Traders,Yesterday the market took a pretty huge hit as the weekend did NOT bring any certainty, instead it brought more concerns. We saw massive losses across the board and panic started to set in. It also looks like the future is still cloudy as the Fed lowered its standard for collateral it accepts to lend money; clearly things aren't great when you are lowering your standards.
Most of the supports broke yesterday, and that is also alarming, simply because we were already very close to YTD levels. Some of these indices do not have any support levels left in them and could easily free-fall further.
And now the big story has moved from Lehman to AIG. Yesterday's news created ripples across the market as they need close to 100 billion dollars, and even some analyst said that will NOT be enough. The concern about AIG is that it could have worldwide fall out - as banks around the world rely on them from all levels, insurance to investments. It is also a Dow Jones Industrial Component - with a balance sheet topping a trillion - it could create bigger problems for the market. Unlike Lehman - AIG maybe a company the Fed can NOT afford to let fail.
Lastly - the Fed meets today and the odds on them CUTTING the Target (and Discount) Rate is 90% - based on Fed Fund Futures.
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Fed expected to CUT!
While this country is seeing inflation still climbing, even according to government reported methods (CPI), instead of raising rates - or at least standing pat, the Fed is now expected to Cut Rates!
Just a week ago the Fed indicated and almost every analyst expected that the Fed would not change rates for the rest of 2008; expectations were that we would start RAISING rates in the 1st quarter of 2009. As the "worst is behind us" in the credit crisis and the bottom in the housing market was predicted to happen sometime in late 2008 or early 2009. However, last weekend saw the entire economic landscape slip backwards.
Rumors that Lehman was going to get bought out by a Korean bank were greatly exaggerated, Monday they failed. AIG, one of the world's largest insurers by asset (well over a trillion dollars) is looking like it could fail - by as early as Wednesday this week - if not for a major ($100 billion) cash infusion. Several other banks are at the tipping point.
The Fed lowered the standards, over the weekend, for collateral to include shares of stock and ALL Grades of debt instruments. It could look like a Pawnshop as firms pony up all kinds of crud to borrow money. But at 2.25% for a short-term loan (now extended from 30 days to 84 days) may still be too costly. The expectation - to lower rates again.
Traditionally it's the Target Rate (the rate the Fed sets for banks to lend to each other), that all eyes are on. But banks don't have any money left to lend each other and now a new wave and borrowers are in line (those are the investment banks and now AIG - nonmembers). It's really all about ONE rate now, the Discount Rate. AIG asked the Fed for $40 billion yesterday - and others will need more.
My expectations are for a 50 bps cut in the target and discount. In fact we could see an inverted cut, where the discount is cut deeper than the target and could fully invert - Target 25 bps and the discount 50bps. I do believe that 50bps is in the cards - simply because of the kind of money that is being shoveled through the Discount Window.
What does this mean? More money is getting printed and lent on even lower grade collateral, including stock. IMHO - it means the ramping of hidden inflation. We may not see the dollar fall anytime soon - but how much money can you print before it becomes just paper? China has already said - "See ya" and has been turning to the Euro as well as Gold. Several other countries are following suit - as the secondary Treasury auctions are looking weaker and weaker. Who wants to OWN treasuries on lower rates and concern of a depreciating face value? It seems only US investors as they scramble to uncertain safety.
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AIG too big to fail?
S&P and Moody's cut their rating at the close, as the stock lost 50% of its value. That sent a second round of concern, as AIG desperately needs to raise capital, and getting a ratings cut is making that possibility more difficult. American International Group, the U.S. largest insurer by assets, was already looking at several sources for capital on Monday - $40 billion from the Fed, $20 billion from possible foreign investments, and towards let afternoon Goldman and JP Morgan were looking to put a $75 billion dollar infusion together. Now the rate cut is making that even more difficult as possible another $10-$15 billion in CDO maybe triggered by creditors - putting them further behind the eight-ball.
Major firms meet with the Fed yesterday to discuss AIG, they ARE too big to let fail as it was indicated that AIG is deeply interwoven at every firm on the street and abroad. However, the Fed "encouraged" AIG to look to the private sector and discouraged them from coming to the Fed. Firms all realize this is not a bank, but rather a massive insurance company - that if it were to fail we WILL see a domino effect as its counter-party obligations could spur massive selling and "forced" liquidations.
In last ditch efforts Goldman and JP Morgan are trying to put $70-$75 billion together in a short-term loan, but some say that will not be enough - and more will be needed, if not NOW - then tomorrow. Some insiders have said that the FED, while currently encouraging them to look for outside funding, KNOW they can't let it fail unless they want to see the house of cards come tumbling down. Maybe the Fed is seeing if AIG can get the funding it needs, before stepping in.
The Fed has bailed out Fannie, Freddie, and Bear Stearns. AIG is no Lehman, not even a Bear Stearns - they are bigger. Does the Fed let them fail? Many believe they are too BIG to let fail. Keep in mind this is also a Dow Jones Industrial component - I don't think (I could be wrong) that any Dow Jones Industrial stock has ever filed for bankruptcy - is AIG the first?
Expect volatility in the stock - they could get some last minute bridge financing - but that is only a band-aid, without becoming a member of the Discount Window Club, they may continue to flounder. You never know, they could be getting money from the Fed right now (wink wink) via Goldman and JP Morgan - hmmm. That would make it look like the Fed is standing tough, but actually lending through back-channels. Nothing would really surprise me anymore.
AIG was slightly up in Europe, but faded and is not down in the pre-market
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WaMu in the rumor mill.
S&P cut WaMu's credit to JUNK and rumors at the close surrounded WaMu that they maybe closing a bulk of their branches as earlier as this week and had also meet with the Fed (but I could not find out if that meant the Fed via the Discount Window or the Fed as in FDIC). The stock traded down to $1.75 in afterhours trading and concerns are they could be the next big bank to collapse and go into FDIC receivership. At this point it is only a rumor on the streets, if we do see a bulk of their branches lock their doors for the last time - there could be truth to the rumors. Keep an eye on any confirmation to the rumor mill. Getting your credit rating cut to JUNK - means that you could also see a run on deposits, which means the rumors are just a self for filling prophecy.
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Futures Pre-Market
Futures did see a slight rally earlier – then AIG sold off more in the early morning and now the futures are pulling off again. Expect to see some pressure at the opening if it remains negative. There is some volatility in the futures in the pre-market, ARB traders may sit this out – depending on the spread.
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Support / Resistance
Supports? Well we blew through those yesterday for the most part. That means we need to find confidence somewhere to halt the slid.
INDU 11,000 ??? / 11,250 (It would be nice to see the market get back to the 11,000 level and close about it – if it continues to slid – there is really no short-term support. AIG has been the big drag and it looks to pull down the index some more today (already down another 25% in the pre-market).
NDX 1700 / 1750 (This index did stay about support, but it looks to be tested at the opening and probably slightly lower. It would be nice to see halt to the slid at the 700 level. If that breaks – that too doesn’t really have any short-term support areas.)
SPX 1175 / 1200 (We are seeing the futures down 15-20 in the pre-market. Maybe 1175 is the support area – but don’t count on it.)
RUT 660-680 / 700 (We broke 700 and looks like 680 will be visited at the opening. Does it hold?)
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Conclusion
We could see a bounce in the market - based on more "hope" that things are getting better and that we are finally at the bottom. However, fundamentally if we are to use the Fed by any measure - they are playing a different hand - they have lowered their standards and said NO to Lehman. That COULD mean expect more failures and less bailout. AIG is the big story now - Lehman's bones are being picked over by the remaining vultures - the question is what kind of house is AIG building, I suspect that even a $100 billion bridge-loan is a big boost - but doesn't mean they are now healthy. AIG is the story now - so keep your eyes on how this unfolds.
The CPI just came out and showed more inflation, the NY FED is injecting $50 billion, and we wait to see what happens to rates after the FMOC today – expectations as of this morning is 90% they will cut.
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