Thursday, October 9, 2008

The Financial Crisis Welcomes The World!

Another Day, Another Move To Save The Financial System

Today we got the news that many in the markets have been waiting for. They have been waiting for what seems to be a very long time. That was the coordinated global rate cut by the central banks of the US, Canada, EU, England as well as a few other countries. EU rates have been to high and still remain that way even post cut.

As I discussed yesterday morning, we had an immediate strong move up in the stock futures, a quick and severe fade and several other moves all before the market opened. After that it was schizophrenic trading all day until the stock market indicators finally finished in the red for the nth day in a row. The end of the day move lower seemed to coincide with a speech being given by Bernanke.

As far as indicators of stock market volatility and fear go, the VIX ended at over 57, which is historically an extremely high number.

Post cut, the TED Spread also remained at an extremely high historical number of 3.75, ending the day at 3.57.

What is the message of the markets?

As is always the case with markets that are free to trade, they will tell you the truth about what participants are thinking. This is somewhat different than listening to the rhetoric of actual people involved in this process. What does the action from Wednesday tell us? That up to this point, the steps that have been taken by the governments around the world are either to insufficient or to undefined to be making much of a difference.

The Fed, the inflation fighter of last resort, has now thrown in the towel on that mandate and is now instead focusing on the fact that our economy is on the edge of something that could potentially be very bad. While it is a good thing that they recognize this, the fact that they finally recognize this gives me some ammunition to be very concerned. The fact that the EU, never a willing participant got involved in this coordinated cut is also an indicator of where we are.

The action in the stock market is also making it clear that, officials and many market "experts" not withstanding, we are in a recession and one that may not be mild. Despite the trillion plus dollars that are now dedicated to this problem, we are not seeing much respite. At least not yet.

What Bullets Remain In The Gun?

An old market cliche' is that you want to keep some of your powder dry, so that when you need to make a move you will be able to. The Fed, at a new Fed Funds rate of 1.5% still has room to move lower, and the EU, which has stubbornly refused to lower rates until today, still has plenty of room to move as well.

It is now obvious to all but a few that jawboning and token responses that have worked in the past will not work this time, and that these guys better get it right, and get it right very soon. This is no time for trial and error, but it is a time to bring all guns to bear.

What Lies Ahead For The Mortgage Market? (MarketWatch Databased News - September 28, 2008)

"On Sunday, U.S. policy makers said they'd reached accord on a financial-market bailout but needed to put it on paper before declaring it final.

No matter what its ultimate shape, the final bill isn't expected to turn the economy around -- plenty of economists see more economic sluggishness and job losses ahead even with a rescue plan in place -- but the credit freeze constricting the financial markets will likely start to thaw, helping more U.S. companies tap the funds they need.

That, in turn, will help prevent a major increase in job layoffs, experts said.

The housing market is another story. "We have a collapsing housing bubble," said Dean Baker, co-director of the Center for Economic and Policy Research. "This bailout won't do anything, as best I can tell, about the collapsing housing bubble, nor should it. The bubble has to collapse."
Meanwhile, the rescue plan may lead to a slight increase in credit available for consumers seeking auto loans, mortgages and credit cards. "There may be some improvement in [credit] availability in the sense that banks might be a little more willing to take risks with people that don't have perfect credit histories," Baker said."

Some good news: IBM pre-announced a positive surprise after the close, and it was announced that PIMCO, the extremely well regarded fixed income manager (led by fixed income superstar Bill Gross) will lead the Treasury foray into the commercial paper market.

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