U.S. stocks jumped yesterday supposedly on news the government is formulating a “permanent” (run for cover when you hear that one) plan to shore up financial markets. The actual reason stocks reversed course and rallied mid-session on a day that the mood was unpleasant and the credit markets remained frozen is anyone’s guess. One gets a sense it was not this “permanent” plan, at least the Senator Schumer version which was nothing more than re-enacting the New Deal. Lord help us!
This version of the plan was not to set up an RTC-type facility to house troubled paper then to sell in an orderly way, but instead to inject government funds in exchange for equity stakes in financial companies and re-writing mortgages to make them more affordable. We can all discuss whether the efforts heretofore are helpful or not, but fat chance with this New Deal-type plan occurring – the housing/credit market is in a tough state, but I don’t think we’re ready to become socialists just yet.
Certainly helping financial shares rebound, which led the advance as the sector gained 11.73%, was the crackdown on a form of short selling that was suppose to be illegal in the first place but apparently not enforced until now.
Industrial and information technology shares were among the next-best performers, up 3.57% and 3.98%, respectively.
Market Activity for September 18 2008
Monetary authorities also played a role as central banks around the world – US, EU, Japan, Canada and Swiss announced coordinated measures to ad massive amounts of liquidity to the banking system. The Fed doubled its existing currency swap with the ECB and Swiss Bank. In addition, they authorized new facilities with the Bank of England, Japan and Canada.
Bottom line, this measure is aimed at reducing funding pressures in the interbank market and to lower LIBOR rates.
Outside of other major issues, many adjustable rate mortgages run off of LIBOR rates, which has jumped big time over the past couple of days as banks are unwilling to lend to their peers. Overnight LIBOR fell to 3.84% from 5.03% but three month LIBOR actually rose – nice try though. Risk aversion remained extremely elevated – as evidence by the three-month Treasury bill that yields just 8 basis points -- and in my humble opinion I don’t see how the Fed’s action changes this. (No, that is not a typo on the three-month T-bill yield, it really is 0.08% -- investors are paying for the safety and liquidity of the Treasury market.)
On the economic front, initial jobless claims for the week ended September 13 rose 10,000 to 455,000. The Labor Department reported claims were boosted because of the impact of Hurricane Gustav. Claims have been elevated for eight weeks now, but I was comforted to see the figure remain below 475,000 in light of Gulf coast weather. Of course, we’ll see the effect of Ike over the next couple of weeks as Houston was hit hard by this storm.
Continuing claims fell 55,000, which is nice, although you won’t hear it reported. I’m not saying we should get excited about this move lower, but it certainly doesn’t hurt.
The current level of claims does not bode well for the September job report, but I don’t think there was anyone on the planet expecting anything special anyway. While this level of jobless claims is unwelcome, it remains well-below the prior two peaks and continues to suggest monthly job losses will remain in the 60,000-80,000 range and not the 150,000-plus level that we see in the typical period of labor market weakness.
In a separate report, the Philly Fed index – a measure of manufacturing activity in the Philadelphia Fed Bank region – came in much higher than expected, rising to post a positive reading of 3.8, the estimate was for a negative 10. (To offer some clarity to new readers, a reading above zero marks expansion, as opposed to the ISM and Chicago-area manufacturing survey in which a number above 50 marks expansion.)
A couple of the underlying sub-indices within the overall survey improved nicely as new orders jumped to 5.6 from -11.9 in August and shipments posted 2.6 from -3.3 last month. If not for a large drag from the inventory component the total survey would have been stronger. That inventory index came in at -22.9 vs. -6.6 in the previous reading as stockpiles plunged, but this is good for next month’s reading as production will likely kick up to replace inventories.
Lastly, household net worth fell 3.5% in the second quarter, as reported by the Federal Reserve via their flow of funds report. Clearly, falling home and stock prices pushed the figure lower – although, as the chart below illustrates it remains elevated (up 48% since 2002 and 212% over the past 20 years).
I’ll note, household liabilities as a share of net worth rose to a record 25.9%, which is up from 18% in 2001. This corresponds with the easy money policy of the Fed – specifically the duration of that easing campaign even as the economy began to boom in 2003 and was in an all out sprint by 2004.
Have a great weekend!
Brent Vondera, Senior Analyst
This version of the plan was not to set up an RTC-type facility to house troubled paper then to sell in an orderly way, but instead to inject government funds in exchange for equity stakes in financial companies and re-writing mortgages to make them more affordable. We can all discuss whether the efforts heretofore are helpful or not, but fat chance with this New Deal-type plan occurring – the housing/credit market is in a tough state, but I don’t think we’re ready to become socialists just yet.
Certainly helping financial shares rebound, which led the advance as the sector gained 11.73%, was the crackdown on a form of short selling that was suppose to be illegal in the first place but apparently not enforced until now.
Industrial and information technology shares were among the next-best performers, up 3.57% and 3.98%, respectively.
Market Activity for September 18 2008
Monetary authorities also played a role as central banks around the world – US, EU, Japan, Canada and Swiss announced coordinated measures to ad massive amounts of liquidity to the banking system. The Fed doubled its existing currency swap with the ECB and Swiss Bank. In addition, they authorized new facilities with the Bank of England, Japan and Canada.
Bottom line, this measure is aimed at reducing funding pressures in the interbank market and to lower LIBOR rates.
Outside of other major issues, many adjustable rate mortgages run off of LIBOR rates, which has jumped big time over the past couple of days as banks are unwilling to lend to their peers. Overnight LIBOR fell to 3.84% from 5.03% but three month LIBOR actually rose – nice try though. Risk aversion remained extremely elevated – as evidence by the three-month Treasury bill that yields just 8 basis points -- and in my humble opinion I don’t see how the Fed’s action changes this. (No, that is not a typo on the three-month T-bill yield, it really is 0.08% -- investors are paying for the safety and liquidity of the Treasury market.)
On the economic front, initial jobless claims for the week ended September 13 rose 10,000 to 455,000. The Labor Department reported claims were boosted because of the impact of Hurricane Gustav. Claims have been elevated for eight weeks now, but I was comforted to see the figure remain below 475,000 in light of Gulf coast weather. Of course, we’ll see the effect of Ike over the next couple of weeks as Houston was hit hard by this storm.
Continuing claims fell 55,000, which is nice, although you won’t hear it reported. I’m not saying we should get excited about this move lower, but it certainly doesn’t hurt.
The current level of claims does not bode well for the September job report, but I don’t think there was anyone on the planet expecting anything special anyway. While this level of jobless claims is unwelcome, it remains well-below the prior two peaks and continues to suggest monthly job losses will remain in the 60,000-80,000 range and not the 150,000-plus level that we see in the typical period of labor market weakness.
In a separate report, the Philly Fed index – a measure of manufacturing activity in the Philadelphia Fed Bank region – came in much higher than expected, rising to post a positive reading of 3.8, the estimate was for a negative 10. (To offer some clarity to new readers, a reading above zero marks expansion, as opposed to the ISM and Chicago-area manufacturing survey in which a number above 50 marks expansion.)
A couple of the underlying sub-indices within the overall survey improved nicely as new orders jumped to 5.6 from -11.9 in August and shipments posted 2.6 from -3.3 last month. If not for a large drag from the inventory component the total survey would have been stronger. That inventory index came in at -22.9 vs. -6.6 in the previous reading as stockpiles plunged, but this is good for next month’s reading as production will likely kick up to replace inventories.
Lastly, household net worth fell 3.5% in the second quarter, as reported by the Federal Reserve via their flow of funds report. Clearly, falling home and stock prices pushed the figure lower – although, as the chart below illustrates it remains elevated (up 48% since 2002 and 212% over the past 20 years).
I’ll note, household liabilities as a share of net worth rose to a record 25.9%, which is up from 18% in 2001. This corresponds with the easy money policy of the Fed – specifically the duration of that easing campaign even as the economy began to boom in 2003 and was in an all out sprint by 2004.
Have a great weekend!
Brent Vondera, Senior Analyst
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