Fed means business...
Tuesday, March 18, 2008 at 07:00AM If you think the news of BSC's token buyout by JPM is the focus of the day, we don't blame you. In our opinion, the real story of the day is the news that our Fed has opened its direct credit facility (lending) program to not only the commercial banks but to the investment bankers as well. This is why we added the morning Journal piece from todays news hogs JPM titled to possibly soothe the soul.. "Major moves should help markets and credit situation' alert. (You probably need to visit the site to read this as the PDF's dont got through email delivery). We didn't grasp the FED facts fully last night, not many did after seeing BSC and $2 a share. Shock factor was in full effect for the lot of traders.. In addition FED increased the loan period to 90 days from 28 days. This of course, assumes that you still have collateral (good or bad quality) to exchange for liquid cash. End of day all talking heads looking at the days action were complementing the FED action. If this policy was announced a week or two ago, this BSC soap would have never taken place. One thing we got to give credit to Mr. Bernanke and co., is that once they realized they made a mistake, they quickly acted to prevent same mistake from happening again. They also prevented a run on other firms today which was the real frightening deal. Traders also tried to run a few into the ground from LEH to anything having a 'broker' association (IBKR).
Lets first quickly talk about BSC here. It is obvious that the Fed "allowed" BSC to be purchased ONLY by JPM. Because this is a rather forced and preferred way, it's really up to JPM to come up with this symbolic offer to steal a company that's in distress. Years down the road, people are going to see this as one of the "deal of the decade" type of transaction and it'll probably be printed in the next edition of university Economics textbook as a great case study. The implication of this deal here is that now people are adding "default risk" to financial institutions. If the traditional thinking is that a financial stock is a good value if it trades around its book value in a distressed environment, it no longer applies in today's environment. Given what market participants have seen with BSC, they are assigning another discount to the previous valuation model. This explains some of the ugly action in the financial sector. We think even though the case with BSC is fairly unique and it may be just one time event within the sector, the thought of having another well known institution to go belly up won't go away for a long while. You can be sure that financials stocks will be depressed for a while until all of the credit issues have been full resolved and confidence will then be restored.
Now lets talk about the implication of Fed here. We think Fed hasn't played an active role in a crisis this aggressively in a long time. For the sake of the stability of our capital system and our market here, we applaud their latest action and we are not the only ones mid day/end of day. Just look at the final 30 minutes after the horrific overnight futures. Some may argue that this is just a desperate and late move by Fed and they are always behind the curve. To us, it's better late than never! The rate cuts will take months to work its way into the system, but the lending program now with pretty much unlimited capital is an immediate relief. This basically eases any fear that a major institution can run into a liquidity crunch. We think this is definitely a way to stop a catastrophic collapse of our financial sector.
With the combination of a good closing reaction from the market and the collapse of the commodity prices today, this market may again found a short term bottom earlier today. If GS and LEH come out with some assurance that liquidity isn't a problem and things aren't nearly as bad as people fear, we think this market may generate enough momentum to start a rally. GS reports tomorrow. However, any rally in this environment is still a bear rally and it'd be constrained by the technical level we all should be familiar by now. Assume the rally takes place after the Fed decision tomorrow, we are looking at 1320 SPX, 12200 Dow as the first resistance and 1380 SPX, 12700 Dow as the ultimate resistance. Unfortuantely, at this point, we can only take this one day at a time and we'd see how things develop with the first attempt of a rally. Of course, the stability of the capital system here only provides that, the stability. It doesn't preclude us from having a recession and inflation still.
The commodity prices 'apparently' all reversed today and took some pretty heavy damage. In our opinion, if this is the first drop in a while, we are inclined to buy on the dip. Remember, the decline in commodity price may be fast and dramatic, we are still in an environment where this is still a bull market in commodities. Until the day Fed stops printing and pumping paper into the system, and U.S. dollar gains back some serious ground against some major currencies, the runup in commodities is far from over. The next couple of days may present us with some good buying opportunities in some of the names we like and we'd be prepared for it. Best is to go through the Journal and catch up on the highlighted names in each sector and make sure they are not missing from your watchlist. Charts are up for a few as well.
Today feels different. If we didn't blow up again at lows, you wonder what it would take if today's BSC debacle didn't do it?. We just need to hit or come close to the trifecta Tuesday ...1.GS 2.VISA ipo 3. FED and we could be off to the races in the short term.
Demi/ YourPersonalTrader
Correction: VISA will price their IPO on Tuesday and trade on Wednesday, a day earlier than their prior pricing/trading date. They will be issuing 406 mln shares with a price range of $37-42.