Now THAT was a wild wild week -- the cherry on the cake of what's been a truly wild summer. The Fed's emergency Discount Rate Cut from 6.25% to 5.75% was more symbolic than anything, and it restored if not liquidity than certainly some investor confidence. It also may be signaling a rate cut at the September FOMC meeting.
It turns out Fed Chairman Ben Bernanke is a bit of a closet technician. Why? Rumors of this action helped turn around the 340 point sell off Thursday -- when the Dow was off 1500 points in less than 30 days, and the S&P500 had traded down to its 200 day moving average. Intra-day, the SPX touched the 12% mark for the correction, and the Dow Industrials hit a minus 11% from its July 19th peak. (I do not believe either index actually closed past the 10% threshold).
Let's review the week by the numbers: Not a lot of green-on-the-screen -- US Treasuries were up 0.8%, with Crue oil close behind ay 0.7%. REITs managed to eke out a 0.4% lift. and the dollar, off more than 3% for the past year, tacked on a 0.4% gain.
The losers? Well, pretty much everything else: The Russell 2000 slid 0.3%; the S&P500 lost half a percent for the week, even after a 2.5% jump on Friday (Barron's noted this was the biggest one day jump since April 2003. US Corp Junk bonds gave up 0.5%, and the Dow Industrials lost 1.2%. The tech laden Nasdaq gave up 1.6%.
Even bigger losses were found overseas. That's no surprise, as most of those bourses had risen much higher than US markets over the past few years. European stocks lost 0.8%, Global stocks got shellacked for 2.9%, while emerging markets plummeted 8.2% on the week.
Barron's Trader column asked:
"JUST HOW DURABLE IS THIS BOUNCE, and has the market turned the corner? Traders looking for signs of a buyable panic point certainly saw evidence of anxiety. A whopping 1,106 stocks skidded to fresh 52-week lows on Thursday. The flight toward the safety of bonds sent the 10-year Treasury's yield plummeting 11.7% on Wednesday alone, only the sixth time ever that the yield has fallen more than 10% in a day, note researchers at Bespoke Investment Group.
But while the selloff has thinned the ranks of New York Stock Exchange stocks still holding above their 200-day moving averages, to just about 30% by Thursday, that figure had been lower before (and the anxiety it denotes more acute). That percentage had fallen to 15% before the stock market bottomed in 1998 and to 16% in 2002 -- a hint "there was still room on the downside before a major oversold reading is recorded," suggests Natexis Bleichroeder's John Roque."
Lots of ground to cover today, and we got a late start. Let's getr clicking!
INVESTING & TRADING
• Jim Cramer and Doug Kass debate the end results of the Fed action at the WSJ's Marketbeat: Saving the Market, or Postponing Doom?
• The escape of the enablers: When Wall Street fails, it inevitably asks for a handout. Wall Street loves to talk about letting financial markets weed out the weak. But when the Street itself gets in trouble, it sticks out its little tin cup, asking for help. And gets it.
The subprime-mortgage-market meltdown is a classic example of the way small fry get devoured, but the whales of Wall Street get rescued. Here's the deal: People with crummy credit who took out mortgages are being allowed to fail in record numbers. The mortgage companies that made those loans are being allowed to fail. The Street itself? It's bailout city. Even before the Fed made a symbolic half-point cut in the discount rate, it and other central banks from Switzerland to Singapore were trying to rescue the Street by injecting hundreds of billions of dollars into the financial markets and announcing they will put up more, if needed. (Fortune)
• Wall Street Mill Churns Out Bad Wurst: A homeowner in Irvine, California, defaults on her mortgage; two Bear Stearns hedge funds implode. French banking giant BNP Paribas halts withdrawals from three of its investment funds; the world's central banks have to inject hundreds of billions of dollars into the money markets over a two-day period to keep interbank lending rates from soaring. Unrelated events? Hardly. What was once touted as a problem with a niche product (subprime loans) in a small sector of the U.S. economy (residential real estate) is somehow strewing its detritus across the globe. (Bloomberg)
• Fear makes a welcome return: “At particular times a great deal of stupid people have a great deal of stupid money. . . At intervals. . . the money of these people – the blind capital, as we call it, of the country – is particularly large and craving; it seeks for someone to devour it, and there is a ‘plethora’; it finds someone, and there is ‘speculation’; it is devoured, and there is ‘panic’.” --Walter Bagehot. (FT)
• Yen Carry Trade Unraveling Faster: It is official. The much-celebrated global carry trade, revolving around the low cost of borrowing in yen (at interest rates barely above zero), is coming unwound in response to the global credit crisis. The money wheel is spinning in reverse, as the rise in the low-yielding yen is accompanied by sudden falls in various regional high-yielding currencies: the New Zealand dollar, the Australian dollar and, to a lesser degree, the Korean won. (Forbes)
• "Leverage is wonderful when asset prices are rising. It is a bear when asset prices start to retreat. It creates a vicious cycle. Both the sinners and the sacred get got in the undertow."Paul Kasriel on Leverage -
• Wonder who lost the most money, reputation or power this month? Read Bonfire of the vanities: the fortunes and reputations that have gone up in smoke
• How a hedge fund star lost it all: His loss of $1.6 billion of investors' money is the biggest hedge fund collapse this year. Much of it occurred during a few frantic days in July, when a meltdown in the subprime mortgage market triggered a shock wave that caused the values of many debt securities, like those held by Sowood, to drop sharply. Larson suddenly did not have enough money to repay his lenders, and he was forced to dissolve the fund. He sold off the remnants and closed Sowood on July 30. (The Boston Globe)
• How To Speak Hedgie Amusing commentary from Slate
Lots of Fed action this week, and commentary also:
• Fed Offers Banks Loans Amid Crisis: The Federal Reserve took highly unusual steps Friday to open up the supply of cash to the nation's banks and signaled a willingness to cut interest rates if necessary, at a time when some of the safest financial markets are seizing up and threatening the broader economic outlook.
• More on the Fed’s Discount Window Action: Real Time Economics explains: In making it easier for banks to borrow from the its “discount window” the Fed is exploiting a little-used central bank tool to calm markets, though one with limitations in the current crisis. The Fed’s primary means of managing interest rates and the supply of credit is through open market operations. If it wants to increase the supply of credit and nudge interest rates down, it buys securities, either permanently or temporarily. The money the Fed uses to purchase the securities are eventually deposited in the banking system and gets lent out.
The discount window is a means for the Fed to lend directly to banks. Historically, though, it hasn’t been used much. It was normally below the fed funds rate and thus, to discourage banks from borrowing at the discount window and lending it out at a profit in the fed funds market, the Fed required a bank to prove it had exhausted all other sources of funds first. Discount loans came to be seen, then, as the last resort of a bank in distress and were thus avoided if at all possible. (An important exception: discount loans shot to $46 billion after the Sept. 11, 2001 terrorist attacks disrupted the money market) See also Markets Crisis Tests Resolve Of Fed, Officials
• Bernanke's Rate Cut Restores Volcker Tradition: August 17, 2007, marks the return of traditional central banking at the U.S. Federal Reserve under Chairman Ben Bernanke. By cutting the discount rate -- and not the overnight federal-funds rate target -- the Fed has gone back to the classic function for which central banks are created: to act as lender of last resort to troubled lenders who cannot obtain funding in the market. (Barron's)
• Moral Hazard on Wall Street and Main Street: The Federal Reserve took additional steps earlier today. First, it liberalized the so-called discount window borrowings, which are neither at a discount nor take place at a window. The Fed cut the punitive rate from 100 bps more than the fed funds target to only 50 bps and lengthened the period that the funds can be borrowed.Yet, discount window borrowings are minor ($265 million total in the week ending Aug. 15), and the discount rate is still above the fed funds target and well above the recent average effective fed funds rate (weighted by size). As such, these moves are largely symbolic. (TheStreet.com) See also Fed Treads Moral Hazard
• Bernanke Sees Lesson in the Depression: Whether the Fed was primarily responsible for the severe and sustained economic contraction of the 1930s, as asserted by economists Milton Friedman and Anna Schwartz, or just bears partial responsibility, is still a subject of lively debate among economic historians almost 80 years after the fact. (Bloomberg)
TECHNOLOGY & SCIENCE
MUSIC BOOKS MOVIES TV FUN!
• Todays Book Club Pick - It was exactly 100 years ago: The Panic of 1907: Lessons Learned from the Market's Perfect Storm by Robert F. Bruner looks fascinating. Although the technology or the financial engineering may change, Human Nature does not -- and thats whats always, at bottom, the root cause of these dislocations.
• WARNING: INSANELY ADDICTIVE GAME: BOOMSHINE
That's all from what may very well be the nicest weather weekend of the slowly fading summer. See you on the beach!
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When, exactly did the Fed adjust the discount rate to be HIGHER than the Fed Funds rate? When I was involved in the repo market in the early 90's, the disco was always 50 bps below fed funds. When did they alter this policy?
Posted by: shoeless | Aug 18, 2007 7:21:05 PM
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