Wednesday, December 12, 2007

TAF To Save the Day

Top Line: Market is in a down phase with a Dow move to 12,500 expected.

How do you describe this day? We're not sure what the Fed was thinking exactly but the timing of this latest move seems highly coordinated with the rate cut of Tuesday. Was the move on Wednesday part of the reason for the 25bps instead of 50bps? Well, we'll never know about that but what we do know is that the market got a lift out of the news, at least initially.

Before the market opened on Wednesday, a consortium of central banks announced that they were going to provide global financing as a group. This is a big effort to provide some significant financing to increase the liquidity in the so-called credit crunch. We have another question, "What are the world's central bankers going to do when things get really tough?"

To answer that question, we take a look at the reason they are trying to pump liquidity into the system. Their hope is that they can avoid what is going to happen next, recession or worse. The Chairman of the Federal Reserve didn't get his nickname Helicopter Ben for nothing. His latest trick has Fleck has titled his Daily Rap "Ben's Choppers Get Airborne", perfect.

Here is where we find out just what the Fed can do by lowering rates and floating more liquidity than one can imagine, $40 billion in the TAF, term auction facility. The phrase "pushing on a string" comes to mind first. This is the time when the Fed wants to increase credit, which is really called debt. If the Fed can convince the world to borrow just a little more, then the global economy can continue down the path.

The problem with this thinking process is that we have done this so many times that it may not work this time. When people have limited resources and massive debt servicing to do, there is little need or reason for them to borrow More money that needs to be serviced. So, with loan rates even at very low levels, people can't borrow because they have no more ability to service their loans. They could borrow money to pay off higher interest rate debt but the Fed and other central bankers need them to Spend more money and take on more debt. This is what pushing on a string means. The Fed can lower rates but the borrowers will not spend any more money.

The other news is the Greenspan op-ed piece in Wednesday's WSJ. You may not be able to view this due to the subscription level but you probably have access to the WSJ where you can find this article. Greenspan makes some statements that indicate that he couldn't do anything more than he did and he didn't cause the housing problems with 1% fed funds rate. Please, he was the Chairman of the Federal Reserve, the most powerful position in the world.

Market action was certainly a sight to behold with the Dow almost covering the entire loss from Tuesday in the first minutes of trading. Tuesday, the Dow went down 294 points and at the open on Wednesday it was up about 275 points. Of course, from there it went straight down until it was down over 100 points and then it rallied into the close, finishing up 40. What a crazy ride we've been on for the last two days.

Clearly, the bulls are ready to jump on any hint of good news on a global scale but company news in the mortgage arena was not pretty the last couple of days. Wednesday's news was more of the same that we heard from Washington Mutual, the housing market is not going to improve anytime soon. Today's confessions were more on the lines of we can't believe how bad it's already become even though we thought it wouldn't get this bad when we were talking about it six months ago. We guess they didn't have time to read the Wednesday Update, too bad.

FSI: 105.04

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