Fed to the rescue… markets stage best rally in years on news of latest Bernanke bailout
The true beneficiaries of the Fed’s latest move
John Williams on the long-term effects of the TSLF
An “eye-popping” bond event… U.S. debt no longer the world standard
Gas prices strike record high again, plus the most expensive gas station in the U.S.
Rejoice! The benevolent Fed saved the market… again.
The Fed’s new TSLF — a promise to swap Treasuries for mortgage-backed securities — kicked off the best day for U.S. stocks in five years.
The Dow shot up 417 points, or 3.5%, its best percentage gain since March 2003. The Nasdaq also had its biggest percentage gain since spring ’03, up nearly 4%. The S&P hasn’t seen a day this good since May 2002… it popped 3.7%.
Stock markets in Asia rallied big on the Fed bailout plan too. Markets in Australia, Hong Kong, Malaysia and Singapore all surged about 3%. Indian and Japanese markets gained 1% apiece.
In classic form, whatever America did, China did not. The Shanghai Composite fell 2.3% on rumors the Chinese central bank is planning to hike rates again… and the government is devising more ingenious ways to stymie inflation in their fledgling capitalist economy.
Mortgage enablers Fannie Mae and Freddie Mac were by far the most appreciative of the Bernanke clan offering. Once “sure thing” darlings of state pension plans and corporate retirement accounts alike, the government-sponsored mortgage lenders have already endured one hell of a year.
Both firms plunged 12% on Monday after a Barron’s report suggested the two companies were (gasp!) spiraling toward insolvency and would need a government bailout. Little did Barron’s know that the bailout was just a few hours away. As of March 27, up to $200 billion in Freddie and Fannie mortgage-backed securities will be as good as government bonds. (Ha!)
Both stocks popped over 10% yesterday. Still they remain about 75% off their all-time highs. Together, Fannie and Freddie account for approximately 45% of the $11 trillion U.S. home loan market.
The chairman prays: Please, God, don’t let Fannie and Freddie die
If Fannie and Freddie were the beneficiaries of yesterday’s bailout plan, Treasuries were not. For the first time since Word War II, owning U.S. Treasuries is a riskier bet than owning German bonds.
On the basis of credit default swaps, which are used to speculate on a government’s ability to repay debt, the 10-year note traded at a record-high 16 basis points today. German bunds are trading at 15 basis points, also a record. A decline in these spreads shows improving confidence in the government’s ability to pay… an increase shows the opposite.
By way of comparison, before the credit crisis began in July, U.S. credit default swaps were at 1.6 points, compared with 2.5 points on bunds. The rapid rise in both U.S. and German bonds shows how much the credit markets have seized up since the subprime mess began.
“The U.S. government is not immune from the consequences of the credit crisis,” Fabrizio Capanna, a corporate bond trader for the French bank BNP Paribas told Bloomberg yesterday. “Support for troubled financial institutions in the U.S. will be perceived as a weakening of U.S. sovereign credit.”
“That’s certainly eye-opening,” writes our managing editor Chris Mayer, who flipped us the story early this morning. “The market consensus is that you stand a greater chance of default investing in U.S. Treasuries than in German bonds. The poor fiscal condition of the U.S. is no longer a matter of debate. It’s something people readily acknowledge and worry about. We live in interesting times, that’s for sure.”
For their part, currency traders didn’t seem to know what to make of the Fed’s diabolical plan. The dollar index felt some roller coaster swings:
After a wild day, the dollar index ended at 72.6 — just above its record low set on March 7. The euro still trades for $1.54. The pound remains at $2.01. Likewise with the yen… 102.
“The Federal Reserve’s announcement,” opines our friend John Williams, “that it will be providing an added $200 billion in liquidity to the system in a coordinated action with other central banks, on top of the $200 billion emergency funding announced by the Fed on Friday (March 7), again highlights the depth of and the ongoing deterioration in the banking system’s solvency crisis.
“The good news is the Fed will create whatever dollars it needs to keep the system from imploding. The bad news is the price that will be paid in higher inflation. Despite any relief rallies that seem to be taking place in the equity and dollar markets, the news here has horrendous implications for the dollar and inflation, corresponding positive implications for gold and likely continued trouble for equities.”
And more annoying data for the Fed: The U.S. trade deficit jumped to $58 billion in January, up nearly a percent from the previous month, the Commerce Department reported yesterday.
The U.S. imported a record $206 billion of goods in services during the month. Crude oil accounted for the biggest share, $27 billion. Oil traded as low as $85 in January. As oil jacked its way to $109.72 yesterday — another record high — a new record trade deficit is likely when February deficit details emerge.
Gas prices crept to another record high of their own today. AAA reports the national average price is now $3.25 for a gallon of unleaded.
If you don’t care for high gas prices, by all means, stay the heck out of Gorda, California.:
Yep, that’s $5.20 for a gallon of the cheap stuff. Our forecast was a scant winter season off.
In the middle of nowhere on the Pacific Coast Highway, this Amerigo station is the only gas for miles. James Willman, the man who attends the station seven days a week, told The New York Times yesterday that someone threatens or curses at him almost every day.
“This plan of Bernanke’s,” says one reader, “to swap Treasuries for bad paper in order to help the creators of the bad paper constitutes in my mind panic and dereliction of duty.
“What idiot would borrow from his savings account and loan it out to a gambler down on his luck to help the jerk out? Someone needs to step up and call for some kind of boycott to get the attention of these numbskulls in Washington who are playing not only with fire, but with our very lives and fortunes, and those of our children. Shame on them all.”
“I thought your edition yesterday was downright painful to read,” writes another reader. “Painful, because you lump everyone together — the baby boomers are not the instant-gratification set.
“We are the ones that help our elderly parents so they don’t have to steal cans of cat food for dinner, pay our fixed-rate mortgages that had 20% down or more, send our kids through college, pay our taxes no matter how outrageous and have no control over the federal government, the Fed, the IMF or anything else that impacts our lives — including federal support to use our food for energy, instead of filling our bellies, while they decry the use of coal, which is right in our backyards.
“We didn’t choose to go off the gold standard. We are the ones whose bank accounts are shrinking, whose retirement accounts are suffering, who lose our health benefits when we retire and who paid into Social Security all of our working lives and can’t count on it in retirement.
“So please, moderate your tone. We didn’t choose any of it, and the Democrats and Republicans never represented our interests, and don’t now.”
The 5: You’re kidding, right? Of all the mayhem in yesterday’s issue, you quibble with our use of the term ‘baby boomer’? How can you be emotionally attached to a demographic cohort? Oy. Puzzlement aside, “boomers” are roughly 44-62 today. The “me” generation is by far the most heavily represented cohort in Washington. And it shows. This next nugget is for you boomers, too:
We learned today that marijuana growers in Canada have exported much less bud as exchange rates eat into their margins.
“Canadian marijuana is now less competitive against marijuana grown elsewhere,” an economics professor at Simon Fraser University told the Missoulian this week. “This is a cost-driven business. With exports no longer viable, the British Columbia marijuana industry has certainly taken a hit, so to speak.”
The loonie trades for $1.01 this morning. Sorry, potheads, maybe you should start growing your own.
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