Rate cutting by itself won't heal what's ailing the credit market. Other recent moves by the central bank, however, are along the lines of what's needed to stem the problem. These include the Fed allowing securities firms to borrow at the same interest rate as commercial banks, extending the terms of those loans to six months from 28 days and accepting as collateral non-agency mortgage backed debt securities.
J.P. Morgan picking up Bear Stearns for a song (with the backing of a $30 billion government credit line for Bear's troubled holdings) was a bailout in all but name. The move has gone a long way to restoring investor confidence.
What we've seen in the seen in the credit market in recent weeks is akin to a good old fashion run on the banks. But as we've been saying since the credit market started to unravel last summer, any financial problem can be fixed if you throw enough money at it. The Fed has since thrown a heck of a lot of money into the system.
Monetary policy typically acts with a lag of six to nine months. When relative calm returns we could see a powerful rally in stocks in general and financials in particular, thanks to the dramatic decline in short-term rates. Meantime, we may have to endure a few more stomach-churning, 300 point one-day swings in the Dow Industrials before returning to business as usual. Hang in there.
Keep in mind that while we're constructive on the stock market here we're not locked into that forecast. So far, there are enough positive signs that the economy is not in recession or at worst the slowdown will be very mild. However, we're keeping a way eye on jobless claims, which have inched higher but remain below recessionary levels. Likewise, industrial commodity prices are still strong, although they have weakened a bit. If we see these two key economic indicators deteriorate much further it will be cause for concern. courtesy of Leed's Newsletter
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