Rate Cut And British Bank Bail Out

We have a global rate cut.  Stocks rallied briefly but at this moment (call it High Noon) the Dow is down 178 and the S&P 500 is down 20 (call it 2% for each).  My Bold Prediction yesterday was that a rate cut would not help - there are plenty of borrowers at current rates but a dearth of lenders, as banks and money market funds focus on preserving their liquidity.  That said, one might argue that the opportunity cost of not lending at the rate borrowers were paying yesterday has now risen, which should spur new lending. 

The Brits announced a bail out plan for their banks which includes $87 billion for direct equity investments in preferred shares of eight big banks (only the strong survive).

In the US Treasury rates are actually moving up, which is encouraging - the hope is that investors, including banks, will sell Treasuries and buy anything else, like commercial paper.  That said, per Bloomberg the selling is in two year notes and longer; bills out to one year are showing higher prices/lower yields, which suggests the opposite of increased lender confidence.

Fed reports on excess bank reserves and commercial paper outstanding come out on Thursday.  One indication of a credit market thaw will be a decrease in excess reserves and an increase in CP issuance.

My questions - what news flash would prompt a buyer to decide that now is the time to step in?  If nothing comes to mind, then why will we rally from here?

BONUS QUESTIONS:  General Motors stock is at a level last seen in 1952; Ford is back to its lows from the mid-80's.  Will the Fed and the Treasury allow a headline-grabbing, confidence sapping bankruptcy by one of these once-proud titans of American industry?  I say no way, but my opinion and fifty cents gets you a third of a cup of coffee. 

P.S. - Yes, GM and Ford are due for their share of the $25 billion loan deal passed by Congress but I read somewhere that unless timetables are advanced they won't be getting that money until next summer.

PROGRESSING, GEOMETRICALLY:  Per this chart the Nikkei was at 40,000 in early 1990.  By 2000 it had halved to 20,000 and now, with 2010 in sight, the Nikkei is at 9,940, well positioned to complete another halving.  FWIW, the Nikkei was lower than the Dow back in April-June 2003 (e.g., 4/21 - Nikkei  7699; Dow Jones 8306).

A BIT LATER:  At 1:20, a full eighty minutes later, the Dow is up 32 and the S&P is up 2.  As I was saying, the markets will embrace these rate cuts and move relentlessly upwards from the lows.  But do note - "relentlessly" only covers the next five nanoseconds; after that, you're on your own.

NEXT TO LAST UPDATE:  At 2:00 the Dow has climbed with only modest relent to +98 (we detoured to -50 sometime in the last forty minutes).  The VIX volatility index has set an all-time intra-day high of 59.  Nice to see the bulls at least offering a scuffle today.  Back with more after four.   Closing time Eastern time.  Meanwhile, this guide to why its too late to panic now is encouraging.

CLOSING TIME:  Troubling - the Dow was up about 150 at 3:30 and closed down 189 by 4:00.

Comments

[Pofarmer]

Who's going to borrow into the teeth of this downturn?? Who's going to lend?? My screen has the Dow down 201, up from down 258. This thing has got momentum, I'm not sure I've ever seen a chart drop off so steeply. The govt may very well be along for the ride untill this thing finds a bottom. At one point, I thought a low projection of 7500 was crazy, but, at the rate we are going, we could blow through that.

[glasater]

Wow just Wow!

Germany is not accepting credit cards from the UK!

Heard this on CNBC

[clarice I'm NOT Spartacus]

WOW_-And that's the nail in the EU coffin, isn't it? When the going gets tough, we return to nationalism.

[Steve]

Great site you have!!

Would you like a Link Exchange with our new blog COMMON CENTS were we blog about the issues of the day??

http://www.commoncts.blogspot.com

[glasater]

Yes Clarice--the speed of all of this is breathtaking.

[Ranger]

WOW_-And that's the nail in the EU coffin, isn't it? When the going gets tough, we return to nationalism.

Posted by: clarice I'm NOT Spartacus | October 08, 2008 at 12:27 PM

Absolutely. Every government still has to answer to their national voters.

I'm not sure though how the German's can actually bar credit cards from another member country. Granted, Britain is not technically part of the EMU yet, but they are part of the EU and barring credit from an EU member country would clearly be a violation of the rules against anti-competitive policies. If that is true, then Britain will never join the EMU.

[clarice I'm NOT Spartacus]

The Daily Mail has a big piece on how all the EU countries are scrambling to protect their own countries' financial system--beginning with Ireland. Go to EU Referendum blog..

[Charlie (Colorado)]

Well, last I heard Treasury isn't buying mortgage backed securities yet --- still finding companies to administer them --- and it isn't buying commercial paper yet --- needs to set up administrative procedures --- so why would either of those have any effect yet?

[Ranger]

Well, my understanding is that capitulation is when the conventional wisdom is that there is no way to make money in the market for the forseeable future. I would say that since people are still hoping that something the Fed or the Treasury does is going to save the day, we have not hit capitualtion yet.

When the general consensus becomes 'its all over, there is nothing anyone can do... get the hell out now!!!' is when the money is going to start flowing back into the market.

[Jane Whitman]

If you are not Spartacus, then who is?

[Steven W.]

There needs to a new level of support established for a new bottom to take place. Prior existing levels have now been punctured and there are so many margin calls accumulating + stop losses being triggered that it will take some time for things to settle. Add to that a potential Obama presidency and all the world economy killing taxes + debt raising spending that would entail ... and outlook is not good.

[clarice I'm NOT Spartacus]

Tom Maguire is Spartacus..the rest of us are all plain Janes..

[anon]

Dear Syl-

You don't come here too often but ya I read one of your last messages.

Say the economy is like the social contract-or even better like a divided highway where everyone is expected to want to live, or profit.

Well what if somebody is driving down the wrong side of the highway with a huge semi-truck? Economically speaking-what if profitability isn't the goal?
What if your end is political and reproducing the conditions of something in the past that everyone knows about is your means....

You know you finally give up on shorting something that's too big to short...and you go after something else that's easier and that you happen to know with timing would be very, very vulnerable.

[I am Spartacus]

If you are not Spartacus, then who is?

I am.

[hrtshpdbox]

"I'm not sure I've ever seen a chart drop off so steeply."
The chart of a fertilizer company like Mosaic (sym MOS), down more than 60% in the last two weeks, sure looks a lot worse to me. And that's a good thing (the decline in resource prices), and the ultimate saving grace that helps stop an over-reaction like we're currently having in the market. Margin call liquidation ends eventually, and there will be a "V bottom" one of these days soon; heck, I'll guess it's today. Right now the Dow is down 174, I'll come back and tout myself when it closes higher.

[Tom Maguire]

I am not Spartacus.

Wait, did I blow my line? Am I Spartacus?

I AM Spartacus!

[Pofarmer]

The Fed was showing something called " Asset backed commercial paper money market mutual fund liquidity facility" with a balance of 10880 as of Sep 24th.

[Rick Ballard]

hrtshpdbox,

It's almost as if you're implying that someone must be buying at these prices. How could that be? Who would be so foolish as to buy when prices are this low?

[Tom Maguire]

Well, last I heard Treasury isn't buying mortgage backed securities yet --- still finding companies to administer them --- and it isn't buying commercial paper yet --- needs to set up administrative procedures --- so why would either of those have any effect yet?

If we were talking about stocks I would say that it should have rallied investors expectations.

But lenders? I assume they have a "show me the money" mentality. Until the Treasury and Fed start buying, little is lost by hiding in overnight paper.

My fave scare story - a friend of mine at a money market fund was trying to raise cash the day AIG went bust. He had two week A1+/P1 paper for which there were no bids. Not weak, unacceptable bids - no bids. IN two weeks it was worth par, but on that day it was valueless.

My impression is that even now the CP market is essentially reduced to overnight rolls. Long term, like seven-day, is out of the question.

Well - the new Fed facility will change that when it arrives. And I am currently under the impression that the Fed was allowing money market funds to take assets (like two week CP) to the discount window as any bank can.

OK, here we go - from just after AIG:

The Federal Reserve took another step deep into uncharted territory Friday morning, effectively coming to the rescue of another struggling financial sector — this time the money-market mutual-fund industry. Worried that money market mutual funds weren’t liquid enough to handle a building wave of redemptions from nervous investors, the Fed said it would use its discount window to lend up to $230 billion to the industry — via commercial banks — against illiquid asset backed commercial paper which is widely held by money market funds.

[Amused bystander]

If you are not Spartacus, then who is?

And when did he know it?

[Pofarmer]

Can we have a Global Market/currency/liquidity/equity/market crash???

Stay tuned.

News at 11:00.

[hrtshpdbox]

"Who would be so foolish as to buy when prices are this low?"

LOL. I just bought some Coca Cola at under 48 dollars; getting paid a 3+ % dividend to wait for this "defensive" stock to recover won't be too difficult.

[JayC]

Some guy on CNBC pointed out last night that at this rate we're less than a month away from the Dow going to 0.

But he also pointed out that if the Dow did go to 0 it would be a GREAT buying opportunity

[Pofarmer]

Good read on the current crisis from SEPTEMBER 07 and why the Fed probably can't stop it.

LUN.

[Charlie (Colorado)]

Any time someone is talking about the Dow at 0 is a buying opportunity.

In the mean time, it looks like the market gapped down 200, and has bounced off that twice. If I were a trader, I'd trade on the bet that the market will close up.

[Charlie (Colorado)]

Uh, Po, he's predicting that credit would crash around September 21. Of 2007.

Looking back, he's been predicting the market would tank for about as long as that web site has been up.

The only way he could be wrong is if the market never, never ever, went down sharply.

[Ranger]

"Who would be so foolish as to buy when prices are this low?"

Posted by: hrtshpdbox | October 08, 2008 at 01:25 PM

I think this statement sumarizes my understanding of what capitulation looks like.

[Pofarmer]

Ah, missed that last little bit.

That time frame is about the "injections of liquidity" that I was thinking of the other day. I wonder if they are going to be able to hold it together this time?

[Pofarmer]

There is a gap on the chart on Monday. The market will want to close that gap. After that point, it's anybodies guess.

[Rick Ballard]

Ranger,

I sure wish that Typhus pad had sarcasm HTML tags.

I'm not sure that classical capitulation can occur in the sense that 90% of hrtshpdbox's clients call him at 10AM and scream "Get me the hell out - I don't care what it costs.". There is simply too much money in mutual funds where the buy/sell decision is based upon ending NAV. I think we've been seeing a 'rolling' capitulation in the past five days based upon people with mutual fund accounts making their transfer decisions in the last hour of trading - forcing mutual fund managers to sell when they might otherwise prefer to hold or buy.

Or something else.

[Rick Ballard]

Why AP is pure crap

Look at the chart on the upper right and consider how the story might have been written.

Pending Home Sales for August '08 Increase 20% Over August '07 Levels

Pending Home Sales for August '08 Increase 25% Over Year Low

The upward revision in the July number and the nice increase in August reflect very decent inventory clearance in the housing market. Now, after distressed inventory has cleared, what happens next?

[Charlie (Colorado)]

Man, with Cramer saying "get out of the market for he next five years" and some loon saying "Down to zero", it's hard to think of how many more capitulatory signs you could get. Credit rates are looking better --- all the longer term stuff is showing higher yields, and now overnights are paying 4+ pct, less than 30 years, and they've got Fed backing now.

Greed will cut in real soon.

[clarice I'm NOT Spartacus]

What is Cramer's background again?

[Jim Ryan]

Cramer made a fortune as a hedge fund manager. I used to listen to his radio show. It helped me turn $10K into $14K in a year. He's good a picking stocks and his book on it is good.

But the other stuff he says - about what the Fed should do, what the macroeconomic situation is, and how great a guy Elliot Spitzer is, etc. - seem less reliable and rather more hysterical.

[Charlie (Colorado)]

The thing is that he's got a stock-picking show on CNBC that has a *lot* of followers. Just his panic might have accounted for a couple hundred points.

[Rick Ballard]

Charlie,

Common sense might kick in as well. The cut in consumer credit use in August coupled with home sales coming off the bottom by 12.5% plus the fact that total income did manage to increase by over 3% in September (based upon FICA numbers) suggest that this is a rather odd 'recession'. Increased income, increased saving and increased bargain buying aren't signs of economic collapse.

[Gmax]

Cramer, the guy who was homeless and sleeping in his car for awhile?

He called bottom on the market at 11500 too, and probably will not remind you of that fact. Every day is a new day with Cramer, and he rarely publicly acknowledges his misses. Oh he is big on a wall of shame for CEOs who miss estimates, just not so much for JC.

[Charlie (Colorado)]

Common sense might kick in as well.

"Common sense" == greed.

IIn other news, T bill yields are up (equivalently, people are selling T's to do something else with the money), commercial credit offers are up (more people want to rent money) and all indications are that LIBOR will be down.

Which indicates the credit freeze is thawing.

Also, someone at Treasury wants to set up a market and clearinghouse for CDSs.

[Charlie (Colorado)]

Oh he is big on a wall of shame for CEOs who miss estimates, just not so much for JC.

To be fair, I've seen him apologizing abjectly for that.

[Charlie (Colorado)]

NOvember crude below $90, and November unleaded is $2,03.

[Charlie (Colorado)]

okay, here's another prediction: Dow > 10K by close Friday. It may even close about 10K by Friday's close.

[Jim Ryan]

I've seen him apologizing abjectly

And dazed about Spitzer when he was outed. It's the wild swings from vindictive yelling at Greenspan, to screaming chicken little, to mortified hat-in-hand that indicate unreason. He should just stick with what he's smart about, areas in which he can stay calm, like picking stocks.

[Tom Maguire]

IIn other news, T bill yields are up (equivalently, people are selling T's to do something else with the money), commercial credit offers are up (more people want to rent money) and all indications are that LIBOR will be down.

Which indicates the credit freeze is thawing.

You've got me on this one, Charlie - per my trusty NY Times the 3m T-bill close on Tuesday was at a 0.81 yield at the Bloomberg right now is at 0.65, which is headed the wrong way.

However, yields on 2 to 30 year Treasuries are *up*, which is good. And some day we will welcome a steeper yield curve as an easy way for banks to make some money and rebuild their balance sheets.

But I really want to see a sell-off in bills, not notes. One might even argue that the current action indicates people are selling notes to buy bills, which would indicate even greater fear. Ahhhh!

Hmm. That said, what would a foreign bank (or foreign central bank) be doing now? Maybe sell notes buy bills makes sense for them collectively. Or maybe the opposite - helpful, huh?

[Charlie (Colorado)]

Sorry, I was insufficiently precise; I was looking at 2/10/30, and using what I heard someone on CNBC about credit offers being up.

[Charlie (Colorado)]

Let's say you've got some money to stash for a few days. If I've got it right that the commercial paper purchase program isn't running yet, but will be soon, and I'm kind of risk averse, I'd be tempted to wait a few days; where would I put the money? Real short term T-stuff.

[LindaK]

Here's another possible capitulation indicator: cab drivers in affluent Westchester County (NY) congratulating themselves on their shorting profits.

[sophy]

I will thank for my friends bringing me in this world. I am not regret to buy Hellgate Palladium .