Overnight LIBOR rate drops 51% to 2.469%, It's a Start!

Overnight LIBOR rates dropped 51% this morning to 2.469%, down from 5.09% yesterday. This is a good sign. It's a start, next we need to see a correction in the 3-month LIBOR rate, which actually increased 1.4% to 4.82% this morning. Hopefully the overnight improvement will feed into longer term paper and stabilize these crazy credit markets!

Overnight LIBOR Rate (Source: Tradesignals.com)

You can find LIBOR quotes at cnbc.com, or you can find rates and charts at tradesignals.com you might need to register.

Interbank Lending Pressures Continue (Libor Rates), Even With Central Banks Performing Surgery..

Looking at what's going on in the inter-bank lending and forex market is really interesting. I never thought it would come down to a global funding freeze. Money flow is like blood flow; blood is needed to transfer important nutrients to cells, money is needed for the transfer of goods and services between businesses and people. Without the availability of short-term credit (1-mo., 3-mo.) by lending institutions, the problem trickles down to every company needing immediate liquidity to fund payrolls and day-to-day expenses. This is happening right now. With the fall of Lehman Brothers and so many others on the brink of nationalization, lending between banks has frozen up due to insolvency exposure risk. Nobody knows who is infected which is the reason why Libor rates spiked. Also inter-bank lending pressure hurt those in need of U.S Dollars, which could be part of the reason why the value of the U.S Dollar has increased (lack of supply and institutional hoarding). This forced institutions in need of $US to go out into the forex market and bid it up. Since this continued pressure will have a drastic impact on our economy, the Fed is trying to relieve this pressure by funding 3-month commercial paper directly, lowering the fed funds rate and maybe even taking direct stakes in banks. The Libor rate usually is in lockstep with the fed funds rate, but they've diverged significantly which is a big concern. Plus lowering the Fed funds rate won't work if there's no lending going on, it could spark confidence but a recession would just counteract that effect. Once credit is able to flow again to mid-prime borrowers the crisis will be solved. With the Fed performing 3 day's worth of surgery, 1-month and 3-month Libor rates still haven't come down. Banks are just flat out scared to provide capital. But since there is a lag effect to the fix here is an optimistic view, along with 1-mo and 3-mo Libor 10 day libor charts below. The carry trade unwind is also an interesting story, stay tuned.
"Source: Banks borrow record $420 billion per day from Fed (Reuters, 10/9/2008)

"The Fed's various measures have not been quick fixes for the CP market, but they will eventually help. "People act on a lag. It's not a night-and-day difference," said Deborah Cunningham, chief investment officer for Federated Investors' taxable money markets, on Wednesday. "But people are gaining confidence and that confidence is what is needed to restore normal operations, and it's coming back slowly.""

1 Month Libor Rates (10 Day Chart) - Source: Tradesignals.com

3 Month Libor Rates (10 Day Chart) - Source: Tradesignals.com

US Markets Lose 7%, VIX Spikes, GM's Judgment Day (Ticker View, VIX Chart)

The major market moving news today was about GM. "Standard & Poor's Ratings Services on Thursday placed General Motors Corp.'s debt on CreditWatch with negative implications, meaning the automaker's credit, which is already in junk territory, could face another downgrade". Marketwatch Link This killed GM's stock and exchange traded unsecured senior notes.

Market Summary 10/9/08 (Ticker View)
Volatility Index Spikes

GM (Common Stock)

GMS (Exchange Traded Unsecured Senior Notes)

So it's going to be judgement day for GM soon. Around 8,000 on the Dow is the post '87 crash trend line along with tech bubble lows. So in my opinion 8,000 (+/- 300pts) will not be breached, and we closed at 8,579 today so I think we're not that far from a bottom, unless this DOES turn into a great depression.

Nouriel Roubini: Possibility Of Big U.S Bank Failure, Nationalization (Tech Ticker)

This is a must see, it's from Yahoo's Tech Ticker which is a great financial internet show. Roubini thinks there's a possiblity of a big U.S bank failure which could be nationalized. This could hurt many institutions exposed, here's the video. I remember he was predicting this financial crisis in early 2007, also look at this recent New York Times article about Dr. Doom and his arguments on CNBC in 12/2007. I'm wondering when the Roubini trade will get too crowded though, we'll see if he continues to be spot on..

Embedded Video FromYahoo Tech Ticker

"On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.

The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer. Dr. Doom, NYT, Published Aug 18, 2008"

Roubini on Kudlow & Co. Bull Bear Smackdown! 12/07

Here is info on Nouriel Roubini from his website http://www.rgemonitor.com/
"As Chairman of RGE Monitor, Nouriel provides strategic guidance for RGE Monitor's business and content. Professor Nouriel Roubini is an internationally known expert in the field of international macroeconomics. He is a Professor of Economics at New York University's Stern School of Business and is also the co-founder and Chairman of RGE Monitor, an innovative economic and geo-strategic information service named one of the best economics websites by BusinessWeek, Forbes, the Wall Street Journal and The Economist.

Professor Roubini served as a senior adviser to the White House Council of Economic Advisers and the U.S. Treasury Department; has published numerous policy papers and books on key international macroeconomic issues; and is regularly cited as an authority in the media. He received an undergraduate degree at Bocconi University in Milan, Italy and a Ph.D. in Economics at Harvard University, and was previously a faculty member at Yale University."

Tokyo Nikkei 225 Down 9.38%, Coordinated Global Rate Cuts

The Tokyo Nikkei 225 Index lost 9.38%, closing at 9202.32. This shows that the financial crisis is global. Here's the 5 day Nikkei chart from Yahoo Finance, and it has followed the S&P.. Also many central banks around the world decided to cut rates..
"Fed, central banks cut rates to aid world economy

The Fed reduced its key rate from 2 percent to 1.5 percent. In Europe, which also has been hard hit by the financial crisis, the Bank of England cut its rate by half a point to 4.5 percent and the European Central Bank sliced its rate by half a point to 3.75 percent. The central banks of China, Canada, Sweden, and Switzerland also cut rates. The Bank of Japan said it strongly supported the actions."

I'm thinking there has to be a an upside correction sometime soon in all markets... We'll see.

LIBOR Rate Update, How It Relates To Consumer (3-Month LIBOR)

Since the LIBOR rate is all over the news and affecting the global financial system, I wanted to post some charts and information. LIBOR is the London Inter-Bank Offered Rate. Here's a description of the rate and why it's often used, along with a nice flash graphic below.
"Libor, set every morning in London, is what banks pay to borrow money from each other. That in turn determines prices for financial contracts valued at $393 trillion as of Dec. 31, 2007, or $60,000 for every person in the world, and helps set consumer interest rates on everything from home loans to credit cards.

Corporate bank loans are often linked to three-month Libor rates. Libor also affects interest costs on credit cards, student loans and adjustable-rate mortgages. From 2004 to 2006, more than half of the U.S. subprime mortgages at the root of the financial crisis, or those issued to the least creditworthy borrowers, had adjustable rates linked to Libor, said Guy Cecala, publisher of Inside Mortgage Finance in Bethesda, Maryland." Source: Bloomberg.com, 10/3/2008

Click For Larger Image, via Bloomberg Link

This rate is very important because it measures liquidity risk between banks. Because of so many bank failures recently in the U.S and Europe, banks were unwilling to shell out 3 month loans to other banks because of solvency risk. As a result 1 month and 3 Month LIBOR rates spiked making it more expensive to borrow money. As stated in the description above, the 3 Month LIBOR rate is linked to corporate bank loans, as well as consumer loans including adjustable rate mortgages. Here's a recent chart of the 3 Month LIBOR rate and you can see it spiked recently due to the financial mess.

3 Month LIBOR Rate Chart (Source: Tradesignals.com)

Bernanke's Outlook For Economic Growth Has Worsened

Here is a video of Bernanke's speech at the National Association of Business Economics conference giving his economic and inflation outlook..
"Bernanke: Economic outlook weaker: Fed chairman says financial crisis will dampen economy well into 2009 and hints at future rate cuts; says recent actions by Fed, Treasury should help economy recover." CNN Money

Interesting Article About Market Sentiment & Time Magazine Cover

I came across an interesting article from tradingmarkets.com, "Sentiment Now Bearish As All Heck". Gary Kaltbaum talks about many sentiment indicators of a market bottom, and backs it up with 7 reasons. By the way, the Dow at 3:00est is down 311 points to 9,643 and the S&P is down 35 points to 1021 and "Bernanke sees worsening economy, hints at rate cuts".
"I just want to note that all the reactions we usually see at near term lows are being put in place. I did not say bear market bottom... and nothing is 100%. First off... here is TIME MAGAZINE!" Continue with article.

Source: Time Magazine Cover 10/13/08

Jim Cramer on the Colbert Report (10/6/2008 Video)

Stephen Colbert gets insight on the turmoil of financial markets from Jim Cramer, host of CNBC's "Mad Money." 6:15 minutes (updated from fancast to comedy central video).

Will Fed Lower Rates? Technicals of Fed Fund Futures Chart, Options & Curve

There's talk on the street that the U.S. will cut the Fed Funds rate, possibly coordinating with other foreign central banks. Here are quotes from the Bloomberg article: Treasury 2-Year Gains Unstoppable as Fed May Cut Rate (Update2), plus a CNBC video with Diane Swonk @ Mesirow Financial.
``My biggest concern has been and continues to be that the real economy is going into the doldrums,'' said Thomas Girard, a money manager who helps oversee $110 billion in fixed income assets at New York Life Investment Management in New York. ``That ultimately leads the Federal Reserve to lower rates, maybe over the next six months by 100 basis points, and if that is the case Treasury yields will decline.''

"Goldman Sachs economists predicted on Oct. 3 the Fed may lower its target by 1 percentage point in coming months. The firm previously expected policy makers to keep rates unchanged."

Here are charts from barchart.com that show the Fed Fund Futures Chart, Options and Curve. It should be noted that the Call/Put Premium Ratio is 63.50..

Jim Cramer: Time to get out of the stock market (MSNBC Video)

The Dow Jones Industrials just broke through a major 10,000 support level, which was created from the '94 and '02 lows. Jim is saying we could fall 20% from here and he could be right if we don't see a capitulation volume day with a reversal over 10,000. The post '87 crash to '94 bottoms, disregarding the tech bubble lows, brings us to 8,000 on the Dow, which is about 20% below today's levels. Click the chart for a larger view of these trends. If massive hedge fund redemption's occur and European banks keep failing, it's hard to tell what could prop up this market.

An Idea To Prevent The Next Credit Default Swap Illiquidity Crisis

In order to prevent this financial massacre from happening in the future there must be capital and collateral ratio requirements that CDS counterparties must follow in order to sustain their ability to honor existing swap obligations if portfolio holdings get distressed. I'm sure Lehman, AIG and Bear had risk controls in place, but they obviously did not factor in any type of credit disaster risk. If anyone reading this knows about CDS risk management practices please comment. Credit ratings agencies and institutional buyers thought these pooled mortgage backed securities diversified away risk, however too much bad risk (sub-prime debt) was concentrated in these securities and cash stopped flowing in, so the A rated securities were written down to distressed levels.

These counterparties must have the ability to honor existing swap obligations or be forced to sell the obligation to another party or raise additional capital. There must be liquid collateral posted to the par value of these obligations to easily calculate a ratio breach.. If there were conservative ratios in place I'm sure these forced bankruptcies and counterparty ripple effects would have never happened. If these swap counterparties violate a conservative CDS Obligation/Liquid Collateral Value ratio (kind of like how the home builders breached their debt/tangible net worth ratio bank covenants when they kept writing down land values) they must transfer the obligation to another party within a certain time period, or be forced to raise capital or post additional liquid collateral to cover the ratio breach. I'm sure there could be ways to incorporate the underlying securities if they were to be swapped in a default, incorporating CDS par value-underlying market value into the ratio. Again I'm not sure how these transactions are structured. I'm wondering if this could work and what affect it would have on the CDS market and spreads. I also want to know how the illiquid CDS obligation would be transferred to another party since it could bring massive risk to a new party. What if nobody wants it and they can't raise capital?? Could it be transferred in pieces?

This would force financial institutions to deal with their liquidity problems quickly and efficiently, instead of creating a cross-default domino effect like we saw last month. Indirectly these banks were not hedging away their default risk which needs to be addressed for the future health of the CDS market, and the next debt security crisis, when everyone wants to buy an aircarhome in 2108..

Here's an interesting write up on SeekingAlpha: How Banks Hedge Counterparty Risk

Dow Index Analysis, 10,000 Key Long Term Support Level, Falling Wedge

Looking strictly at the technicals, 10,000 is the next major whole number for support as well as the 2004 and 2005 lows. On Friday the Dow closed at 10,325, breaking last week's low of 10,365 when the Dow lost 777 points in one day. So that breach might mean we continue lower, of course it all depends on how traders digest the bail out. Looking at the chart, it seems the Dow is in a falling wedge pattern in an underlying downtrend. Usually these patterns predict a corrective reversal but requires some sort of catalyst for the wedge to squeeze the crowded trade which is around 10,250 on the chart. However, eventually the long term trend prevails and if there is a corrective reversal I'd like to see a successful re-test of the reversal point to tell if we're ready for an uptrend. If there are serious issues with our economy, the Dow could break down from that wedge and test 10,000 which is where the '94-'02 trend hits today. Any type of correction could be delayed due to the short sale ban affecting a squeeze or institutional capital staying on the sidelines. There is also a second trend which tracks the lows of '87 and '94 and it hits today at about 8,000. So hopefully the state of our economy is almost priced into the indices and we don't break below 10,000... And hopefully the Fed doesn't have to subsidize the labor force!

Dow Index: Falling Wedge (Source: Barchart.com)

Description of Falling Wedge Reversal (Source: Sharp2be)

Dow Index: 25 Year Chart w/ Trends (Source: Barchart.com)

I also posted about this on Sep 13, 2008, http://www.distressedvolatility.com/2008/09/long-term-dow-s-technicals-near-term.html.