Markets and the Dead Cat Bounce

deMolay · Intermediate Crude Joined: Sep 04, 2005 Posts: 907

It will be a rough week. The TED Spread has risen to 3.5. Libor Rises Most on Record After U.S. Congress Rejects Bailout

By Gavin Finch

Sept. 30 (Bloomberg) -- The cost of borrowing in dollars overnight rose the most on record after the U.S. Congress rejected a $700 billion bank-rescue plan, putting an unprecedented squeeze on the global financial system.

The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent today, the British Bankers' Association said. The euro interbank offered rate, or Euribor, for one-month loans jumped to a record 5.05 percent, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, also increased to an all-time high.

``This is unheard of, the money markets should be the engine driving the financial system but they have broken down,'' said Kornelius Purps, a fixed-income strategist in Munich for UniCredit Markets and Investment Banking, a unit of Italy's largest lender. ``Any institution that hasn't completed its 2008 funding needs by now is going to be in very serious trouble. More banks are going to need to be bailed out.''

The seizure in the credit markets is tipping lenders toward insolvency, forcing U.S. and European governments to rescue five banks in the past two days, including Dexia SA, the world's biggest provider of loans to local governments, and Wachovia Corp. Money-market rates climbed even after the Federal Reserve yesterday more than doubled the size of its dollar-swap line with foreign central banks to $620 billion. In Europe, banks borrowed dollars from the ECB at almost six times the Fed's benchmark interest rate today.

Commercial Paper

Libor, set by 16 banks including Citigroup Inc. and UBS AG in a daily survey by the BBA, is used to calculate rates on $360 trillion of financial products worldwide, from credit derivatives to home loans and company bonds.

As money-market rates rise, banks charge higher interest on loans to companies and consumers. U.S. securities firms and lenders alone have a record $871 billion of bonds maturing through 2009, according to JPMorgan Chase & Co.

Yields on overnight U.S. commercial paper jumped 171 basis points today to an eight-month high of 3.95 percent, according to data compiled by Bloomberg. Average rates on paper backed by assets such as credit cards and auto loans rose 229 basis points to 6.5 percent, the highest since 2001. Companies sell commercial paper to help pay for day-to-day expenses such as salaries and rent.

Funding constraints are being exacerbated as financial companies try to settle trades and buttress balance sheets over the quarter-end, balking at lending for more than a day.

ECB Injection

The Frankfurt-based ECB said it lent banks $30 billion for one day at a marginal rate of 11 percent, 900 basis points above the Fed's key rate of 2 percent. The ECB said it received bids for $77.3 billion. The Bank of Japan injected more than 19 trillion yen ($182 billion) into the country's system over the past two weeks, the most in at least six years. The Reserve Bank of Australia pumped in A$1.95 billion ($1.6 billion) today.

In the year before the turmoil in money markets began in July 2007, the Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, never exceeded 15 basis points. It was a record 250 basis points today.

``The money markets have completely broken down, with no trading taking place at all,'' said Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt. ``There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.''

Asian Rates

Borrowing rates rose in Asia earlier today. The three-month interbank offered dollar rate in Singapore jumped to an eight- month high of 3.90 percent. The three-month rate in Hong Kong rose by the most in almost a week to 3.664 percent. The difference between the rate Australian banks charge each other for three-month loans and the overnight indexed swap rate reached 98 points, close to a six-month high.

Financial institutions have posted almost $590 billion of writedowns and losses tied to U.S. subprime mortgages since the start of last year, according to data compiled by Bloomberg.

Dexia got a 6.4 billion-euro ($9.2 billion) state-backed rescue, Belgian Prime Minister Yves Leterme said today. Yesterday, the U.K. Treasury seized Bradford & Bingley Plc, Britain's biggest lender to landlords, while governments in Belgium, the Netherlands and Luxembourg extended a lifeline to Fortis, Belgium's largest financial-services firm. Elsewhere, Hypo Real Estate Holding AG received a loan guarantee from Germany, and Iceland agreed to rescue Glitnir Bank hf.

`New Extreme'

``Counterparty fear in the banking sector is at a new extreme,'' said Greg Gibbs, director of currency strategy at ABN Amro Holding Bank NV in Sydney. ``Credit conditions are as tight as a drum. Unless this settles down, central banks would need to cut rates globally to bring funding costs down.''

Congress's rejection of the U.S. government's bank-rescue plan yesterday prompted traders to fully price in a cut in the Fed's target rate of at least a quarter point next month, futures on the Chicago Board of Trade showed. The odds were zero percent a month ago.

The difference between what banks and the U.S. Treasury pay to borrow money for three months, the so-called TED spread, was at 352 basis points today after breaching 350 basis points for the first time yesterday. The spread was at 110 basis points a month ago.

``We can be sure that funding pressures are not going to ease while there is so much uncertainty,'' said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., part of the world's largest inter-bank broker. ``Cash is going to be at a premium. There's really no end in sight.''

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

Last Updated: September 30, 2008 09:54 EDT
_________________
"Since you have chosen to elect a man with a timber toe to succeed me, you may all go to hell and I will go to Texas." Davy Crockett

smallpoxgirl · Moderator Joined: Nov 08, 2004 Posts: 6486

Up about 250 at the moment.
_________________
"We were standing on the edges
Of a thousand burning bridges
Sifting through the ashes every day
What we thought would never end
Now is nothing more than a memory
The way things were before
I lost my way" - OCMS

Zardoz · Posted: Tue Sep 30, 2008 8:37 am Post subject: Re: Stocks will got up today.

Edit the thread title, Jason.
_________________
"Thank you for attending the oil age. We're going to scrape what we can out of these tar pits in Alberta and then shut down the machines and turn out the lights. Goodnight." - seldom_seen

deMolay · Intermediate Crude Joined: Sep 04, 2005 Posts: 907

Key Phrase. ``The money markets have completely broken down, with no trading taking place at all,'' said Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt. ``There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.''
_________________
"Since you have chosen to elect a man with a timber toe to succeed me, you may all go to hell and I will go to Texas." Davy Crockett

jasonraymondson

Delphis

I agree with Ferret, but I think there are people flocking to the blue chips right now as well. There are some very good companies, with good EPS, and good dividends as well.

I think the sentiment right now is get out of growth and look for good yielding value equity...

At any rate there is likely to be quite a bit of porpoising in the coming weeks...

Here is the biological definition and reasoning behind porpoising...interesting correlation to the market: link
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"Two things are infinite: the universe and human stupidity; and I'm not sure about the universe."....Albert Einstein

ohcomeon · Heavy Crude Joined: Jun 10, 2006 Posts: 140 Location: USA

deMolay · Intermediate Crude Joined: Sep 04, 2005 Posts: 907

Jason how did you hijack my thread?
_________________
"Since you have chosen to elect a man with a timber toe to succeed me, you may all go to hell and I will go to Texas." Davy Crockett

rockdoc123 · Light Sweet Crude Joined: May 16, 2005 Posts: 1718

The biggest worry right now is that Libor is above 6% which is somewhat unprecidented. Basically no one is lending money to anyone. This has far reaching consequences for all aspects of business if it continues for any length of time.

Difficult to say whether bottom has been reached yet. The volatility index is higher now than in the past 4 years which means fear and panic are rampant in the markets.

Big question will be how long this recession will last. the normal 11 month average rule probably doesn't hold given all the tendrils the credit collapse has in all areas of the economy.

One interesting point I make is that this particular set of events will eventually drive oil to higher levels than we have seen. The lack of investment capital available means that fewer wells will be drilled. Companies like Cheseapeake drill thousands of gas wells a year and finance them through the markets. Lower gas prices coupled with equity drying up means little new drilling and some wells shutin (Chesepeake announced some shutins last week). Big offshore projects often depend on project financing which will just be too expensive to obtain. The drop in oil prices further determines these investments will be the first to get shelved. So going forward, less drilling equals less oil and gas. Smaller O&G firms are dependant on investors and they are now running for the hills. Larger companies who may have cash on hand could potentially orchestrate a number of takeovers/mergers. Again the outcome of this is fewer companies drilling, less oil being produced overall. My bet is on short term retreat of oil to $85.....then rise again to $170 or higher within a two year period.

paimei01

Dive dive dive ! Smile

emersonbiggins

smallpoxgirl · Moderator Joined: Nov 08, 2004 Posts: 6486

Welcome to the wild wild world of whipsaws.
_________________
"We were standing on the edges
Of a thousand burning bridges
Sifting through the ashes every day
What we thought would never end
Now is nothing more than a memory
The way things were before
I lost my way" - OCMS

CRACKERMAN · Tar Sands Joined: Jul 28, 2008 Posts: 26

Zardoz

Closed up 485 points.

Gotta be The Mother Of All Dead Cat Bounces.
_________________
"Thank you for attending the oil age. We're going to scrape what we can out of these tar pits in Alberta and then shut down the machines and turn out the lights. Goodnight." - seldom_seen