Only Another $12 Billion

CFC (Countrywide Financial) was in the news in a big way, $12 billion. Apparently, the banks are willing to loan even more money to this company in order to keep it afloat. Bank of America probably is feeling better after this latest move because the stock price surged over 12% after the news and above the B of A's 18. The market thinks that just because CFC lined up some more financing, there are no more problems in credit. While many problems have surfaced, that doesn’t mean they are solved or will be solved in an easy manner. But, on Thursday, the market was happy to trade up starting early in the day.

The next few days seem to be important to the pattern we have been discussing. We are looking back to the high of last week and notice that it seems to be getting closer. We have been fairly confident that we wouldn’t see it again for a long time but here we are back close again. We need to remind ourselves that the market has come off its highs of July and August and this move is not exactly strong. The way the market ended the day on Thursday seems to be the story. The early birds are buying this market and the late traders are selling it and this runs counter to bullish trading. The light volume is another key ingredient that pushes us into the hugely bearish camp.

Next week should prove interesting. We will see if the market thinks so. Tonight, we are just amazed how so much money can be injected into the banking system in such a short time. The Fed seems to want to avert any crisis by pushing money by buying hand over fist. Obviously they have deep pockets and can provide some confidence for some time. We think they continue their bet that they can prevent a collapse simply by adding money to the system. We obviously do not believe their injections will help the economy; but it will help the banks which in turn will keep their depositors happy or liquid if they have any cash at the bank.

We were referred to a very timely article by a Bank of England governor which we would like you to have access to here. For a bit of a easier read, this article should provide the highlights although the previous article is readable and talks about the bank conduits we have mentioned here with too little space to explain them very well. This article does a pretty good job describing how they work and the way the banks will probably need to bail them out. Fleck pointed this out in his Daily Rap today and we thought you might enjoy it, too.

We did say we would make a determination on the Fed move for next week but we think the market action of the tomorrow and Monday will somewhat determine what they do. We would like to defer our educated guess until Sunday evening with another shot at it on Monday night. In the mean time, we think the Fed is doing all it can to avoid lowering rates next week. Their constant reserve injections and the banks constant and heavy borrowing at the discount window are all designed to prevent the rate cut next week. From all the readings we do as well as how the market trades, it seems that a 25 bps cut is a foregone conclusion. We’re not sure that is the case but if you pushed us hard tonight we would probably agree with a 25 bps cut. We still lean toward none at this meeting. You can weigh in on this topic in the comments—we all look forward to it.