The last week of February could bring good news to the ailing stock market especially after the late rally that occurred when it was reported that Ambac Financial, the bond insurer, was close to an agreement with banks. The completion of this deal would offer the credit and banking markets some much needed relief and the stock market would likely rebound somewhat. The deal could be completed as early as the last week of February.
This session has seen stocks in the negative for the majority of the time and the news of the possible deal sent stocks on a positive run that will hopefully continue once the deal is made. If the deal falls through, however, stocks will likely go plunging yet again.
Ambac's triple A credit ratings were threatened as a direct result of their involvement in the precarious mortgage bond business. This exposure resulted in many banks writing down the company's holdings and the reduced value is having its affect on the stock market.
Most financial stocks had been in a downward spiral especially after the two biggest US home financing companies, Freddie Mac and Fannie May, were recommended as a sell by Merrill Lynch and Company. This recommendation was in anticipation of the financial market deteriorating even further in the very near future.
The news of the bailout caused financial shares to change directions and the losses were replaced by gains at closing.
Not surprisingly, the Ambac shares were up by 16 percent in light of the potential deal. Shares for Fannie Mae and Freddie Mac were still down, but moving back to the positive side of things. The stock market has been suffering significantly since the fall when the fallout from the sub prime mortgage mess really hit the fan. Since then there has been great hope of some relief and a turnaround but nothing of that nature was seen until the potential Ambac deal this week.
What Should Investors Do:
Investors are likely relieved at the turn of the market but should proceed with caution. Even if the Ambac deal goes through, and it is not certain it will as of yet, that does not mean the stock market will rebound significantly and show significant gains. What it does mean is that there may be some relief and recovery in the near future, but this does not mean investors should start taking big chances on the stock market.
It is still highly recommended to proceed with caution and care until there is a better understanding of how the market will react to the Ambac bailout, should it occur. Investors are anxious to get back into the swing of things and begin trading a little more liberally. However, for the moment anyway, it is not recommended to engage in any kind of liberal trades thanks to the volatile stock market.
The good news for investors is that the market will rebound. It always does regardless of bad deals, recessions, and/or bailouts. In time, the market always recovers and investors will just need to sit back and wait for the market to start looking a little better. Whether a major rebound will occur or not with the potential Ambac deal is anyones guess. But, it does look good so investors should position themselves for this possibility to take advantage of the positive gains.
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