Weekly Financial Markets Analysis - A Credit Crisis Is Looming
Stock-Markets / Financial Markets Sep 29, 2007 - 02:07 AM GMT
FedWatch: The discount window has moved.
The original $2 billion borrowed at the Fed discount window has been repaid. Two weeks ago, yet another $7.2 billion borrowed by other banks was outstanding. This week, there are no outstanding loans at the Federal Reserve Discount window. End of story…or is it?
The Federal Reserve has another tool called the Federal Temporary Open Market Operations (FOMO), which is used to influence the Federal Funds market. The purpose of FOMO is, “To implement monetary policy, short-term repurchase and reverse repurchase agreements are used to temporarily affect the size of the Federal Reserve System's portfolio and influence day-to-day trading in the federal funds market.”
The chart at the left tells us about continued “liquidity injections” or repurchase agreements between it and member banks. The Fed may enter a repurchase agreement to provide credit for a bank in exchange for assets that are “repurchased” by the Fed. Likewise, the Fed can enter into reverse repurchase agreements to reduce the amount of credit outstanding.
What this chart may be telling us is that the Federal Reserve Discount Window may have been getting a little too much negative publicity. In order to keep things quieter, the Fed may have simply moved the Discount Window transactions to the Federal Open Market Window, where scrutiny is less pervasive.
Credit Revulsion takes hold.
The commercial paper market continues to shrink since the subprime debacle. Admittedly, the decline is slowing from $48.1 billion the week before last to only $13.6 billion in the past week. ``The commercial paper market is not deteriorating as fast as it was in August, but as long as outstandings continue to fall, it is not out of the woods yet,'' Christopher Low, chief economist at FTN Financial in New York, wrote in a note to clients. ``It's still more accurate to say the patient is less sick than to say the patient is recovering.''
Commercial paper is owned by mutual funds, such as money market funds, as well as banks, corporations and pensions. Subprime debt found its way into the commercial paper markets through the use of asset-backed commercial paper, which has fallen $270.5 billion in the last seven weeks, adding to the total outstanding decline in the commercial paper market of $368.1 billion during the same period. Since August, the commercial paper market declined by 17%, while the asset-backed market shrank by 23%. This abrupt shrinkage may resurrect a term once used during the Great Depression. It is called “credit revulsion.”
Running out of credit? Just raise the ceiling!
The U.S. Senate on Thursday approved a bill to raise the national debt limit by 850 billion U.S. dollars to 9.815 trillion dollars. What is intriguing is that none of the U.S. news services are covering this event. But the Chinese certainly know, since the only source for this announcement is the China View. President Bush is expected to sign the bill raising the debt ceiling to $9.815 Trillion by Monday, so the federal government won't have to shut down. There. I said it. Doesn't it make you feel better?
Japan 's Nikkei falls on signs of a weaker economy.
This is the latest headline from Bloomberg. Slowing retail sales and a shrinking middle class are adding to the woes as unemployment rates climbed and consumer prices dropped for the seventh straight month. While this morning's drop in the Nikkei is not shown in the chart, there is ample evidence to show that the September rally is over.
Central Bank raising interest rates again?
This week, the Central Bank of China raised interest rates and down-payment minimums for those buying second homes in China . Sound familiar? As a matter of fact, not! As recently as a year ago, homeowners could effectively mortgage up to 100% of the value of a second home here in the U.S. It appears that the banking officials in China have been observing our behavior and decided not to let it happen there.
“Pop-up” fly ball ready to come crashing down.
As I mentioned last week, Bernanke's rate cut didn't produce a home run for the market. Granted, the S&P 500 index managed to stay up for an additional week, but that may be attributed to the practice of “ window dressing .” This is where money managers buy into the winners at the end of a quarter, so they cannot be accused of making poor choices, regardless of the fundamentals. Usually those same stocks are jettisoned after the quarter end.
Why are bonds trending down?
CNN Money reports that, “Treasurys (sic) shake off losses and end higher.” The decline in durable goods orders helped bond investors as a new batch decided to own bonds as a safe have against a slowing economy.
It has been well documented that the Federal Reserve follows the bond market. In other words, interest rates have been dropping in the bond market since June, while the Federal Reserve waited until September. Is the bond market now giving us a different picture?
Housing bottom 'could be a ways off': Lockhart
Dennis Lockhart , new president of the Atlanta Federal Reserve Bank isn't looking at my charts, is he? "I believed, and still do, that the factor weighing most heavily on this change in the outlook has been the potential negative ramifications of the financial turmoil," Lockhart commented.
Allthough he believes the Fed can bring our economy to a soft landing, he still sees turmoil ahead in the financial markets.
Dollar grazes new low.
The current thought process used for the dollar is that it will continue showing weakness as long as the housing slump persists and the economy weakens. In fact, due to the belief that the Fed will cut interest rates again soon, it is thought that the trend will persist. Although there are striking similarities between the housing index and the dollar in 2007, there is an even stronger inverse relationship between stocks and bonds and the dollar.
The rally in gold tires…
…and today it put in what may be the final surge to a 27-year high. Not everyone is happy about this move. 'Funds are throwing lot of money at gold,' said Kitco analyst Jon Nadler. He added, however, that gold's one way ascent over the past month is taking on some 'ominous and speculative features that may not see it correct in orderly fashion'.
Time to take some off the table?
Diesel looking better than gasoline.
The outlook on the economy has put a ceiling on the price of oil in the past, according to the EIA's report this week. The Fed's rate cut has taken off the ceiling, leaving the price of oil to find a new, higher ceiling, as the thinking goes. If you buy that thought, then $100 oil and $5.00 per gallon gasoline is in our near future. But it is even clearer that the housing market, which has accounted for as much as 70% of the employment in our nation is declining even further. I simply don't see that squaring with the notion of $100 per barrel oil. Do you?
Natural gas supplies are in good shape.
A new warm front and the return of GM workers to their jobs should put a floor under natural gas prices, says the Energy Information Agency . Meanwhile, natural gas in storage in the U.S. grew last week and is 8 percent above the five-year average for this time of year, a government report said Thursday.
Despite what the EIA suggests, the charts say that lower natural gas prices are on their way.
A credit crisis is looming.
Marc Faber , a leading international economist wrote this on September 20, 2007. “Unlike all the Wall Street strategists who compare the current credit crisis to the credit crisis of 1998 (Long Term Capital Management), I believe that the ongoing credit problems will be far worse and of a longer-term nature. This will make it difficult for the market to reach new highs in the near future. Moreover, even if the 1998 comparison were to hold, we would still be looking at a much deeper stock market correction than the 22% sell-off we saw in 1998”.
Back on the air again.
Tim Wood of www.cyclesman.com , John Grant and I have had a running commentary on the markets again this week. You may listen to our comments by clicking here .
Please make an appointment to discuss our investment strategies by calling Claire or Tony at (517) 699-1554, ext 10 or 11. Or e-mail us at tpi@thepracticalinvestor.com .
Regards,
Anthony M. Cherniawski,
President and CIO
http://www.thepracticalinvestor.com
As a State Registered Investment Advisor, The Practical Investor (TPI) manages private client investment portfolios using a proprietary investment strategy created by Chief Investment Officer Tony Cherniawski. Throughout 2000-01, when many investors felt the pain of double digit market losses, TPI successfully navigated the choppy investment waters, creating a profit for our private investment clients. With a focus on preserving assets and capitalizing on opportunities, TPI clients benefited greatly from the TPI strategies, allowing them to stay on track with their life goals
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