Tuesday, November 25, 2008

Fed Rolls Out Additional Programs, Market Rallies

The Dow is up another 100 points in early trading on a positive reaction to two new programs that are being rolled out by the Fed and supported by Treasury.

The first program is aimed at purchasing direct obligations from Fannie and Freddie, and is aimed at reducing the cost and increasing the availability of credit to purchase houses. The Fed will buy up to $100 billion in direct GSE obligations and up to $500 billion in mortgage-backed securities.

The second program is aimed at supporting asset-backed securities collaterized by student loans, auto loans, credit card loans, and Small Business Admin. loans. Here is what Treasury Secretary Paulson just said about this program in his press conference:

"Issuance of ABS in these areas reached $240 billion in 2007, but credit market stresses led to a steep decline in the third quarter of 2008, and the market essentially came to a halt in October. As a result, millions of Americans cannot find affordable financing for their basic credit needs. And credit card rates are climbing, making it more expensive for families to finance everyday purchases. This lack of affordable consumer credit undermines consumer spending and as a result weakens our economy. To address this need and support the return of consumer lending, the Treasury will provide $20 billion of credit protection to the Federal Reserve in connection with its $200 billion Term Asset Backed Securities Loan Facility. By providing liquidity to issuers of consumer asset backed paper, the Federal Reserve facility will enable a broad range of institutions to step up their lending, enabling borrowers to have access to lower cost consumer finance and small business loans."

In economic news, 3Q GDP was revised to -0.5% (in-line with consensus) from its advnaced reading of -0.3%. And November consumer confidence rose to 44.9 (vs. 38.0 consensus), which was a positive surprise. It is hard to imaging consumers becoming more positive with all the bleak news in the media, but maybe I just need to turn off CNBC once in a while.

In stock news:
  • BHP withdrew its $68 billion hostile takeover bid for Rio Tinto (RTP) due to falling commodity prices and the global recession.
  • GOOG is up $20 on news that it will dramatically scale back on the contract users it employs. It is not laying off employees, but taking steps to reduce operating expenses.
  • Starbucks said it expects negative same-store sales in 2009. Have you tried those McDonald's iced coffees?

Asian markets were higher across the board overnight. Oil is lower this morning after a big pop yesterday. The 10-year yield is falling 20 basis points, and is back down to 3.13%, one of the lowest levels in the last 50 years. And the VIX is -3% lower to 62.

I like the 2.5-day rally, but would really like to see the market consolidate its gains for once without fully giving them back. You know I have also said I want to see both the VIX and the Yen (FXY) fall further. Baby steps.

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