Tuesday, March 11, 2008

Fed Rides to the Rescue

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The most important news item of the day is today's progression to outright purchase of bad mortgage paper by the Fed. Today, we take 1 step closer to this ultimate outcome - now the Fed is going to allow banks to shovel off this bad paper for 28 days (loans) - while this creates great moral hazard, it is a lot healthier for the economy than simply cutting Fed funds rates to 0%. Investors are also probably very happy to see coordinated action by multiple central banks as it shows they get that it is not "contained to subprime" as a certain Fed chief of the most powerful country in the world said last year.

And yet again, the Plunge Protection Team (for about the 4th time since this tempest started last summer) has crushed shorts in pre-market. Thankfully for us, I lightened up my Ultrashort Financial (SKF) and Real Estate (SRS) positions as mentioned Friday (and I took a bit more off yesterday) as they were "relatively" outperforming Friday - only to continue their carnage yesterday. But frankly that was just good fortune. Many people would be pressing those short bets as the market looked on the cusp of breaking down, and now they suffer large losses due to an item outside of their control. That very easily could of been me as well, as I had about 13-14% of the portfolio in those 2 positions middle of last week - I do feel bad for people who continuously are getting killed by the Fed stepping in pre-market since I've been in their shoes the previous 3 times. Once again this shows, bear markets are not easy for either longs or shorts.

How long this rally will last will be interesting to me... and will it turn from short covering in the worst hit areas to geniune buying? I remain suspicious until proven otherwise... but in theory this move should help the banking system. Personally I wish the market had another really bad day so I could of bought positions I've been waiting on at lower prices. Now that opportunity appears to be gone, at least for the short run, thanks to the "Invisible Hand" (although today they were not that Invisible)
  • The Federal Reserve on Tuesday ramped up efforts to provide more relief to squeezed financial institutions, a coordinated action with other central banks aimed at easing a global credit crises that threatens to push the U.S. economy into its first recession since 2001.
  • The Fed said it will make up to $200 billion in Treasury securities available to big Wall Street investment houses and banks. The new action is designed to ensure that there is an ample supply of Treasury securities. With strains in financial markets, demand has grown for Treasury securities, considered the safest investment in the world because they are backed by the U.S. government.
  • "Pressures in some of these markets have recently increased again," the Fed said in a statement. "We all continue to work together and will take appropriate steps to address those liquidity pressures." The other banks involved are the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank.

  • The Fed announced the creation of a new tool, called the Term Securities Lending Facility (TSLF), geared to provide primary dealers -- big Wall Street investment firms and banks that trade directly with the Fed -- with short-term loans of Treasury securities. They would pledge other securities -- including federal agency residential-mortgage-backed securities, such as those of mortgage giants Fannnie Mae and Freddie Mac -- as collateral for the loans of Treasury securities.

  • The loans would be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008.

  • The Fed has been working to pump billions of dollars into the banking system to aid an economy rocked by the subprime mortgage crisis and the severe tightening of credit. A meltdown in the housing and credit markets has made banks and other financial institutions reluctant to lend to each other, causing a cash crunch. Financial companies wracked up multibillion-dollar losses as investments in mortgage-backed securities soured with the housing market's bust. Problems first started in the market for subprime mortgages-- those made to people with blemished credit histories. However, troubles have spread to other areas.

Long Ultrashort Financial, Ultrashort Real Estate in fund; no personal position

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