Well, well, well…the Fed finally got creative. If you missed it, the Fed announced they will provide $200B worth of Treasuries to primary dealers (investment banks) for a term of 28 days in return for AAA-rated mortgage backed securities. This new tool, called the Term Securities Lending Facility (TSFL), is different than the Term Auction Facility (TAF) which was only targeted at commercial banks. This move is just what the financial markets needed. This unique intervention pretty much replaces an inter-meeting rate cut (which everyone was calling for) and targets the exact problem in the credit markets – liquidity issues.
Basically, the government said they will accept banks' mortgage-backed securities (MBS) in exchange for a safer investment – government Treasuries. Some of the banks' MBS are at risk of defaulting and many have declined significantly in value over the last few years as home prices have fallen drastically. This move caused lots of short covering and many of the stocks that have been knocked down the most over the last few months (financials, mortgage/bond insurers, homebuilders) got the biggest pop today.
Now, we have to start thinking about what the Fed will do at their next meeting March 18th. Before today’s move the market had at least a 75 bp cut priced in, but now the Fed won’t need to cut that much. Today’s move prevents inflation from spiraling out of control and prevents the Dollar from continuing its precipitous decline. My hat goes off to Bernanke and his team for their creative approach to solve this worldwide crisis.
We probably saw at least another short term bottom in many of the financial stocks until some more bad news surfaces. What we have to remember is this move does not immediately fix our problems. Investors are very optimistic right now and look for this rally to continue for a few days. There was no “sell the rally” like we have been seeing for the past few months – on any good news, investors were selling. The write-downs by the banks will still happen, they just might not be as big anymore.
Something very important to note is that this plan is being coordinated with the European Central Bank, the Bank of England, and several other banks. Foreign banks are expected to provide up to $45B in funds (Source: Bloomberg.com). This is a worldwide crisis and now there is a worldwide effort to try and fix the problem.
Bonds sold off on this news and the dollar rebounded slightly. Many of the emerging market ETFs were up huge. Bear Stearns was down huge in early trading because an analyst cuts its price target in half and warned of more write-downs. Oil almost hit $110 during trading and settle at about $109.
Also, Google popped “after European Union regulators cleared the Internet company's $3.1B bid for online ad tracker DoubleClick” (Source: Finance.yahoo.com). GOOG was up $26.
The January trade deficit was slightly greater than the December deficit.
Sprint Nextel was down huge after it had its earnings estimates cut (Source: MSN.com).
Here are the results from yesterday’s $50B Term Auction Facility.
There were 82 bidders that submitted $92.595B worth of bids. The going rate was 2.80%.
DJIA 12,156.81 +416.66 (+3.55%)
Nasdaq 2,255.76 +86.42 (+3.98%)
S&P 500 1,320.65 +47.28 (+3.71%)
NYSE Volume 5,309,577,000
2-Yr Bond 1.74% +0.27
10-Yr Bond 3.60% +0.14
30-Yr Bond 4.53% +0.08
Crude Oil (Apr) 108.75 +0.85
Nat Gas (Apr) 10.000 -0.024
Gold (Apr) 976.00 +4.20
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