Expect Another Preventative Rate Cut
A: Stocks are just off record highs, fed funds target rate is at non-restrictive 4.75%, the US dollar is at record lows and sinking further, oil is bubbling at record highs, inflation is a long term threat, and commodities are at very high levels; hardly an environment that needs rate cuts. But this credit situation is much worse than many people think and I think the fed is cutting rates now so that when they 'kick in' in the future it will be just when we need them to! It's a very confusing time right now, leaving me to focus on the biggest threat to everything: the credit markets.
The fed has two decision meetings left for this year; Oct. 31st & Dec. 11th. As much as I don't want it to happen given inflation concerns down the road, it looks like the fed will cut rates again by 1/4 point at the end of this month.
The earnings for major banks have come out in the past few weeks and they have been nothing short of disgusting!
* Wachovia (WB) - Wachovia Corp. before Friday's opening bell said its third-quarter earnings fell 10% from a year earlier as the bank booked a $1.3 billion write-down as a result of disruption in fixed-income markets.
* Bank of America (BAC) - Nose-diving profits at the company's global corporate and investment-banking group were behind the earnings miss. Profits at the unit fell 93.0%, to $100 million, from $1.43 billion a year ago.
* Citigroup (C) - Citigroup, the global banking giant, said today that third-quarter profit dropped 57 percent after it faced heavy blows to its fixed-income and consumer businesses. "There really is a lot of deterioration happening in mortgages right now," Gary L. Crittenden, Citigroup's chief financial officer, told investors and analysts on a conference call today.
* Washington Mutual (WM) - Washington Mutual Inc. shares fell nearly 8 percent Thursday, a day after reporting fallout from the housing slump drove its third-quarter profit down 72 percent. Chief Executive Kerry Killinger said "increasingly difficult market conditions" are hamstringing the banking industry.
Just to name a few of the big boys. We heard about insolvency cases at Rhinebridge CP and fire sales of assets to meet debt payment deadlines at Tango Finance, Ltd.. But the most compelling case that problems are getting real serious again in the credit markets, comes from the plunge in the ABX Indexes over the past few weeks. Folks, if you want to get an idea of investor sentiment in the subprime mortgage backed securities world, you look at the ABX Indexes! As I have discussed since Tuesday, things are getting very scary! The chart below shows you the selloff in the ABX Index for 'AA' paper. Look at that selloff since October 11th (I inserted red 'y' and 'x' axis so that you can see the low we hit when the credit mess first hit, the recovery, and the recent selloff taking us below the low point hit back in early August)! We are now lower than the bottom hit when the credit crunch first came to the surface back in early August; you know, when the Dow went from 14,100 to about a trading day low of 12,455 or so in a 2 1/2 week period + started the changes for everyone seeking a loan!
The Wall Street Journal Blog, Real-Time Economics, had a post yesterday citing a quote from a hedge fund manager who said:
...Somebody told me this morning, ‘It is starting to feel like early August, and not just because of the weather"...This hedgie insider is referring to the dysfunction going on at the core of the credit markets; the secondary mortgage markets! The ABX Index is real evidence of this distress! On Tuesday, I thought I wrote a great post titled, "Will The Real Hangover Please Stand Up", but it didn't get the reader participation I was hoping for. In that post I stated:
It was clear that equities were drunk on rate cuts, as I posted last week, and I think the street is yet to adapt fully to a world of credit restrictions, solvency issues, global inflation and higher rates. The first credit blip was an 'awakening' of sorts, and for those that think it's completely over, well, stop hitting the snooze button! Is the latest collapse another indication of distress in the credit markets? I've mentioned before that the credit mess is NOT OVER! We are yet to see the full dragging effects of the credit turmoil in corporate earnings and the side effect to investors and the consumer.The DOW is now down 290 points or so from when I wrote that and it's because something is brewing in the very confusing, mis-understood, world of credit! I think another round of woes is very near and it looks like the fed will have to act to limit the ultimate drag on the US economy down the road.
Expect another preventative fed rate cut to help 'forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.'; as the fed stated with their last easing!
