Nov 30, 2011

The Fed to the Rescue, Again

November 30, 2011

Good news or bad news? In economics, the dismal science, news is definitely in the eye of the beholder. Stocks, commodities, and the Euro are soaring this morning after six central banks (the Fed, ECB, Bank of Canada, Bank of Japan, Bank of England, and the Swiss National Bank) lowered the cost of emergency dollar funding for European banks. The banks also agreed to extend bilateral swap programs through Feb 2013, from Aug 2012. Additionally and unrelated, China cut bank reserve requirements to 21% from 21.5% to stem a slowdown in exports to Europe.

Is this coordinated central bank action good news? It definitely helps the liquidity problem faced by the major banks in Europe. I have shown the big rise in overnight funding costs for European banks a number of times over the past six months, but recently pricing has spiked to 2008 levels as solvency concerns in Europe have risen dramatically. The central bank action definitely helps the liquidity problem for the banks, but it doesn’t address the sovereign solvency issues which continue to plague these banks’ balance sheets. But is it good news that liquidity is so bad that the central banks must act in a coordinated effort we have only seen rarely, most recently in the fall of 2008 after Lehman collapsed? I’m not so sure.

Not surprisingly financial stocks and inflation beneficiaries (materials and energy) are up strong this morning. Partially due to bans on short selling financial stocks in some European markets and primarily due to the liquidity problems faced by our banks, US financials have been hammered to levels close to those in 2008. Bank of America (BAC) traded below $5 yesterday for the first time since early 2009, but is finding a bid today in spite of S&P lowering their credit rating for dozens of banks yesterday.

A number of people have asked me about the EFSF and how it is funded. I ran into this chart below from The Big Picture that attempts to clarify how the facility is funded. Have fun with this one.

Microsoft (MSFT) announced this morning that they have sold more X-box 360 game consoles this week than ever before. I have to admit that I am a member of that crowd, picking one up for my kids for Christmas (please keep that quiet J) . On Black Friday I was online looking to purchase one, and I found it for $425 fully loaded. Because I was buying it through the American Express (AXP) points portal and using Amazon (AMZN) and CNET for price comparisons, there was a dearth of information on what was included in the unit that I was buying. I navigated over to the MSFT website to find out why I should spend an extra $100 on the additional memory, and found they were offering the same package for $199, no tax, no shipping! I bought one, surprised that the manufacturer was offering the unit for much less than any of their resellers. They have sold almost 1 million units in the past week.

FaceBook may file for a reported $100 billion IPO to come in the first third of 2012. If accurate, this is an enormous deal that dwarfs Google’s (GOOG) 2004 IPO. The company will reportedly be selling $10 billion worth of stock in the deal.

American Airlines (AMR) filed for bankruptcy yesterday citing debt, rising fuel costs, and high labor costs. The company plans to operate on a normal schedule during the reorganization. AMR is one of the few airlines that hasn’t participated in the recent industry consolidation.

Bloomberg’s ongoing investigation of federal records has discovered that Hank Paulson met with investors on July 21, 2008 to give them a head’s up about looming problems at Freddie Mac (FRE) and Fannie Mae (FNM), just hours after telling the NY Times all was well with the two GSE’s. All four people in the meeting were Goldman alumni who worked with Paulson while he was still at the firm. Seven weeks later both firms (FRE and FNM) went into conservatorship. Both stocks had fallen 99% since the meeting, with preferred shares losing 85%. Now it appears that not only is the Fed giving out inside information to select investors, but also the Treasury Department. Is it any wonder why individual investors are fleeing the markets, feeling they are rigged?

Hundreds of protestors attacked the British embassy in Tehran yesterday in response to new economic sanctions over their nuclear program, forcing the UK government to close the embassy.

Some data out of Germany shows why the Germans are so intent on maintaining the Euro in spite of the costs faced by the German people for bailing out the weaker members. The Federation of German Wholesale, Foreign Trade and Services said it expects exports to exceed 1 trillion euro by year end and continue increasing in 2012. Year to date exports are up 12%. As I’ve mentioned before, the Euro heavily benefits German exports, effectively acting as a weaker than justified currency for them.

UCLA has decided to go back to the drawing board on the football field as they begin their search for a new coach, days before they attempt to win the Pac 12 against Oregon. My opinion is that the only way they’ll ever get out of their own way in football is to 1) start with a new athletic director and 2) invest in their facilities so at a minimum they have a full 100 yard field to practice on. The new helmets were a good idea, they might help recruiting, and certainly can’t hurt.

Have a great day


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