Will Monday See a Fed-Driven Boost to the Stock Market?

donsutherland1 · 07-13-08, 08:19 PM

On Monday, the major U.S. stock market indices will be attempting to come off near two-year lows. Early on, the Fed’s decision to grant authority to the New York Federal Reserve Bank to lend funds to Fannie Mae and Freddie Mac to help them address potential liquidity challenges will likely figure in market trends.

If the immediate impact following the Fed’s creating its three temporary liquidity facilities—Term Auction Facility (TAF), Term Secured Lending Facility (TSLF), and Primary Dealer Credit Facility (PDCF)—is representative, the major indices should experience a boost.

However, once one gets beyond two weeks, continuing developments concerning fundamental factors, geopolitical developments, and market psychology will determine whether or not any rally is relatively short-lived. The July 15 Producer Price Index (PPI) and July 16 Consumer Price Index (CPI) reports could pose a significant challenge, especially if one begins to see higher inflation creep into the core numbers. My guess is that we’ll see the core CPI figure come in around +0.3% vs. the consensus forecast of +0.2%.

More immediately, Freddie Mac will be issuing short-term notes on Monday. The success of that auction could loom large. A successful auction might further mitigate immediate concerns. A continuing widening of the premium between Freddie Mac/Fannie Mae securities and comparable maturity Treasury instruments, especially after the Fed granted those government-sponsored enterprises (GSEs) the ability to borrow from the New York Federal Reserve could be troubling. It could well raise the specter that the Federal Government might need to take an investment stake in those GSEs, which would dilute shareholder equity and perhaps raise additional questions about a further widening of a government role with respect to those GSEs.

My early guess is that Freddie Mac’s auction will go reasonably well in the wake of the Fed’s decision.

Summerwind · 07-14-08, 12:02 AM

Well the Asian stocks started Monday up a bit, then collapsed again. Tomorrow will be a nail biter, for sure.

donsutherland1 · 07-14-08, 07:53 AM

Quote:

Originally Posted by Summerwind

Well the Asian stocks started Monday up a bit, then collapsed again. Tomorrow will be a nail biter, for sure.

Summerwind,

I don't believe Fannie's and Freddie's woes were weighing on Asian markets as much as they were in the U.S. and, to a lesser extent, Europe. Asia's markets have been declining for some time on account of rapidly rising inflation, high energy prices (which impede production, boost inflation, and erode competitive advantages on account of shipping costs) and growing concern that a sluggish U.S. economy and the ongoing unwinding of the non-oil portion of the U.S. trade deficit will reduce their export growth. Given that some of Asia's fastest growing economies have a strong export-driven component, this is a major concern.

donsutherland1 · 07-14-08, 09:21 AM

With respect to Freddie Mac's sale of $3 billion in short-term notes, CNBC reported:

In a key test of confidence, Freddie Mac's $3 billion bill sale Monday drew stronger demand than a similar sale July 7. Fannie Mae and Freddie Mac. Freddie Mac sold $2 billion of three-month bills at a 2.309 percent rate, compared with a 2.323 percent rate for a same size and maturity deal sold on July 7.

Freddie Mac also sold $1 billion of six-month bills at a 2.496 percent rate, compared with 2.489 for a $2 billion, six-month deal sold a week earlier.

Just after 10:20 am EDT, the Dow Jones Industrials was up almost 60 points (+0.6). Shares of Freddie Mac were up about 1.7% and shares of Fannie Mae were higher by about 4.7%.

donsutherland1 · 07-14-08, 11:12 AM

Stocks turned broadly lower on rumors concerning National City Bank. To put things into perspective, National City Bank has just over $155 billion in assets, making it almost 5 times as large as IndyMac.

Reuters reported, "In response to market rumors, National City bank says experiencing no unusual depositor or creditor activity, maintains more than $12 billion of excess short-term liquidity as of Friday's close."

donsutherland1 · 07-14-08, 03:16 PM

The Tale of an All-Too-Short Stock Market Bounce…

What had started as a nice rally, with the Dow Jones Industrials up more than 138 points at one point in the opening 30 minutes of trading following Sunday’s disclosure that the Federal Reserve had authorized the New York Federal Reserve to lend funds to Fannie Mae and Freddie Mac, crumbled later in the morning on rumors that National City Corporation ($155.0 billion in assets) and Washington Mutual Bank ($319.7 billion in assets) were facing difficulties. Both banks dwarf IndyMac ($32.3 billion in assets), which was taken over by the FDIC on Friday. Through much of the rest of the day, stocks held onto their losses, with rally attempt after rally attempt being beaten back.

But that changed during the final 30 minutes of trading for the Dow. Shortly after 3:30 pm EDT, the Dow scaled what seemed to be Mount Everest to break onto the summit of positive territory. However, as if exhausted by the effort, the Dow succumbed shortly thereafter. At the end of trading, both the Dow Jones Industrials and S&P 500 slipped to new closing lows for the year.

The Dow Jones Industrials fell to 11,055.19. That is its lowest close since the Dow closed at 11,051.05 on July 24, 2006.

To date, the Dow Jones Industrials has now fallen 22.0% from its October 2007 peak of 14,164.53. In inflation-adjusted terms, the Dow is now 25.2% below its peak.

The S&P 500 closed at 1,228.30. That is its lowest close since June 13, 2006 when it closed at 1,223.69. To date, the S&P 500 has now fallen 21.5% from its October 2007 peak of 1,565.15. In inflation-adjusted terms, the S&P 500 is now 24.8% below its peak.

Fannie May (down more than 5%) and Freddie Mac (down more than 8%) suffered another ghastly day of trading. Very early, Fannie Mae had been up almost 32% and Freddie Mac 26% from Friday’s dismal close.

With respect to rumors concerning National City Bank, CNN reported, “…market rumors spread that the Cleveland-based bank was on the verge of collapse.” Meanwhile, Bloomberg.com reported:

Treasuries gained, pushing two-year note yields down the most in almost five months, as stocks fell on concern that U.S. banking-system losses may be worsening.

Predictions of wider losses overshadowed the Treasury Department's support of Freddie Mac and Fannie Mae. Washington Mutual Inc. posted its biggest drop ever and National City Corp. tumbled to a 24-year low after last week's collapse of IndyMac Bancorp Inc. spurred speculation that more regional banks may be short of capital.

It should be noted that the demise of real estate bubbles has typically been followed by a banking crisis in which numerous financial institutions fail. The U.S. is likely in the very early stages of such a situation. Already, 2008 has witnessed more bank failures than 2007. Since 2002, bank failures have occurred as follows:

2002 12
2003 3
2004 4
2005 0
2006 0
2007 3
2008 5

Source: Federal Deposit Insurance Corporation

In the midst of the eye of the trading storm that passed over National City Corp., Washington Mutual Bank, along with the two troubled GSEs, crude oil quietly edged higher to a near-record closing price of $145.18.

Tomorrow, the producer price index will be released. Whether inflationary pressures will be ratcheted even higher to further drain Wall Street of its diminishing reservoir of confidence remains to be seen.

Iriemon · 07-14-08, 03:35 PM

Even more depressing:

Dow Jones on December 28, 1999: 11,476.71

That's 8 years of no growth, a real loss compared to inflation.

oldreliable67 · 07-15-08, 03:12 PM

Quote:

Originally Posted by Iriemon

Even more depressing:

Dow Jones on December 28, 1999: 11,476.71

That's 8 years of no growth, a real loss compared to inflation.

Markets go up. Markets go down. Thats why they are called markets.

Not to be flip about it, but we, as both consumers and investors, all too often hear only about things/stocks that we should buy! buy! buy! Thats how Wall St makes its dough, persuading us to buy their products.

Very seldom does one hear of a sell recommendation. They are often couched in such euphemisms as a "neutral" or "hold" rating, or one of my personal favorites, "use as a source of funds to buy something else."

It is not written anywhere that any prices always go up, or down, or sideways. They are markets. They will go anywhere the perception of the buying and selling public takes them. Despite Wall St's best efforts to get the public to only buy! buy! buy!

After all, selling, especially selling short, is distinctly un-American and downright sinful, is it not?

Iriemon · 07-15-08, 03:55 PM

Quote:

Originally Posted by oldreliable67

Markets go up. Markets go down. Thats why they are called markets.

Not to be flip about it, but we, as both consumers and investors, all too often hear only about things/stocks that we should buy! buy! buy! Thats how Wall St makes its dough, persuading us to buy their products.

Very seldom does one hear of a sell recommendation. They are often couched in such euphemisms as a "neutral" or "hold" rating, or one of my personal favorites, "use as a source of funds to buy something else."

It is not written anywhere that any prices always go up, or down, or sideways. They are markets. They will go anywhere the perception of the buying and selling public takes them. Despite Wall St's best efforts to get the public to only buy! buy! buy!

After all, selling, especially selling short, is distinctly un-American and downright sinful, is it not?

Good points, and accurate of course. I just like it better when they are going up!

This is probably a good time to buy, actually.