On Friday there was blood in the streets and the best time to buy is during maximum pessimism – well, maybe Stock Traders and Investors saw an opportunity, because after several days of heavy selling, yesterday the Dow exploded 11% higher or 936 points to cap off the best one gain
in Dow Jones history. And this morning Traders are going in for a second helping as Stocks are once again trading higher – however, prices are off their best levels of the day.
It is pretty amazing to see Stocks potentially bottom out, at least so far, on Oct 10th. That is exactly 6 years and one day after the market bottomed out on Oct 9th, 2002. We don’t know if in fact this is the bottom of the market, as there are many uncertainties still to overcome – but when you factor in the sharp Stock rally, historical perspective and the fact that the Fed will create an upside bias to financial stocks by purchasing their shares – it gives a bit more of a positive feeling than we had just last week.
How has the Bond Market responded to this enormous Stock rally? It depends on what you are looking at – Treasuries are getting hammered lower as money pours out of these safe-haven instruments and into Stocks. However, Mortgage Bonds are actually trading a bit higher, as their value may appear a bit more attractive after the recent decline in pricing.
The Bush Administration including Treasury Secretary Henry Paulson, Federal Chairman Ben Bernanke, and FDIC Chairman Sheila Bair announced a plan to use $250 billion of the $700 billion financial rescue bailout bill recently passed by Congress to buy directly into American banks. The government will begin by buying stock in nine of the largest banks including Bank of America, JPMorgan Chase, and Citigroup. This is a very good idea and we continue to be impressed with the efforts of the government to stabilize the financial markets. As we have talked about, the over leveraged banking system is mostly due to accounting regulations. As losses are taken, it reduces (on paper) the net worth of institutions, which then see their ratio of loans to capital skyrocket. The only ways to deleverage are;
To sell off the loans – and in this market, that means at “fire sale” prices, which add to losses. exacerbate the problem, and this is why we are where we are.
To raise capital. But it is hard to do in this market. So the Feds plan today says they will buy non-voting or preferred shares. This is a way to help banks raise capital.
The credit markets are improving somewhat as evidenced by the drop in the 3 month LIBOR Rate bringing it to 4.635% from 4.7525% on Monday and from last Friday’s level of 4.81875%.
After several days of losses, Mortgage Bonds are technically oversold and ripe for a bounce higher. With prices crashing below the 200-day Moving Average, the Bond does have a lot of technical damage to repair in order for prices to improve much further.