Friday, August 10, 2007

Credit Crunch Continues, Fed Steps In To Provide Liquidity

The market had a very rough day yesterday, after the credit crunch news moved across the sea to hurt a large French bank. This morning, the pressure is still on the markets. It didn't help that Asian markets were down across the board overnight.

CNBC is reporting that there is a significant forced liquidation on at a large hedge fund. That could be one of the reasons that there is so much selling pressure on the market. The upside of these liquidations, is that once they run their course, there is usally a natural lift for the market.

Of note, the Fed stepped in this morning to inject liquidity into the system, as I have been saying they would for weeks now. They then stepped in a second time, adding roughly $35 billion in reserves this morning. And they focused their buying on the mortgage-backed securities, where liquidity was most needed.

Additionally, the ECB added $83 billion to its money markets, and the Bank of Japan added liquidity last night as well. So this is the largest coordinated central bank intervention since the aftermath of 9/11. That should tell those doubters out there how serious this situation is.

But the Fed can easily throw a lifeline to the markets by just cutting interest rates, as we have been screaming for. Donald Trump was on CNBC this am saying he thinks the Fed needs to cut by a full 1% right now. Whoa, Donnie. Let's not get crazy.

The Fed will step in and cut rates, that is what the fed funds futures market is telling us. But given their history of being late to do everything, I don't expect an emergency meeting to take place.

In the meantime, this correction is still in the range of the previous 6 over the last several years, in terms of its percentage decline. And negative sentiment is again off the charts. One silver lining is that the number of new lows on the NYSE looks to by going down, indicating the selling pressure may be easing. Stay tuned.


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