, over 18%! As I mentioned before, this market has been up and down, and volatility is the name of the game.

It is obvious by looking at the sectors of the TSX Composite that the resources sector is leading this downward spiral. Today alone the S&P/TSX Capped Gold sector index was down 9.5%, as were Materials at 8.2% and the S&P/TSX Capped Energy index, down 6.5%.

Not helping us Canadians very much are some major developments that happened yesterday and today in the United States. Firstly, the government announced a bailout of Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM). . Both of these companies are the major players in the US mortgage markets. Each company has seen their shares prices free fall as investors jump ship in anticipation of the takeover. Without going into detail, they provide liquidity to the secondary mortgage market by buying mortgages off banks and bundling them for sale to investors. This allows the banks to lend more as they get cash for their mortgages. For more idea on the basics of it, read my last post. While this news comes as a relief to some, it reinforces my assertion below that the US sub-prime mortgage crisis is not over, and won't be going away anytime soon. It is important to stay on top of this story, and I will try to do that for you and summarize it here as it unfolds!!

Other major news (well, events) in the states is that shares of Lehman Brothers (NYSE: LEH), one of New York's most well known investment banks, got hammered today and dropped 44.95% to close at $7.79. Investors fear that the company is on the verge of default, as options for raising capital are becoming further and further beyond reach. What does that mean?

In simple terms, there are only three ways a Company can raise capital using the market:

1.) Sell equity, like common shares, to the public and receive cash. Today's free fall plunge is proof investors are not too keen on buying their shares, so that really doesn't appear to be a viable option... especially at the abysmal price of $7.79.

2.) Sell debt, like bonds or other fixed income product, with the promise of a stream of interest payments on the debt. For a distressed Company like Lehman, this might not be an option as their obligations related to mortgage debts keep mounting, which is what is ruining them in the first place. Adding more liability to the equation when your capital ratios are all out of whack is not likely and potentially not possible.

3.) Third, and more plausible, is that the company could sell off assets to convert them into cash. There have been rumors that they were looking to sell a major branch to Korea's Business Development Bank. Apparently that rumor appears to be more and more unlikely.

So, these 3 options might not occur and Lehman will likely continue its death spiral tomorrow. What we saw happen with Bear Stearns when it collapsed in March '08 under similar circumstances was a larger player, J.P Morgan Chase, come in and buy the entire company as the distressed price of $10.00 / share.

As I write this, a financial news alert just popped up that after the market closed (which was three hours ago) Lehman announced it would announce some "key initiatives" tomorrow morning to address this capital-raising issue.

All in all, a pretty crazy day. Stay tuned to see what happens with Lehman!

PS - In the meantime, keep your cash away from the market still. It doesn't appear to be getting any better!