Monday, October 13, 2008

Market Surges on Bailout News

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?

Bottom Line:

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.

Stay tuned!


Avl Guy said...

I can't take credit for another reader's, Silver Dollar, comment below, but I did warn of recidivism, Jeff. Humans, markets & policymakers will, when facing a new & alien devil they can’t comprehend versus an old devil who's comfortably familiar, go with the latter.
So we attempt to "Party Like It's 2007!!" This Brave New World (of debt destruction & austerity) is just too "alien"; most will grope for the way back, no matter how unsustainable it may be...or short their 'return visit' is.

Let's see how this week goes as, you said, the bond market & currency markets digest the implications of all these bloated multi-year guarantees, and capital injections.

"The govt's are doing everything to FORCE inter-bank lending. Don't be surprised that buying stakes in the banks will be used to force that. Example - The UK's bank bailout is contingent on the banks agreeing to lending to their customers at 2007 levels. The only way to do that would be to go right back to making high-risk loans to unqualified customers, which would just re-inflate the debt bubble, and make things even worse down the road.Extend that concept outward to the Eurozone and US, and you can see where they're taking this. Look back over the last couple of weeks, and you'll see that the UK and Ireland have been floating most of the trial balloons that the rest of the world end up following"

Jeff said...


Great points.

I think the problem with the reflating is the psychology of the borrowers has changed.

You can't force someone to lend.

Unemployment and foreclosures have made many unable to lend, and its only going to get worse as the recession deepens.

Like you said, its unsustainable. This is going to end spectacularly!

The desperation and the stupidity of these moves by the feds are amazing. I guess I shouldn't be surprised!

Jeff said...

THis is interesting. It looks like that nationalization of the banking system has commenced.

No shareholder dilution though. Hmmm how is that going to work? Can you say handout?

Our hard earned taxdollars taxdollars at work bailing out the pigmen. Sickening:

"Oct. 13 (Bloomberg) -- The Bush administration will invest about $125 billion in nine of the biggest U.S. banks, including Citigroup Inc. and Goldman Sachs Group Inc., in the government's latest attempt to shore up confidence in the financial system.

The cash injections in exchange for preferred shares are part of a $700 billion rescue approved by Congress and follow similar moves by European leaders to unfreeze global credit markets by helping beleaguered banks. The other companies are Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Merrill Lynch & Co., Morgan Stanley, State Street Corp. and Bank of New York Mellon Corp., said people briefed on the plan

The Treasury plans to spend $25 billion each for stakes in Citigroup and JPMorgan, people said. Another $25 billion will be divided between Bank of America and Merrill, which agreed last month to be acquired by Bank of America. Wells Fargo is to get at least $20 billion, Goldman and Morgan Stanley will each get $10 billion, and State Street and Bank of New York will get about $3 billion each, people said.

The government will obtain its stakes with a type of security designed not to dilute the value of common shares.

None of nine banks getting government money was given a choice about it, said people familiar with the plans. All of the banks involved will have to submit to compensation restrictions as mandated by Congress, people said."

Jeff said...

Get out of the way if you are short.

This is the pump of the century.

johndaniels said...

i understand the volume was very low. one government, one banking system. I am out. i am leaving the digital currency world. remember there are still money market frozen up, and what is the future for the dollar? if this doesnt work, and people and banks entrench (as im doing) and hoard capital, things shouldnt improve, despite stock market speculation.

w/e im just out. im not gonna play their game anymore.

Jeff said...


I totally agree.

Its sickening isn't it? I am about done with these pigs myself.

This looks to be a total handout. England got it right if you are going to socialize your banking system.

They gave the taxpayers common and preferred shares. They also restricted bonuses and stopped all dividend payments. This at least gives the taxpayer a chance to get their money back down the road.

I hope the bond market shoves this bailout right up the Paulsons *** tomorrow.

MyInvestorsPlace said...

Very informative article in this time of the financial crisis and wall street issues!

I am staying tuned to know more on the updates of this article.

MyInvestorsPlace - trading, value, investing, forex, stock, market, technical, analysis, systems

Jeff said...


Treasuries are getting creamed in Asia tonight.

Lets see what the bond boys have to say tomorrow morning:

"TOKYO, Oct 14 (Reuters) - U.S. Treasuries plummeted in Asia on Tuesday as investor demand for the safety of government debt was curbed after stock markets around the world rallied.

Bourses across Asia climbed sharply as fear toward risk partially eased after key central banks agreed to a list of steps aimed at reviving interbank lending and restoring credit market liquidity.

Benchmark 10-year notes US10YT= dropped 1-9/32 in price to yield 4.036 percent from 3.874 percent.

Jeff said...

Stocks have pulled back after soaring at the open higher.

Credit market response has been mixed so far. Libor has come back down but not significantly.

Most of the spreads have narrowed.

Terrible report on worldwide reduced tech spending has sent the nasdaq lower.

I will have an update up this afternoon.

The Log Chopper said...

It's interesting that Hank Greenberg is trying to get the gov't to renegotiate the loan terms to AIG.

I truly hope he succeeds. AIG could have gotten better terms if they had gotten a loan from the mob.

An $85 billion loan with 14% interest over a two-year repayment period. Oh ya, and for the this $85 billion loan, the gov't gets 80% ownership of a trillion dollar company. Say what!?!

This isn't a bail-out. It's more like a death-warrant that ensures the slow, painful death of AIG.

Ya, I'm not wild about how AIG has conducted business in the past, but think about how AIG's demise will affect people (and it will die if the loan terms aren't changed.). Pensions will go away, stockholders will lose value as shares go to zero, retirement accounts wiped out, people lose jobs, etc.

I wonder why Paulson negotiated such harsh terms? It makes me wonder what's in this for Goldman Sachs...

Jeff said...


AIG was a CDS nightmare. I agree it will hurt a lot of people, but the company was literally run into the ground.

They have already burned through the $85 billion they got from the government. Who knws what the price tag will be when this is all said and done.

THe fact that all of these companies ran themselves into the ground is a tragedy. Its amazing what greed can do!