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Beware !
Germany got bad news coming out ! ! !
Trade with care ! ! !
Morgan Stanley The Cavalry Arrive
If the Fed?s actions on Friday ? and the obvious implication that it is ready to do more if required ? stabilize credit markets, then it will set the scene for a decent recovery in equity markets. My view is that markets probably have passed the point of maximum stress, at least in this episode.
The Fed cut the discount rate by 50 basis points to 5.75%, the first time since the early 1990s that the discount rate has been changed without a change in the Federal funds target (now at 5.25%). In addition, the Fed extended the term on discount window loans from overnight to up to 30 days, with the loan renewable by the borrower. Finally, the Fed?s statement effectively dropped FOMC?s tightening bias, acknowledging that the downside risks to growth had increased ?appreciably? ? setting the scene for a cut in the funds target, if that is deemed necessary.
A few thoughts on this:
First, the Fed?s actions come after the problems in credit markets entered a third, and far more threatening, phase. The first phase, which started early this year, was the meltdown in the secondary market for securities linked to sub-prime mortgages. The second phase, which started a month ago, was the spread of distress to high-risk corporate-debt instruments. This adjustment still largely involved falls in high-risk securities and the closing down of narrow financing flows ? which could still be seen as an appropriate re-pricing of risk. But a third phase, starting the week before last, saw serious disruption to the supply of short-term corporate credit. This was a critical change.
The seizing up of short-end credit markets, most notably the markets for asset-backed commercial paper and nonagency mortgage-backed securities, smacked of a genuine credit crunch, in my view. While the closing down of long-term credit risks the financial equivalent of starving to death, the shutdown of short-term funding risks financial cardiac arrest. If borrowers cannot roll over short-term debt facilities, then we could quickly see corporate failures ? with all the knock-on effects to economic activity that that implies.
Second, markets and policy makers implicitly saw this third phase of credit distress as a much more substantial threat to growth than what had gone before. Whereas initially financial-related stocks had seen the severest contagion from credit distress, through last week investors started to sell aggressively growth-related assets: non-financial equities in developed markets, emerging market equities, and commodities, with a knock-on to the high-yield commodity currencies.
Viewed in this light, the Fed?s actions should not be seen as an attempt to bail out poor investments ? this is no Bernanke put ? but a defensible response to serious financial disruption and an important change in the balance of risks in the economic outlook. Having said that, to the extent that short-term credit flows resume, then the Fed may well err on giving markets as little as is deemed safe in terms of Fed funds rate cuts over the next month. Put another way, the markets may be wrong in expecting a funds rate below 4.75% by November.
Third, while we have seen major disruption in credit markets and they are likely to remain tender for some time ? see Greg Peters? Lifting of the Fog, August 17 ? I expect equity markets to respond quickly to the changed circumstances. In other words, I don?t think it will require a return to full health in credit markets to get a decent rally in equities. On that point, it?s worth noting that our European, Asian and Emerging Market equity strategists all turned bullish on their markets last week (having turned cautious prior to the correction starting).
In the very near term, financial stocks may lead the rally (as they did in New York on Friday ? see Exhibit 1). That is where the shorts were, and short-covering would push them higher. We are likewise likely to see a quick reversal in the sell-down in growth-related assets, such as emerging market equities. But I stick by my bigger picture view that financials, particularly in the developed world, are likely to be persistent under-performers over the medium term. If recent events don?t signal a top in their earnings cycle, I?m assuming that the top will be next year.
Finally, a few bigger picture points:
First, the past month has again emphasized that strength of financial linkages between markets. Because of that, I continue to believe that markets will remain coupled even if we see economic decoupling.
Second, the degree of hyper-leverage within the financial and investment community is now an important source of risk, independent of economic risks.
Third, it is noteworthy that these problems arose in what remains a fundamentally healthy global economy. The stresses would likely intensity ? and be far harder to ease ? if growth started to deteriorate.
Fourth, while the immediate market stress may now ease, the underlying problems in the US mortgage market will not. Nor, therefore, will the likely economic damage from those problems. As I?ve noted before, calibrating that economic damage is not a matter of quantifying the investment loss on already-made sub-prime loans. The economic impact will be due to the fact that over the past four years sub-prime borrowers were given around US$1 trillion, which they then used to build new homes, push up the price of established homes, furnish their homes, and buy the other accoutrements of a lifestyle, which they do not have the incomes to sustain. They will not be getting another $1 trillion over the next four years.
Finally, I still have a sense that the view of most investors ? and policy makers, economists, and corporate leaders ? is that growth will remain strong. The consensus is that, even after four years of exceptionally strong global growth, growth will remain strong for the foreseeable future. When a view is so widely held, I assume that it?s embedded into most asset prices ? certainly for growth assets, such as equities (there is a case that it?s not reflected now in, say, Treasury yields). That suggests to me that, once equities recover their poise after the correction, prices will be much more sensitive to any news that suggests those expectations are wrong, rather than news that supports the already-priced-in view.
FED CUTS DISCOUNT RATE, EUROPEAN / US EQUITIES REBOUND, RISK AVERSIONS ARRESTED ...FOR THE NIGHT
In a surprise move, Fed cut the Discount Rate from 6.25% to 5.75% on Friday and took steps to encourage banks to borrow from the discount window by lengthening the term of such loans to as long as 30 days from the current one day. Fed officials joined in a conference all with leading financial executivesaiming to ensure the Fed's moves have maximum impact by making clear that officials area actively inviting more borrowing from the Fed. Fed said reduction was a temporary change in order to provide banks with assurances about the cost and availability of funds.
Fed Statement 1:
"To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility. The Board approved a 50 basis point reduction in the primary credit rate to 5-3/4 percent, to narrow the spread between the primary credit rate and the Federal Open Market Committee's target federal funds rate to 50 basis points. The Board is also announcing a change to the Reserve Banks' usual practices to allow the provision of term financing for as long as 30 days, renewable by the borrower. These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially. These changes are designed to provide depositories with greater assurance about the cost and availability of funding. The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets. Existing collateral margins will be maintained. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York and San Francisco"
Fed Statement 2:
"Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."
Fed left the Fed Funds rate unchanged at 5.25%.
The Fed Funds Rate
The federal funds rate is the rate charged by one depository institution on an overnight sale of immediately available funds (balances at the Federal Reserve) to another depository institution; the rate may vary from depository institution to depository institution and from day to day. The target federal funds rate is set by the Federal Open Market Committee (FOMC). By setting a target federal funds rate and using the tools of monetary policy-- open market operations, discount window lending, and reserve requirements--to achieve that target rate, the Federal Reserve and the FOMC seek "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates," as required by the Federal Reserve Act.
At each of its meeting, the FOMC examines a number of indicators of current and prospective economic developments. Then, cognizant that its actions affect economic activity with a lag, it must decide whether to alter its target for the federal funds rate. An actual decline in the rate stimulates economic growth, but an excessively high level of economic activity can cause inflation pressures to build to a point that ultimately undermines the sustainability of an economic expansion. An actual rise in the rate curbs economic growth and helps contain inflation pressures, and thus can promote the sustainability of an economic expansion; too great a rise, however, can retard economic growth too much. The FOMC's actions on the target federal funds rate are undertaken to achieve the maximum rate of economic growth consistent with price stability and moderate long- term interest rates.
The Discount Rate
The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility--the discount window. The Federal Reserve Banks offer three discount window programs to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. All discount window loans are fully secured.
Under the primary credit program, loans are extended for a very short term (usually overnight) to depository institutions in generally sound financial condition. Depository institutions that are not eligible for primary credit may apply for secondary credit to meet short-term liquidity needs or to resolve severe financial difficulties. Seasonal credit is extended to relatively small depository institutions that have recurring intra-year fluctuations in funding needs, such as banks in agricultural or seasonal resort communities.
The discount rate charged for primary credit (the primary credit rate) is set above the usual level of short-term market interest rates. (Because primary credit is the Federal Reserve's main discount window program, the Federal Reserve at times uses the term "discount rate" to mean the primary credit rate.) The discount rate on secondary credit is above the rate on primary credit. The discount rate for seasonal credit is an average of selected market rates. Discount rates are established by each Reserve Bank's board of directors, subject to the review and determination of the Board of Governors of the Federal Reserve System. The discount rates for the three lending programs are the same across all Reserve Banks except on days around a change in the rate.
Federal Reserve Banks lend funds to depository institutions at the discount window.
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Strong, well-capitalized banks borrow under the primary credit program; other banks use the secondary credit program and pay a higher rate. - Relatively small banks with seasonal fluctuations in reserves can use the Fed's seasonal credit program.
If the dow does close abv 13797...then i think we should get out on any rebounce..that means down trend to 11800 support remain...if this broke then 11000...bottom..
I think along the way there will still be hiccup but i think a further ferderal fund cut of 0.25% will be more effective...the dow must drop 500 pts before Bernanke will cut fund rate ...
http://www.federalreserve.gov/boarddocs/press/monetary/2007/200708172/default.htm
Come Ben...cut the fund rate than dow will up 500 pts..
yea hopefully close in the green region...doesn't look promising currently and i agree with Pinnacle...look at just yesterday performance? down one moment at 300 then close suddenly at the last hour -15 points only...
this 7th Lunar Ghost month is already scary enough...now accompanied by this turmoil in the markets...spook me out~!
Not very promising...
It will be consider good if can close in green.
wow, very hard to believe, another trade from another counter in USA went through with a gain of about 650%!
Last price was 33.5 dollars and the trade went thru at 250 dollars....thought it is just 300 quantity , it is still USD75,000 trade...
poor seller, must have been a panic mistake, hand shaking while punching key stroke. Hope he does not get a real stroke. Wish him well.
Hope all SJ members to be cool and check entries , double check, before confirming a trade...
just for information, in USA, you can trade ANY quantity of share on-line. no problem for small quantity also, just pay the minimum commission..very often when they declare dividend and it can be automatically reinvested, but the problem is you get odd number including decimal or fractional share which can be sold also.
one opening trade i saw in USA, Sold with 55% discount.(180% rise) . now that share was 5% rise insteads the original 180% rise. the poor chap who key in wrongly ( may be panic) must be very sad now while the lucky buyer is smiling .
that remind me of the recent DBS case... Let's hope SJ members stay cool , check entries carefully, double check before hit the button to confirm trade.
