Wednesday, October 08, 2008

World cuts 1/2 point, or "Its just a dead animal..."

The world's major central banks (well, except Japan obviously) have all cuts their target rate by 1/2 point. Truthfully, I have no idea what this is supposed to accomplish in the U.S. I have long thought rates in the U.K. and the Eurozone were too high given their economic situation. Admittedly, deflation is an increasing risk, so I suppose there is no harm in making this a global rate cut.

You can see the dollar is weaker and stocks are much higher just by watching CNBC. Here's the bond market's immediate reaction is interesting. Treasury market is modestly weaker in the intermediate part of the curve. About flat on both the 2-year and 30-year. Its a little counter-intuitive that bonds would be weaker on a Fed cut, but I think that just shows how strong the panic bid for Treasuries is. I wouldn't be surprised to see this sell-off fade in the short-term, but longer-term there isn't much upside (price wise) in the 7-10 year area of the Treasury curve.

CDS on major financials are a good bit tighter. Bank of America, Citigroup, and Wells Fargo 10-20 tighter. Goldman 30 tighter. GECC 20 tighter. American Express 25 tighter. Morgan Stanley confused (I'm getting quotes indicating both tighter and wider, welcome to the Financial Panic of 2008.)

CDX 11 about 8 tighter.

I don't think the Fed is "out of bullets." But in my mind, they've done enough. Now we just need time. Everyone wants stocks to soar and credit to return overnight. They want one of these Treasury/Fed measures to "solve" the crisis. But the crisis isn't about any one thing, its about confidence and trust. Financials broke that trust when they made a slew of bad loans. Now they need to rebuild trust. Like a philanderer trying to reform, it just takes time.

Now, remember that I'm not a stock guy, but I think retail investors keep withdrawing from their mutual funds for a while here. Of course, historically when retail sells its usually a great time to buy. Regardless, I see stocks remaining under pressure until retail is done selling.


Mandar said...

well said, "like a Philanderer trying to reform", it will take time...; And Bingo! its about building trust; but its also about curtailing Irrational Exuberence that has hit the Structured Finance Space. And cutting rates and bailing out is all good, but the counter argument of moral hazard incentivising risk-taking will have to be factored in

PNL4LYFE said...

Well this reaction is pretty terrible. I know all the equity guys will say that 100bp would have made a difference, but I disagree; it just would have made the bounce and fade bigger.

clyde said...

I agree that the Fed has done enough. It's as if they expect to announce a plan and have everything turn around in a day or two. Then, when that doesn't happen, they announce another plan. All of this just adds to the unknown, and pushes investors out of the market. Who knows what will happen tomorrow? Not only do we have market risk, but what new plan will the Fed announce that might negatively impact my positions? Better to sit on the sidelines. Now where will the buyers come from?

Christopher Wheeler said...

In the manufacturing arena, one reaction reaction to problems is what is called "overadjusting the process." You take a part coming off the machine, measure it, and then tweak the machine. Then you do it again, then you do it again. The problem with that is that you never let the process stabilize to normal capability. Sometimes you have to resist the temptation to keep pulling on the levers and knobs, and just let the machine run for a while to determine your true process capability.

It feels like governments are trying to do the same thing. Every day a new program or intervention is announced, without giving the markets time to settle down and get used to the last adjustment. It probably doesn't help that it is an election year.

There are a lot of people who work in the credit markets. Leave 'em alone to do their jobs, and eventually they will figure out how to muddle through.