Should I Buy / Sell Shares in Northern Rock

Today saw share prices in Northern Rock fall by another 33%.
There was another record withdrawal of saving funds by nervous investors.
This withdrawal occured despite the Bank of England promising to underwrite all savings.
This guarantee from the Bank of England is 100% watertight. There is no reason why they would want to let a major UK bank go under.
Furthermore, the Bank of England promised that there emergency borrowing would be extended should Northern Rock be taken over by another bank.

Despite the high street panic the fundamentals of Northern Rock are not altogether bad. Most mortgages are pretty secure. With interest rates likely to be peaking either now or at 6% UK mortgage defaults are unlikely to increase significantly.
Northern Rock has very little exposure to the bad debts US sub prime mortgage sector. There difficulties only stem from the fact that financial institutions are much less willing to buy the bundles of mortgage lending. However, primarily the problem is one of short term cash flow problems, and not fundamental weaknesses in the business.

However, having said that the damage to the reputation of the bank will not be possible to reverse.

The most likely scenario now is that Northern Rock will get taken over by another bank. This means they can take on their mortgages and get rid of the label "Northern Rock"

Should this occur the shares start to look an attractive flutter, especially if they were to fall further this week.

What do you think? Is is worth buying shares in Northern Rock now?

• Northern Rock and the impact on the Economy
• Why is Northern rock facing problems
  

Stock Markets Lose Apetitie for Risk

This has been one of the worst weeks for the Dow Jones for 4 years - the stock market fell 4.2% this week. In particular brokers are becoming more wary of buying risky assets.. In part this stems from worries over the US housing market's sub prime market. This is basically lending mortgages to people with bad credit histories. These kinds of loans are more risky, but in the past house prices rose rapidly in the US. Now that house prices in the US are falling, there are increasing concerns that this kind of mortgage lending is too risky. Therefore the risk premium of insuring such mortgages has increased significantly.

Some brokers fear the worst for the stock markets is over. But the big question is whether falling house prices could tip the US economy into recession.

Effects of a falling stock market on US economy

Stock Market and the Housing Market

The US has recently experienced significant falls in the value of shares. After 12 months of solid growth in share prices. Suddenly US investors are realising the economy faces underlying weakness.

Part of the sell off came from even bigger falls in China. With the US economy increasingly dependent on Chinese capital flows a fall in the Shanghai index causes a knock effect on American investors. The problem is that America's huge current account deficit is being financed by mainly Chinese investors buying up US Securites. At the moment China is willing to keep up the purchase of US assets at cheap rates. This enables US interest rates to remain low. However if the Chinese were to stop buying US debt there would need to be a significant devaluation in the dollar and / or higher US interest rates.

However weakness on the Chinese stock market is not the only reason for Worries in the US. THe US housing market is very weak at the moment. Home building has slumped and house prices are starting to fall. Furthermore there are worries about the lending of bad debt to people with poor credit histories. Because of the weakness of both the US housing Market and US stock market there is a growing fear that the US may be entering into a period of recession by the end of the year.

Alan Greenspan says the threat of recession is now a "possibility"

"By the end of the year, there is the possibility but not the probability of the US moving into recession." He has argued this week that corporate profit margins appear to be narrowing, indicating that a recent economic expansion has reached a "mature phase".

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Events in US and the rest of the world could also feed through into the UK housing market and economy.