Good Afternoon Everyone!
The market continues to amaze me. I expected a big bounce today but this is ridiculous. Stocks were up 10% today after the European bailout was announced. The Treasury is expected to announce a similar plan tomorrow.
I would take today's moonshot with a grain of salt. Tomorrow is what we need to focus on because the bond market opens back up. One thing is for sure, the next few days are not a good time to be short. The bulls should have control short term if the bond market behaves.
Now this is a big if. All of these bailouts are just find and dandy, but the problem is they need to be paid for. Keep a close eye on treasury yields tomorrow, especially the 10-year. The bond market controls long term rates, and if they don't like government spending on the bailouts, yields will rise. Lets see where these are tomorrow.
Euribor Hardly Budges
Overnight lending rates between the banks must come down in response to this massive stimulus by the world's central bankers. If these do not come down tomorrow we are in deep trouble folks! So far the Euribor lending rates have barely come in at all:
Current Euribor ratesperiod 10-13-2008 10-10-2008 10-09-2008
1 month 5.024% 5.118% 5.126%
3 months 5.318% 5.381% 5.393%
6 months 5.367% 5.431% 5.448%
12 months 5.425% 5.489% 5.512%
The reason we dropped like a rock last week was because the commercial credit markets were frozen as Euribor rates soared. As you can see above, so far the bailout hasn't done squat to lower lending rates. I am very concerned that these rates have barely come in at all after the largest global bailout in history! If the central bankers can't stimulate lending after flooding the global system with cash, then what will?
The market has turned into a speculative casino. I did not like the price action today. These extreme moves are not the signs of a market recovery. Its a sign of complete chaos.
The worlds central bankers just took their best shot at ending the financial crisis. There are no weapons left in their arsenal. If the lending rates continue to stay high and the banks continue to hoard cash, we are going to fold like a tent. The second threat here is the bond market. If they decide to have a temper tantrum, demand for treasuries will drop which sends yields higher.
It will be critical to see how these two threats digest all of the stimulus that was just thrown into the system. It will take some time for this all to play out. The bond market will want to see exactly how much capital is thrown into the banks. They will also be looking at how the TARP(housing bailout) is being used and to what extent.
The Euribor so far doesn't seem impressed with the bailouts. Consider this to be a red flag. The commercial markets must get unclogged, and the banks must start lending to one another. If this rate continues to stay high, we will be back in the dumps very quickly.
As for the equities, today's monster rally looked overdone. This muddied the waters short term. If the move up was more orderly today, I would have said that the short term looked rather bullish for equities.
However, the violence of the move combined with all of the data that must be absorbed by the market makes tomorrow a good day to watch rather than participate. Lets see what the bond boys and Euribor have to say tomorrow. This should give us a better idea as to where we are headed.