More Downside If Credit Market Fails To Confirm Rate Cut
From 1990 to 1997, Kevin Haggerty served as Senior Vice President for Equity Trading at Fidelity Capital Markets, Boston, a division of Fidelity Investments. He was responsible for all U.S. institutional Listed, OTC and Option trading in addition to all major Exchange Floor Executions. For a free trial to Kevin’s Daily Trading Report, please click here.
In the last commentary, I mentioned how the commercial paper rates had spiked, and were choking the corporate borrowers such as General Electric
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PowerRating) that was paying 4% on 9 month paper, and it accelerated to 10%, forcing them into a vulture deal with Buffet for a meager $3 bill (10% Pfd). Which is nothing for GE, but it highlights how dire things are.
Yesterday the Fed said they would buy short term commercial paper to free up the market, and will also pay interest on reserves, which they hope will prevent the choking off of the financial system. In the last three days the credit crisis in Europe has had significant acceleration in institutions needing heavy capital infusion, or bailouts, and in some cases nationalization. Hedge fund liquidations accelerated, in addition to investor redemptions, as they run to money market funds provided they are in the new “Govt Protection” program for money market funds. The other choice is to put the funds in a MMF that only holds U.S. Treasury securities.
The SPX has melted down the last five days and -15.3%, which is a panic move, as the global slowdown and derivative meltdown has reached new levels. The index is -36.8% from the 1576 top to yesterdays 996 low so the ingredients for an OCT low are coming together, and certainly a time for those in cash to continue increasing some index equity allocation.
The early markets were selling off this morning before 7:00 AM EST, with the SPX futures down about -25 points, and the INDU futures down close to -300 points. The Fed then announced a 1/2 point cut in the Fed Funds rate to 1.5, and it was also a coordinated rate cut with most of the foreign banks, so that sent the futures soaring, but they have backed off some at 8:12 AM EST, as I complete this, where the SPX futures are +26 and INDU at +160.
A rate cut of some sort was expected soon, but the value of it has to be seen in the credit markets immediately or else there will be another sharp leg down in the major indexes. Hedge funds will continue to liquidate positions into short term strength, especially facing an ugly earnings season.
The primary day trading focus in the Service these last five days has been the major indexes and energy ETFs (extended volatility band levels) and this has been very positive because of the intraday volatility. I see no reason to change it until after this week plays out.
Have a good trading day!
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