Tuesday, October 14, 2008

Early Look: Dow Spikes +400, Then Fades

This morning's enthusiasm has not been able to hold up the markets, unlike yesterday's historic spike. The Dow surged as much as +400 points at the open, but selling kicked in and all of the major indexes are currently negative.

The Nasdaq may have been the early "tell", as big tech stocks didn't really participate as much, and were the first group to give up their early gains. All that said, it is still early.

In an update to its plan, the Treasury said it will buy up to $250 in preferred stock from US financial institutions. A maximum of $25 billion will be available to each institution, and to participate, firms will have to agree to executive compensaiton limits among other things.

The program is starting with the 9 largest financial firms in the U.S., who really didn't have a choice about participating. I heard that Paulson basically told them they would take the money. This plan is closer to the deals Warren Buffet made with GE and Goldman Sachs, as opposed to the plan to start buying mortgage assets from the bank.

In a joint statement, Paulson, Bernanke, and FDIC Chair Bair said the majority of banks in the U.S. are strong and well-capitalized. The actions are being taken to increase confidence in the financial system and improve liquidity.

In that sense, dollar libor (the rate that banks charge to lend each other) is declining across all terms, indicating that the liquidity situation is improving. Other measure of credit angst are also falling a bit from elevated levels.

The dollar is slightly weaker again vs. the euro, and this is helping commodities. Asian markets soared overnight, with Japan spiking +14.2% (I think that's a record). Oil is slightly lower, but still above $80. The 10-year yield is higher at 3.99%. And the VIX is still high at 55.65, up 1% today.

long VIX puts


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