Daily Market Reports | Nov 26 2008
By Greg Peel
The Dow closed up 36 points or 0.4% while the S&P added 0.7% and the Nasdaq lost 0.5%.
Wall Street opened on a positive note, jumping up about 150 points on the announcement of yet another government initiative. Thereafter it drifted back into the red, bounced around a lot, and shot up towards the three o’clock mark. The sellers moved in, of course, but the buyers fought back. In the end it was called a draw. One would have expected profit-taking after two solid days of rally, but the good news provided a balance.
Just when you thought there could not possibly any more the US Treasury and Fed could do to backstop the US financial markets, it appears there is. Last night the TARP – Troubled Asset Relief Program – gave birth to a TALF – Term Asset-Backed Loan Facility. Even if Charles Darwin were alive to witness the TARP’s evolution from its conception, he would be astounded.
The TALF basically represents another step down the credit market tree. It will be used to insure small commercial loans such as auto loans, student loans, credit cards and small business loans. In the latter half of 2008 the credit crisis has moved from the Big End of securitised assets and default swaps to the Little End of the real world economy, just as many a wise analyst had suggested it would. Since March the Fed and the Treasury have been throwing money at the banking sector, through swap facilities, direct debt purchases and bank equity injections, all with one purpose in mind – to encourage banks to begin lending to each other again, which would in turn filter money through to corporate loans, commercial loans and mortgages.
It hasn’t worked.
The Fed and Treasury have led all the horses to a vast sea of water and still they will not drink. They will not drink because they are entirely focused on protecting and dealing with their own balance sheets before they can even dream of increasing the size of those balance sheets with new risk, no matter what Fed guarantees lay behind. Just look at Citi. It has been quietly imploding for twelve months with a new CEO in charge of trying to prevent exactly that. He has failed. Any other bank in better shape – such as new “biggest” bank Wells Fargo – can be understandably forgiven for not risking loans to the Citis of the world. Play it safe – lend to no one. Every man for himself.
So the trillion-odd dollars thrown at the financial sector to date (who cares about the numbers anymore, they mean little) have gone towards attempts to prevent failure rather than any attempt to “trade one’s way out” of failure. This must be a significant source of frustration for one Henry Paulson who will be eagerly crossing off his calendar as January 20 approaches. And what it has meant is that the government money has not found its way down to the little folk – the folk who actually drive the economy. And so, TALF was born.
The TALF effectively turns the Fed into a hedge fund. The TARP will give the Fed US$20bn which it will then leverage ten times to provide US$200bn in commercial loan insurance. The hope is that this facility will result in interest rates on those auto loans, credit cards etc coming down to manageable levels. That’s yet another US$200bn created out of thin air.
But wait – there’s more.
The US government may have all but nationalised the government-sponsored entities of Fannie Mae and Freddie Mac back in July, but there has been no respite for mortgage rates either. Not even with the Fed funds rate falling to 1%. (Remember, Australian mortgages are priced off the RBA cash rate but US mortgages are priced off the 30-year bond rate). So last night the Fed announced it would expand its balance sheet by another US$600bn for the purpose of buying government-sponsored mortgages.
US$600bn? Where the hell is that going to come from?
From the printing press of course. Last month the US CPI was negative. Not lesser growth – actually negative, for the first time ever (since being measured). That means deflation and deflation means fire up Friedman’s helicopter and start throwing dollar bills to the masses. Inflation generated by rapid expansion of the money supply will be countered by asset deflation, so go for it. (At least until you get hyperinflation down the track, but let’s not go there.)
The US$600bn will be split into a parcel of US$100bn to be used to by mortgages directly via auction, and the other US$500bn to buy – wait for it – mortgage-backed securities. Yes – securitisation is back. But this is for sponsored mortgages only, prime all the way.
So now the government owns Fannie and Freddie and the Fed is providing the funds. As good as nationalised.
The market response to this new facility was an immediate 50 basis point fall in the mortgage rate, from 6.0% to 5.5% – a record in one day’s trade. This is clearly the intention.
Lost in the wash amongst the announcements last night was the latest update on the third quarter GDP estimate. Economists have been assuming a fall of 0.3% but the new figure showed a fall of 0.5%. Oh that’s right, we’re heading for recession.
The result was another big fall in the US dollar, driven particularly by a big rally in the pound. Across the pond Gordon Brown had announced his government’s new budget plans on Monday, and despite the stimulus package sending the UK into deep, deep, deficit the market has loved it. The FTSE was up a record 10% on Monday and was still slightly positive last night. The pound has absolutely soared over two sessions, from GBP1.47 to the dollar to GBP1.54. The euro has followed in the wake. It is now the US that is coming back to the pack. The US dollar index has fallen three cents from Friday and is looking decidedly vulnerable.
That should be great news for commodity markets, but it wasn’t. The US dollar was weak because the GDP was weak, and a weak economy means less demand. Thus oil followed its 9% rally on Monday with a 7% fall last night to US$50.77/bbl – down US$3.73.
Gold took a breather, falling US$3.40 to US$819.70/oz. The Aussie was steady at US$0.6514.
Base metals in London also retreated on the GDP news following a couple of strong sessions. Everything bar aluminium fell 1-2%.
The SPI Overnight was rather enthusiastic despite yesterday’s big 6% surge. It added another 81 points or 2%.
There is a popular game on Wall Street now, and it’s called “we have seen the bottom”. Bottom-pickers can, of course, shout this out to the world from the lofty heights of the pile of corpses of their predecessors. However, the measure being most spoken of involves individual 52-week lows in S&P 500 stocks.
The low in October saw about 400 of the 500 S&P stocks register new 52-week lows. The low in November was lower, but saw only 300 of the 500 mark new 52-week lows. This, apparently, is a historically-supported sign that a bottom is now in place.
Either way, a Christmas rally is what many expect. The odds are beginning to stack in favour.
