Municipal money market fund yields remain securely back down to earth

The federal tax-free Fidelity Municipal Money Market fund (FTEXX) reached a high 7-day yield of 5.77% back on October 1, 2008, but is now back down to 1.26%, which is equivalent to a 1.94% taxable 7-day yield in the 35% tax bracket or 1.75% for the 28% tax bracket. These yields are finally below the average taxable money market fund of 2.14%. The so-called "freeze" in so-called inter-bank lending appears to have completed its thawing process, at least in some areas. In other words, the big bank bailout is making good progress at restoring the flow of credit.

The Federal Reserve Commercial Paper Funding Facility (CPFF) kicked off on Monday, October 27, 2008. That should be having a big impact on the commercial paper market which affects money market funds, but how that translates into yields on money market funds is anybody's guess at this stage. The bad news is that if everything works out, money market fund yields should dive down to much closer to the federal funds target rate of 1.00%, but I suspect that there will be enough lingering uncertainty in the money markets for the next few months to keep yields somewhat higher than that.

Note that GE Capital, GMAC, Ford, and Chrysler have registered for the CPFF program, so that may soon result in an increased flow in credit for GE, GM, et al customers. GE supposedly used CPFF on its first day.

-- Jack Krupansky

ECRI Weekly Leading Index indicator falls sharply and remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell sharply (-0.95% vs.-2.53% last week) to its lowest since 2001 and its annualized growth rate fell sharply (to -21.9, a record low for its 60-year history of data, from -19.3), which is well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "With WLI growth plummeting to the lowest reading registered in its six-decade history, the outlook for the economy has darkened dramatically."

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed and there some amount of stimulus as well as potential problems in the pipeline.

My personal outlook is that: The U.S. economy is currently in a recession that started somewhere between June 2007 and August 2008, and currently shows no sign of an imminent end.

Some believe that the recession started in January or even last November, but there were pockets of strength even as recently as June GDP. By the same token, there were roots of weakness popping up in June 2007 and a financial mini-crisis in August 2007 related to housing clearly indicated that at least significant portions of the economy had already begun to crumble.

Although the current economic reports show significant weakness, there is also a vast amount of potential stimulus in the pipeline that could kick-start the economy within the next couple of months. The big bank bailout should start showing some fruit within a month.

Also, once we get past all of this election year posturing next week, we will start seeing a lot more clarity in perspectives on the economy. Congress looks likely to pass a new stimulus bill in November.

-- Jack Krupansky

GDP did NOT decline on a year-on-year basis!

This morning I read the following erroneous claim in an article from Business Spectator (in Australia) by Alan Kohler entitled "The end of deflationary trade":

... US GDP fell in the September quarter - by 0.3 per cent ... it is the first year-on-year decline in GDP since 1991, ...

Well, that is a false claim since the was not a "year-on-year decline in GDP" in Q3. I suspect that they just do not know how to read the government GDP report. The report does say "Real gross domestic product decreased at an annual rate of 0.3 percent in the third quarter of 2008", but that simply means if you took the decline in Q3 (one quarter) and expressed it as an annual rate it (by simply multiplying by 4) it would be -0.3%. In fact, the report immediately goes on to say "(that is, from the second quarter to the third quarter)", making it rather clear that the decline was quarter-on-quarter annualized and not year-on-year.

Let's do the math...

Real GDP in Q3 2007 was $11.6257 trillion. In Q3 2008 it was $11.7200 trillion. That is a year-on-year *gain* of  +0.81%, not a loss!

The actual (estimated) decline in real GDP in Q3 from Q2 was a mere $7.4 billion or a quarter-on-quarter decline of -0.0631%. Multiply that by 4 to make it an "annual rate" and you get -0.252%. Round to a single decimal digit and you get the "annual" rate of -0.3%. But that is not a "year-on-year" decline.

-- Jack Krupansky

Q3 GDP not so bad

The bad news today was confirmation that real GDP for Q3 was in fact negative, but it actually was not so bad. Forecasts were for something like a -0.5% or -0.6% contraction (mine was 0.0%), but the headline number came in at -0.3%. The really good news is that nominal GDP was in fact reasonably positive. Although the price of oil and gasoline fell rapidly later in the quarter, the sharp gains early in the quarter led to a GDP deflator of 4.2%, compared to 1.1% in Q2. Nominal GDP, the actual numbers people see when buying and selling goods and services, was actually up +3.8%, compared to +4.1% in Q2 and +3.5% in Q1. Subtracting 4.2% (rounded) from +3.8% (rounded) led to the -0.3% (rounded) decline in real GDP.

-- Jack Krupansky

Fannie Mae and Freddie Mac are... doing just fine!

A week ago I wrote a post entitled "Inappropriate vilification of Fannie Mae and Freddie Mac" about how the housing GSEs are far from being villains in the financial crisis were in fact victims of Wall Street excess and are in fact now part of the solution to the crisis. Today, I read in an article on MarketWatch by Steve Kerch entitled "Back on track - Fannie Mae, Freddie Mac fulfilling housing mission, regulator says" that:

Fannie Mae, Freddie Mac and the Federal Home Loan Bank Boards are doing "business as usual," their regulator said Wednesday...

"They are out playing their role, fulfilling their missions," said James Lockhart, director of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac in their government conservatorship. "They are buying assets and guaranteeing mortgage-backed securities. And they have plenty of room on their balance sheets now to buy assets that will support those missions."

"It really is business as usual. We are encouraging them now to be more creative," Lockhart told a ballroom crowd at the Urban Land institute fall meeting here. "In this marketplace we really need Fannie and Freddie to provide liquidity and support."

...

"I think next year you'll see that that are profitable again and hopefully they will be able to attract investors again," he said.

As far as I can tell, very little has changed since Treasury put the two housing GSEs under a federal conservatorship. There was a change of only top executive management, a little bit of re-org, and the establishment of $100 billion credit facilities to make explicit the long-time implicit guarantee of government backing, but no real change in overall strategy or operation. In other words, no hint that there was anything going on within the housing GSEs that would have caused the financial crisis on Wall Street.

The key factor in their takeover by Treasury was not that they were doing anything "bad", but that their stock had been driven so low that they were unable to raise capital. In truth, Treasury could have simply given them the $100 billion credit facilities and otherwise left them alone, but there is another agenda here to essentially eliminate them, eventually, as competition for business that Wall Street will one day want again.

Actually, it would have been much better to give Fannie and Freddie the $700 billion and instructed them to buy up mortgages and MBS at market prices. After all, they are already set up to do exactly that because that was essentially always a part of their mission (to support the mortgage market.) The basic problem was that the Republicans hobbled the GSEs with "reform" back in 2002 and 2003 which restricted the amount of mortgages and MBS that they could buy rather than leaving it open-ended and funded by a huge Treasury credit facility as it is right now.

It will be interesting to see what the next presidential administration will set as its priorities. Top priority will probably remain having "entities" that perform the current GSE functions and "support" the housing and mortgage markets. Whether such entities should be publicly-held companies is an open question. I do not think many Democrats care about that angle, as long as the entities do their job. Oddly, it is Republicans who should want them to be normal businesses, but it is the Republicans who fought them and finally turned them back into a purely government operation, all because of Wall Street greed and influence peddling.

-- Jack Krupansky

Will the Fed rate cut make any significant difference?

I have seen reports suggesting that the cutting of the federal funds target rate by the Federal Reserve will not make a big difference, but such claims usually fail to note the overall context of the federal funds rate. Yes, it is true that consumers will not directly see much change in their lives as a result of changes in the federal funds target rate, but it is a key rate that affects the flow of money within the banking system and in business in general. An incremental change in the federal funds target rate does provide incremental help to the banking system and to business in general. The problem right now is that the banking system is under such stress that borrowing money from the Federal Reserve or even from other banks is not really the main worry. The big worries are figuring out how to restore sanity to bank balance sheets and to attract deposits to be used as capital for lending.

In truth, the federal funds market is really only intended to narrowly moderate a normal and healthy banking system. The problem is that the U.S. banking system is not what you would call normal and healthy. It is not a complete disaster either, but many banks are in serious need of recapitalization and attraction of new deposits as more important factors.

That said, banks can use all of the help they can get, and a significant reduction in overnight lending rates is certainly one piece of the puzzle.

I would also note that a wide range of lending rates are in fact driven by the federal funds rate, including the prime rate and the new commercial paper funding facility. Other rates are based on the federal funds target rate as well, but many of them have been overwhelmed by the credit risk spread that is added to the federal funds target rate that the Fed does not control.

Maybe that is the essence of the problem in general, there are two variables and the Fed only controls one of them.

In any case, it appears to me that the latest Fed rate cut will in fact make a significant difference and probably within the near future. That said, there are plenty of delayed effects that usually take weeks or even months before changes in the federal funds target rate filters throughout the banking and financial systems and business in general.

If you do not mind oversimplifying, we can say that businesses will see an upside within two months and consumers within four months.

-- Jack Krupansky

Gasoline back under $2.60, over $1.50 cheaper than in July!!

While everybody bounces between agony and ecstasy over the (seemingly) excruciatingly slow process of the big bank bailout, meanwhile consumers are (silently) reaping the benefits of the crude oil and wholesale gasoline "bailout" of speculators -- "bailout" as in the speculators are bailing out of their positions and the prices of crude oil and wholesale gasoline have been falling. Crude oil is down near $67, more than 50% below its peak price of $148.60 on 7/11/2008. Retail gasoline price declines continue to ratchet downwards, with the AAA Daily Fuel Gauge Report price falling to $2.589, finally back under $2.60.

Gasoline has now fallen over $1.50 from it's July peak of $4.114.

November RBOB unleaded gasoline futures are at $1.5240, indicating that retail prices are headed for $2.12 to $2.17 within a few weeks, about 45 cents below the current price level.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

-- Jack Krupansky

Will the Fed cut by three-quarters of a point this week? (updated)

Although some people continue to chatter as if it were likely that the Federal Reserve will cut its federal funds target rate by three-quarters of a point, it appears unlikely at this point in time. Instead, the highest likelihood is that the Federal Open Market Committee (FOMC) will cut its target rate by a half-point, from 1.50% to 1.00%, at its meeting on Wednesday, October 29, 2008.

Fed funds futures indicate a 100% chance of a half-point rate cut and only a 46% chance of a three-quarters point cut.

It will be quite interesting to see how, if, and when this cut plus the last half-point cut filter into money market fund, money market account, and CD rates. The good news is that a fair number of banks are very serious about attracting deposits, so they may be a little hesitant to drop rates too promptly. On the money market fund front, the issue is the commercial paper market and worry about redemptions. I would note that the new Federal Reserve Commercial Paper Funding Facility (CPFF) went into operation on Monday, October 27, 2008, and that could push commercial paper rates down, eventually. Actually, the initial CPFF offerred rate was 3.88% for asset-backed commercial paper and 2.88% for unsecured comercial paper (1.88% plus a 1.00% surcharge), which are substantially higher than average money market fund yields.  CPFF does not affect money market funds directly since issuers of CP sell directly to the Federal Reserve, but it will indirectly affect the money markets by soaking of excess supply of CP, which might then have the effect of pushing yields down. The goal of CPFF is not to reduce the investment opportunities that money market funds see, but simply to act as a "backstop" and assure that CP issuers can sell as much paper as they need to sell independent of the day to day needs of the money market funds to actually buy CP on any given day.

-- Jack Krupansky

Another "massive" stock market rally? It must be another short-squeeze

Hedge funds and in-house proprietary trading desks at the big banks are desperate to make a quick buck and shorting stocks is one of their favorite tools, especially in a weak economy. There is also plenty of "monkey see, monkey do" on Wall Street when it comes to following apparent trends, plus plenty of amateur "investors" tagging along as well. But none of this is "real" selling in then all they are doing is building up a massive deficit of shares that will eventually have to be bought back to cover their short positions. The market cannot go too many days before short-selling reaches the point of "selling exhaustion", where there are simply no more "investors" standing in line ready to short stock. At that point, saavy speculators realize that the short-term trend has ended and reverse their positions and bet on the upside, kicking off yet another massive short-covering "rally" or "short squeeze."

This does not necessarily indicate that a bear market "bottom" has been reached, but simply that "range traders" or "swing traders" have reached their short-term speculative trading bottom and are happy to ride in the other direction.

Alas, the biggest problem with a massive short squeeze rally is that it goes too far the other direction too quickly and may even blow past the upper end of the range-traders' range, leading to increased volatility as speculators grope in the dark for a new sense of the short-term trend.

Another specific event factor today was that smart traders do not want to be on the "wrong side" of the Federal Reserve when another rate cut is expected tomorrow afternoon. Better to be ready with some long positions in advance of a rally and have some dry powder for renewed shorting.

None of this should be of concern to serious, true investors, who should continue to focus on long-term business fundamentals.

-- Jack Krupansky

Over the cliff

Although people have been chattering about a recession for a year now, it was really only in the past few months that a recession really kicked in to the degree needed to indicate a full-blown recession rather that a mere slump or dip. August and early September appeared to mark the point where the economy literally fell off a cliff. This was when Hurricane Ike hit Texas really hard, Boeing suffered a strike, and Detroit cut back on lending for car loans. After the fiscal stimulus in the Spring and early summer, consumers really started to pull back in August and early September, further deterred by the events mentioned above. And then the financial crisis kicked into high gear.

The employment decline in August was steeper than earlier in the year, but still not quite "over the cliff" into true, full-blown recession territory. Now, it does appear that we really are "over the cliff" and could see steeper employment declines, reductions in business spending, further reductions in consumer spending, and further declines in industrial production, at least until Congress institutes enough additional fiscal stimulus to finally boost spending a bit. Weekly unemployment claims now seem solidly up in the 450K range, indicating a recessionary track.

Meantime, it is actually healthy for the economy to contract a bit more to clear the decks of so much deadwood "hangover" from the housing bubble, the Wall Street credit and securitization bubble, and the commodities speculation bubble.

How deep, how broad, and how long are questions that are completely open at this stage of the recession, waiting to see how quickly the banking and financial systems return to something resembling stability. Give Bernanke and Paulson another two months to work their magic and that will be our new baseline. It may be a steep "stair-step" decline from the current level of GDP, but it is what it is, or at least it will be.

-- Jack Krupansky

Gasoline back under $2.70

While everybody bounces between agony and ecstasy over the (seemingly) excruciatingly slow process of the big bank bailout, meanwhile consumers are (silently) reaping the benefits of the crude oil and wholesale gasoline "bailout" of speculators -- "bailout" as in the speculators are bailing out of their positions and the prices of crude oil and wholesale gasoline have been falling. Crude oil is down near $63, more than 50% below its peak price of $148.60 on 7/11/2008. Retail gasoline price declines continue to ratchet downwards, with the AAA Daily Fuel Gauge Report price falling to $2.668.

November RBOB unleaded gasoline futures are at $1.4820, indicating that retail prices are headed for $2.08 to $2.13 within a few weeks, about 55 cents below the current price level.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

-- Jack Krupansky

Is a decline in Q3 GDP a sure thing?

A lot of chatterers are absolutely convinced that real GDP will show a decline for Q3 when reported at the end of this week, but I would say that a decline is far from a sure thing. There are a lot of odd factors that go into real GDP, and they are not all moving in the same direction. First, the report this week is only the "advance" report and is based on estimates for data for September and even August that is simply not yet available and will be extrapolated. There will be a second report at the end of November which is somewhat more accurate, and a third report at the end of December that should be reasonably accurate. Second, the massive declines in the price of crude oil should dramatically reduce the subtraction for imports. Third, moderation of inflation should reduce the subtraction for inflation. Fourth, exports may possibly save the day, again. It is also possible that the final report might indeed be negative, but the advance report may come in somewhat positive. That said, Macroeconomic Advisers, the firm that supplies the monthly real GDP numbers used by the National Bureau of Economic Research (NBER) Business Cycle Dating Committee (BCDC), is forecasting a decline of -0.6% for real Q3 GDP.

I have no firm conviction as to where this advance estimate of GDP will come in, but I am fairly confident that it will be in a range of -1.5% to +1.5%, or an average of 0.0%. The current Macroeconomic Advisers forecast of -0.6% is as good an estimate as any.

Also, Macroeconomic Advisers is forecasting a Q4 real GDP decline of -2.2%.

Finally, a decline in GDP for Q3 will not indicate that a recession is "official" since there is no such thing as an "official recession." NBER is the closest we have to a semi-official arbiter of recession, but they may not mark the beginning of the recession until it is possibly over.

-- Jack Krupansky

Tech consolidation in the cards?

With the credit crunch and looming recession, it is likely that only the very strongest and well-financed and most creditworthy technology companies will thrive and that smaller and weaker tech companies may likely be gobbled up by their healthier brethren. I am not prepared to predict the matchups, but almost nothing would surprise me.

The big risk for stock market investors is that even if you do manage to pick and buy the hot acquisition targets, market volatility might push your stock down in the interim so that even an acquisition at a hefty premium to the market price may be well below your own purchase price.

-- Jack Krupansky

Will the Fed cut by three-quarters of a point this week?

Some people are chattering as if it were likely that the Federal Reserve will cut its federal funds target rate by three-quarters of a point, but that appears rather unlikely at this point in time. Instead, the highest likelihood is that the Federal Open Market Committee (FOMC) will cut its target rate by a half-point, from 1.50% to 1.00%, at its meeting on Wednesday, October 29, 2008.

Fed funds futures indicate a 100% chance of a half-point rate cut and only a 26% chance of a three-quarters point cut.

It will be quite interesting to see how, if, and when this cut plus the last half-point cut filter into money market fund, money market account, and CD rates. The good news is that a fair number of banks are very serious about attracting deposits, so they may be a little hesitant to drop rates too promptly. On the money market fund front, the issue is the commercial paper market and worry about redemptions. I would note that the new Federal Reserve Commercial Paper Funding Facility (CPFF) goes into operation on Monday, October 27, 2008, and that could push commercial paper rates down, eventually. Actually, CPFF does not affect money market funds directly since issuers of CP would sell directly to the Federal Reserve, but it will indirectly affect the money markets by soaking of excess supply of CP, which might then have the effect of pushing yields down.

-- Jack Krupansky

ECRI Weekly Leading Index indicator again falls very sharply and remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell very sharply (-2.53% vs.-2.98% last week) and its annualized growth rate fell sharply (to -19.3, a 33-year low, from -17.1), which is well below the flat line and the lowest since 2001, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "The nose dive in WLI growth to within half a point of its all-time low underscores the speed of deterioration in the economic outlook."

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed and there some amount of stimulus as well as potential problems in the pipeline.

My personal outlook is that: The U.S. economy is currently in a recession that started somewhere between June 2007 and August 2008, and currently shows no sign of an imminent end.

Some believe that the recession started in January or even last November, but there were pockets of strength even as recently as June GDP. By the same token, there were roots of weakness popping up in June 2007 and a financial mini-crisis in August 2007 related to housing clearly indicated that at least significant portions of the economy had already begun to crumble.

Although the current economic reports show significant weakness, there is also a vast amount of potential stimulus in the pipeline that could kick-start the economy within the next couple of months. The big bank bailout should start showing some fruit within a month.

Also, once we get past all of this election year posturing in just a couple of weeks, we will start seeing a lot more clarity in perspectives on the economy. Congress looks likely to pass a new stimulus bill in November.

-- Jack Krupansky

Is the stock market decline really due to panic selling?

Although retail mutual fund investors have been shedding stocks during the financial crisis, the amounts are rather puny compared to the amounts of raw cash that hedge funds throw at the markets for short-selling. In fact, AMG Data Services reports that for the week ended Wednesday, October 22, 2008 there were actually inflows of $686 million to equity mutual funds. The idea that the stock market decline is "panic" selling is complete nonsense and contrived by hedge funds solely to drive down stock prices to profit from their short sales.

In all honesty, there was no great fundamental shift in the outlook for the economy and business over the past 24 or 48 hours, so the idea that suddenly "panic" is a factor is ridiculous.

One factor is that the media is rather clueless about how the stock market works and does not understand short-term trading in contrast to speculation and even investing. Technical traders and speculators look at the price charts and make a judgment as to where "support" and "resistence" levels are likely to be and take long or short positions according and then revise positions as these different price levels are approached, reached, or exceeded on either the up or down side. When a "break" occurs, they dramatically increase positions and ride the momentum until it dies out or the next support or resistence level is approached. None of this has anything to do with either economic or business fundamentals or even so-called "panic."

The only "panic" is from overwhelmed market specialists (the guys on the floor of the New York Stock Exchange that you always see in media photos when the market moves wildly) who are working frantically to keep up with the pace of order flow and rapidly changing prices.

Hedge funds do not usually spend so much of their energy and capital on mere short-term trading of stocks, but since virtually all of their usual speculation strategies appear to have broken during the crisis as investors rush to "safety", they apparently have fallen back on the old tried and true market manipulation and short-term trading with massive amounts of capital to make a few quick bucks.

-- Jack Krupansky

Gasoline back under $2.80 and cheaper than a year ago!!!

We have hit a major milestone in the fight against commodities inflation with gasoline now selling for less than a full year ago. The AAA Daily Fuel Gauge Report shows that the average price of a gallon of regular unleaded gasoline was $2.781 yesterday compared to $2.820 one year ago.

While everybody bounces between agony and ecstasy over the (seemingly) excruciatingly slow process of the big bank bailout, meanwhile consumers are (silently) reaping the benefits of the crude oil and wholesale gasoline "bailout" of speculators -- "bailout" as in the speculators are bailing out of their positions and the prices of crude oil and wholesale gasoline have been falling. Crude oil is down near $63, more than 50% below its peak price of $148.60 on 7/11/2008. Retail gasoline price declines continue to ratchet downwards, with the AAA Daily Fuel Gauge Report price falling to $2.781.

November RBOB unleaded gasoline futures are at $1.4676, indicating that retail prices are headed for $2.06 to $2.11 within a few weeks, about 70 cents below the current price level.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

-- Jack Krupansky

Municipal money market fund yields finally back down to earth

The federal tax-free Fidelity Municipal Money Market fund (FTEXX) reached a high 7-day yield of 5.77% three weeks ago, but is now back down to 1.87%, which is equivalent to a 2.88% taxable 7-day yield in the 35% tax bracket or 2.60% for the 28% tax bracket. These yields are still above the average taxable money market fund of 2.11%, but less than the Fidelity Select Money Market fund (FSLXX) at 2.91% and the Fidelity Money Market Fund (SPRXX) at 3.14%. The so-called "freeze" in so-called inter-bank lending continues its thawing process. In other words, the big bank bailout is making good progress at restoring the flow of credit.

Note: The Federal Reserve Commercial Paper Funding Facility (CPFF) kicks off on Monday, October 27, 2008. That should have a big impact on the commercial paper market which affects money market funds, but how that translates into yields on money market funds is anybody's guess at this stage. The bad news is that if everything works out, money market fund yields should dive down to much closer to the federal funds target rate of 1.50%, but I suspect that there will be enough lingering uncertainty in the money markets for the next few months to keep yields somewhat higher than that.

-- Jack Krupansky

Inappropriate vilification of Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac have been unfairly and inappropriately characterized as being culprits in the mortgage mess, while in fact they have been both heroes and victims and continue to be victimized. All was fine on the housing and mortgage-backed security front up through 2000 or so. Then, as the dot-com bubble burst, Wall Street began casting around for new sources of profit and decided that Fannie Mae and Freddie Mac had a very lucrative business. Back in 2002 and 2003, Wall Street ramped up its own MBS business and simultaneously started raising a big stink about how Fannie and Freddie posed a "systemic risk" to the U.S. financial system and should be "reined in." Wall Street and the Republicans pushed for and did manage to get some legislation passed which put significant limits on the business of Fannie and Freddie. There were also trumped-up "accounting scandals" which were really simply the fact that the nature of their business simply did not fit in well with traditional accounting standards, especially given their mission to promote homeownership and their implicit backing by the U.S. government. Such efforts to shackle Fannie and Freddie were only partially effective, so Fannie and Freddie continued to prosper with the securitization of prime or so-called "conforming" mortgages, which were fairly low risk. Having failed to completely push Fannie and Freddie out of the MBS market, Wall Street focused on non-conforming mortgages, including Alt-A and so-called subprime mortgages, as well as jumbo mortgages that Fannie and Freddie were prohibited against from even considering. Then the housing market boomed in 2003 though 2005, with subprime lending really taking off as Wall Street created a huge demand for higher-yield, higher-fee subprime MBS and variants that somehow magically could be rated AAA and almost as "solid" as U.S. Treasury securities. Fannie and Freddie were not a significant player in that subprime boom. They may have had some relatively minor exposure, but their overwhelming focus remained safe, conforming mortgages.

With the housing boom turning to bust and the husing market entering recession, even Fannie and Freddie were starting to see a higher rate of defaults and foreclosures, but nowhere near the levels seen by the non-prime MBS created by Wall Street. Fannie and Freddie were doing reasonably well up through the Spring of 2008.

Then, the hedge funds and others decided to target Fannie and Freddie and short and talk down their stock and bonds, utilizing all manner of rumors and innuendo. Everybody has always known that the U.S. government was implicitly guaranteeing the debt of Fannie and Freddie, but the rumormongerers on Wall Street persisted in claiming that it was not so.

With rising foreclosures earlier this summer, Fannie and Freddie were believed to need to raise additional capital to maintain the reserves that Wall Street had conned Congress into placing on them back in 2002 and 2003. But, with their stock under intense pressure in July and August, raising capital by selling stock began to look less likely.

Fannie and Freddie probably should have sought a capital infusion ("bailout") from the U.S. government back in July, but the truth is that the Republican administration was all to eager to see Fannie and Freddie go the way of the Dodo bird, and the sooner the better.

Finally, with the rest of the financial system on the verge of implosion, the U.S. Treasury did in fact help out Fannie and Freddie by putting them into a conservatorship.

Now, Fannie and Freddie are completely protected from the shortsellers on Wall Street, although even today there are people who talk as if the debt securities of Fannie and Freddie were not fully backed by the U.S. government when they really are.

Ironically, the U.S. Treasury has had to do very little to keep Fannie and Freddie running, despite the mortgage-related disasters everywhere else. In fact, Fannie and Freddie are a key component of the U.S. Treasury's plans to bailout the mortgage market. For example, without any additional capital, Fannie and Freddie have been instructed to buy $40 billion in MBS on the open market every month.

Fannie and Freddie are in much better shape than the shortsellers ever claimed.

To be clear, Fannie Mae and Freddie Mac are not currently a systemic risk to the financial system.

In fact, if the hedge funds and shortsellers had not attacked the stock of Fannie and Freddie, they would both be relatively healthy even today with everything else that has happened in this crisis.

The simple fact is that Fannie Mae and Freddie Mac are two of the remaining pillars of our financial system.

If Wall Street and the Republicans had not sought to shackle Fannie Mae and Freddie Mac and if Wall Street had not gone after non-prime mortgages with such wild abandon, the current financial crisis would have been completely avoided.

Fannie Mae and Freddie Mac did nothing to create the current mortgage mess. Wall Street and its Republican apologists are completely and 100% responsible.

The only thing I do not completely understand is why the Democrats stand by idly as Fannie Mae and Freddie Mac are vilified, when they know that Wall Street and the Republicans are completely responsible. My only answer is that the Democrats are collectively simply too clueless due to the complexity of MBS to be able to tell the difference.

-- Jack Krupansky

How to get a 3.25% APY on a money market account at Sovereign Bank

I recently opened a new bank account at Sovereign Bank, including a personal checking account, a personal money market account, and a business checking account. They were offering a $100 new account cash bonus (after 90 days), or even up to $300 if certain conditions were met, including maintaining a $15,000 balance in the accounts. At first I was hesitant, figuring that a bank money market account would earn far less than a typical money market mutual fund, but I was wrong. A quick check revealed that a $15,000 balance would earn 2.75% APY and a $25,000 balance would earn 3.00% APY. By the time I got the account set up and money transferred, I checked the online rates and saw that they had upped the rate for a $25,000 balance to 3.25% APY. I asked my banker about the rates and he said to let him know whenever I put more money in the account and he would "code it" so that I would be sure to get the current rate. I did that today and now I should be earning at 3.25% APY in my personal money market account.

The banker gave me a copy of the "Rate Zone 11 Promotions" sheet, which shows that I have "Product code D201" and that he assigned me "Rate index 614." He did say that this promotion lasts through Friday, meaning you have through Friday to sign up for it, but he did not know how long that rate would continue for. I will keep an eye on it, and then request to be re-coded if my rate falls below the current promotion.

Unfortunately, the Web site does not show the current rate for my account, but it does show the interest earned during the current month, updated on a daily basis, so I can get at least an indirect indication of a rate change.

A rate of 3.25% APY corresponds to a simple interest rate of 3.20%. This contrasts with the current Fidelity Money Market fund (SPRXX) 7-day yield of 3.16%.

-- Jack Krupansky

Why did crude oil fall so sharply today?

The sharp decline in the price of crude oil today was simply a "technical" adjustment related to the way commodities futures contracts are traded. Commodities futures trade on a monthly basis, with the "front month" getting most of the action and all of the press. The front month is the the first monthly contract that has more than a full month left before it matures. Once a month, the front month runs down to only a month left in the contract, at which point trading "rolls over" to the next month. November was the front month for crude oil through yesterday. Today was the first day of trading the December contract as the front month. There is always tremendous volatility as traders close out positions in the old front month and re-open positions in the new front month. Sometimes they open positions in the new front month in advance of the first day of trading as the new front month, but the pace of that roll-over is never precisely predictable.

Also, some traders are opening "long" positions to bet on rising prices while other traders are opening "short" positions to bet on declining prices. So, part of the decline may simply mean there are more short positions being opened than long positions.

It always takes a couple of days for the volatility driven by the roll-over process to settle down. None of this has anything to do with fundamentals or supply or demand or geopolitical considerations. It is simply a "technical" logistical anomaly.

OTOH, there may also have been traders who recently bought the December contract expecting that it might rise when it bacame the front month due to concern that OPEC might cut production quotas, but then the price declined when those traders dumped the contract today when they realized that their bet had failed, at least for the short-term.

Another factor in the decline is the simple fact that traders realize that the U.S. economy is in a recession and that there is downwards pressure on demand now.

-- Jack Krupansky

Why did the market plunge again today?

Once again, hedge funds and short-selling are the most likely big culprits. Sure, the economy is crappy, but that never moves markets by itself. Sure, retail investors are probably continuing to dump their mutual funds, but that negative cash flow is rather minor compared to the money that the hedge funds still have to throw at the market.

To put it simply, all a hedge fund has to do is electronically send a "sell-short" order to an exchange and down the price goes, rinse and repeat. It is really that simple. The flip side is that within a week or two we will see another massive rally or two or three.

Call it mindless volatility, but otherwise ignore it, unless you want to pick up some bargains.

-- Jack Krupansky

Switching money market funds at Fidelity to Fidelity Money Market fund (SPRXX)

I just moved the bulk of my cash at Fidelity from the Fidelity Select Money Market fund (FSLXX) to the Fidelity Money Market fund (SPRXX) to go from a 2.88% 7-day yield to a 3.16% 7-day yield, an improvement of 0.28%. These yields are jumping around on a daily basis and usually I do not bother since the difference is fairly small, but more than a quarter-point is too much to pass up. I expect to stay in SPRXX for at least two weeks and then see how the money market landscape has evolved. In particular, the new Federal Reserve Commercial Paper Funding Facility kicks in on Monday, October 17, 2008, which could cause money market fund yields to start to decline. Or at least that is the theory.

NOTE: By moving this cash from the fund it was in on 9/19, I lose the Treasury money market fund guarantee insurance. Poof! Gone. In the new fund my money now has no Treasury insurance. That is the bad news, but it does not bother me since I have a huge amount of faith in Fidelity. The good news is that I can always switch the money back to where it was on 9/19 (FSLXX) and then presto I regain the full Treasury insurance guarantee. So, if you are thinking of a similar move, beware of the consequences. I suspect that this is one of the reasons that such as large yield gap has opened up without investors quickly arbitraging it away.

-- Jack Krupansky

Gasoline back under $2.90!!!

While everybody bounces between agony and ecstasy over the (seemingly) excruciatingly slow process of the big bank bailout, meanwhile consumers are (silently) reaping the benefits of the crude oil and wholesale gasoline "bailout" of speculators -- "bailout" as in the speculators are bailing out of their positions and the prices of crude oil and wholesale gasoline have been falling. Crude oil is down near $73, more than 50% below its peak price of $148.47 on 7/11/2008. Retail gasoline price declines continue to ratchet downwards, with the AAA Daily Fuel Gauge Report price falling to $2.889, a fourth day back below $3.00, and only 7 cents above a year ago.

November RBOB unleaded gasoline futures are at $1.6805, indicating that retail prices are headed for $2.28 to $2.33 within a few weeks, about 60 cents below the current price level.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

-- Jack Krupansky

Leading economic indicators finally pointing to a little light at the end of the dismal economic tunnel

It is too soon to suggest that sunny economic days are here again, or will be anytime soon, but the U.S. Leading Economic Indicators from The Conference Board registered an increase of +0.3% in September after five consecutive months of decline.

-- Jack Krupansky

Gasoline back under $3.00!!!

While everybody bounces between agony and ecstasy over the (seemingly) excruciatingly slow process of the big bank bailout, meanwhile consumers are (silently) reaping the benefits of the crude oil and wholesale gasoline "bailout" of speculators -- "bailout" as in the speculators are bailing out of their positions and the prices of crude oil and wholesale gasoline have been falling. Crude oil is down near $72, more than 50% below its peak price of $148.47 on 7/11/2008. Retail gasoline price declines continue to ratchet downwards, with the AAA Daily Fuel Gauge Report price falling to $2.954, a second day back below $3.00.

November RBOB unleaded gasoline futures are at $1.6661, indicating that retail prices are headed for $2.26 to $2.31 within a few weeks, about 65 cents below the current price level.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

-- Jack Krupansky

ECRI Weekly Leading Index indicator falls very sharply and remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell very sharply (-2.95% vs.-1.29% last week) and the six-month smoothed growth rate fell sharply (to -17.1 from -14.8), which is well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "With its biggest weekly plunge in 37 years WLI growth has dived to a new 33-year low. This data objectively shows that financial market turmoil is rapidly worsening an already-grim recessionary outlook."

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed and there some amount of stimulus as well as potential problems in the pipeline.

Given that the WLI has continued to deteriorate dramatically lately, I will increase my own forecast for the probability of recession, again...

The U.S. economy is currently in a recession that started somewhere between June 2007 and August 2008, and currently shows no sign of an imminent end.

Some believe that the recession started in January or even last November, but there were pockets of strength even as recently as June GDP. By the same token, there were roots of weakness popping up in June 2007 and a financial mini-crisis in August 2007 related to housing clearly indicated that at least significant portions of the economy had already begun to crumble.

Although the current economic reports show significant weakness, there is also a vast amount of potential stimulus in the pipeline that could kick-start the economy within the next couple of months. The big bank bailout should start showing some fruit within a month.

Also, once we get past all of this election year posturing in just a couple of weeks, we will start seeing a lot more clarity in perspectives on the economy. Congress looks likely to pass a new stimulus bill in November.

-- Jack Krupansky

Moving a little more cash to Sovereign Bank

Now that the taxable-equivalent yield on Fidelity FTEXX is back down to 3.50%, this morning I went ahead and moved some parked cash from FTEXX over to Sovereign Bank where I will now have enough cash to hit the next rate tier of 3.25% APY in a money market deposit account. Sure, I will earn a little less for the cash I am moving from FTEXX, but my existing cash at Sovereign will now earn 3.25% APY rather than only 2.75%. The FTEXX yield also appears to be on a downward trend anyway.

Part of the money I am moving is for my estimated taxes that will be due in January 2009. I am much happier to keep it somewhere other than my main transaction account since "out of sight, out of mind" works best for me so that I will not be tempted to spend any of the "extra" cash (need a fancy new computer or iPod touch?) or think that I have a larger cash cushion than I really have.

I am still quite comfortable keeping my cash and stock at Fidelity, but Sovereign is in fact offering a better deal and I will also get a significant new-account bonus after 90 days. Having full FDIC protection is a nice bonus, but was not a primary factor. I still have about half of my cash at Fidelity.

-- Jack Krupansky

Municipal money market fund yields still fairly high but rapidly drifting back down to earth

The federal tax-free Fidelity Municipal Money Market fund (FTEXX) reached a high 7-day yield of 5.77% two weeks ago, but is now back down to 2.52%, which is equivalent to a 3.88% taxable 7-day yield in the 35% tax bracket or 3.50% for the 28% tax bracket. The so-called "freeze" in so-called inter-bank lending continues its thawing process. In other words, the big bank bailout is making good progress at restoring the flow of credit.

I would note that a bunch of taxable money market funds are still showing up with much higher yields than the Fidelity Select Money Market fund (FSLXX) 7-day yield of 2.74% and the Fidelity Money Market fund (SPRXX) at 3.02%. According to Crane Data, there are at least four funds in the 3+% range and one at 4.67% that are supposedly taxable.

The $64 billion question is how long this pricing anomaly will continue or whether in fact this is part of "the new world financial order." It has been a month since municipal money market funds leaped above 3%. And it has been over a week since the Federal Reserve slashed its target rate to 1.50%.

Seriously, we may in fact be entering a new financial "order" in which people actually think about actual risk and actual quality rather than the fantasy world of the credit boom years where just about everything was considered almost as safe as Treasury debt. Or... maybe not, and maybe this is just a short panic phase we are going through before Wall Street gets back to business as usual.

Note: If you are tempted to move your money to one of these high-yield money market funds, be aware that you will not be covered by the Treasury guarantee program for money market funds since that program only covers the balances you had in any given account and specific fund as on 9/19. That sucks, but it is reality.

See: Treasury's Temporary Guarantee Program for Money Market Funds including the FAQ.

-- Jack Krupansky

Monthly GDP for August fell by -1.1% (-12.5% annualized), Q3 tracking for a -0.3% annualized loss

Monthly real GDP, one of the five primary economic indicators that the NBER Business Cycle Dating Committee (NBER BCDC) uses to judge recession start and end dates, fell sharply in August (-1.1% or -12.5% annualized) , according to Macroeconomic Advisers (MA). The government does not publish GDP data at a monthly level, but the NBER Business Cycle Dating Committee says that they refer to sources such as Macroeconomic Advisers (MA) and their MGDP data series. As Macroeconomic Advisers put the report for August:

Monthly GDP declined 1.1% in August following a 0.1% decline in July.  The 1.2% decline over July and August only partially reversed a 1.6% increase over the prior two months.  While there have been several 2-month increases of 1.6% or better in the short history of monthly GDP (since early 1992), there has never been a two-month decline as large as 1.2%.  The closest was a 0.9% decline in the midst of the 2001 recession.  The decline in monthly GDP in August was largely accounted for by a sharp decline in nonfarm inventory investment.  Our latest tracking estimate of a 0.3% decline in GDP in the third quarter assumes essentially no change in monthly GDP in September.

August marked a second consecutive decline in real GDP off of the June peak. Unfortunately, the data is distorted due to the Spring tax rebate stimulus checks that probably impacted July and maybe even August. August was below May, June, and July, and modestly below January, but higher than all other months. In terms of recession dating, you could pick June as the clear peak, or maybe January if you want to discount the tax rebate stimulus as artificial.

If the NBER BCDC is the definitive expert on marking of recessions, MA is the definitive expert on measuring real GDP at the monthly level with their MGDP data series.

-- Jack Krupansky

Is this the last hurrah for hedge funds?

I still strongly suspect that hedge funds (as well as proprietary trading at in-house trading desks at major banks) is the core cause of a lot of the current market turmoil and volatility, but I now also suspect that their days are numbered. Many hedge funds have had quite poor returns over the past year and are at risk for doing poorly over the next year as well. There have been numerous reports of many hedge funds facing redemption requests from their investors and a lot of that money may not come back any time soon. It remains to be seen how many of those rumors are true. I strongly suspect that as investors gradually begin to more fully assess risk, they may find that the risk-adjusted returns for hedge funds are simply not compelling, or at least nowhere near as compelling as they appeared several years ago.

To be sure, hedge funds will continue to exist in the coming years, but their ability to drive the Dow down 700 points in a single day will likely wane in the coming months. Meanwhile, hedge funds (as well as proprietary trading at in-house trading desks at major banks) will likley continue to be very dangerous snakes.

-- Jack Krupansky

Citibank offering 4.00% APY on a 6-month CD

One of the silver linings of the current financial dark clouds is that banks are finally offering attractive yields. Not just risky banks, but mainstream banks as well. Just this morning I noticed a sign in a Citibank branch on East 42nd Street here in Manhattan offering 4.00% APY on a 6-month CD. That is better than the rates on most of their longer term CDs and matches the rate on their 5-year CD. This suggests the timeframe that banks really need increased cash: more than three months, but no more than six months. They also offer decent rates for online banking, but with way too much fine print to appeal to me.

My own financial situation is still way too "fluid" to considering locking up any cash for even six months.

-- Jack Krupansky

Is UBS the first big bank to get to a clean balance sheet?

Plenty of dust remains to settle, but the Swiss government bailout of UBS today seems likely to have made UBS the first major bank to finally get the point of finally having a clean balance sheet. A MarketWatch article by Steve Goldstein entitled "Markets, analysts mixed on Swiss bank move" offers preliminary details. One remaining key question is the level of capitalization of UBS and their level of strength now that they are at least marginally healthy again. But at a minimum they are now healthy enough to start attracting depositors again.

There was also a hint that UBS may be resolving its client exposures to auction-rate securities as well by offloading them to the Swiss government. According to the article:

The pool of assets that UBS is offloading contains mostly debt backed by U.S. residential and commercial mortgages. UBS also is throwing in other U.S. asset-backed and auction-rate securities, notably those backed by student loans, as well as European and Asian bonds.

UBS is going to sell the securities it doesn't want into a special-purpose vehicle, into which it will inject $6 billion to cover the pool's losses. The Swiss National Bank will then provide a loan of up to $54 billion to pay for the assets.

UBS will be able to claw back the profits from the pool, but it will have to repay the loan and hand over $1 billion and 50% of the remaining equity value to the central bank.

This is another great example of the excellent progress that is being made.

Note: UBS is a non-U.S. bank, but they are in fact one of the Federal Reserve's Primary Dealers for open market operations in Treasury securities and inter-bank lending, so they are rather significant for the U.S. financial system.

-- Jack Krupansky

Gasoline prices keep falling and falling and...

While everybody bounces between agony and ecstasy over the (seemingly) excruciatingly slow process of the big bank bailout, meanwhile consumers are (silently) reaping the benefits of the crude oil and wholesale gasoline "bailout" of speculators -- "bailout" as in the speculators are bailing out of their positions and the prices of crude oil and wholesale gasoline have been falling. Crude oil is down near $73, more than 50% below its peak price of $148.47 on 7/11/2008. Retail gasoline price declines continue to ratchet downwards, with the AAA Daily Fuel Gauge Report price falling over 4 cents today to $3.084, more than $1 below the peak price of $4.114 on 7/17/2008.

November RBOB unleaded gasoline futures are at $1.7339, indicating that retail prices are headed for $2.33 to $2.38 within a few weeks, about 70 cents below the current price level.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

-- Jack Krupansky

Down to 17 Primary Government Securities Dealers, 8 from the U.S.

With all of the changes in the banking industry over the past year, we are now down to only 17 Primary Government Securities Dealers who deal directly with the Federal Reserve through the Federal Reserve Bank of New York. Only 8 of them are U.S. firms, with Merrill Lynch likely to drop out as they are integrated with Bank of America:

• BNP Paribas Securities Corp.
• Banc of America Securities LLC
• Barclays Capital Inc.
• Cantor Fitzgerald & Co.
• Citigroup Global Markets Inc.
• Credit Suisse Securities (USA) LLC
• Daiwa Securities America Inc.
• Deutsche Bank Securities Inc.
• Dresdner Kleinwort Securities LLC
• Goldman, Sachs & Co.
• Greenwich Capital Markets, Inc.
• HSBC Securities (USA) Inc.
• J. P. Morgan Securities Inc.
• Merrill Lynch Government Securities Inc.
• Mizuho Securities USA Inc.
• Morgan Stanley & Co. Incorporated
• UBS Securities LLC.

The usual interaction with the Federal Reserve is the buying and selling of Treasury securities as part of the Fed's open market operations.

-- Jack Krupansky

Yes, we are in a recession

I will go along with the assessment of Janet Yellen, President of the Federal Reserve Bank of San Francisco, that the U.S. economy "appears to be in a recession." A Reuters article by Braden Reddall entitled "Fed's Yellen says U.S. appears to be in recession" also quotes her as saying:

"The outlook for the U.S. economy has weakened noticeably, and inflationary pressures have substantially abated," Yellen said in a speech to the Financial Executives International's Silicon Valley chapter in Palo Alto, California.

"Virtually every major sector of the economy has been hit by the financial shock."

Yellen, who is not a voting member of the interest-rate setting Federal Open Market Committee this year, said the just-ended third quarter probably showed "essentially no growth at all" in the U.S. economy, and that worse lies ahead.

"Growth in the fourth quarter appears to be weaker yet, with an outright contraction quite likely," she added.

There are technical issues with the technical definition of recession, but there is more than enough weakness on enough fronts, including employment, industrial production, and retail sales, that waiting for a clear signal on the GDP and real income fronts is rather moot, especially since the turmoil in the banking and credit sector is virtually assured to cause a major dip in most sectors of the economy for much of this month and possibly well into November depending on the pace of deployment of stimulus into the banking system.

For now, it is abundantly clear that the U.S. economy is currently in a recession, although I suspect that the worst will be behind us by the end of the year, if not sooner. There is simply too much stimulus in the pipeline.

-- Jack Krupansky

Stimulus vs. recession

Regardless of what the state of the U.S. economy was over the past couple of months (near or in a recession), there is a truly massive amount of financial stimulation in the pipeline, on the order of a trillion dollars or even much more, that will be filtering into the various nooks and crannies of the economy over the next few months. It will take a few more weeks before the money starts showing up, but it is clearly on the way.

For whatever reasons, quite a few people on Wall Street, seem fixated on projecting the recent past into the future, even when we have good reason to believe that dramatic change is on the way. Actually, that is precisely the mode of operation of a majority of market participants, taking what they know right now and assuming that it will be true tomorrow, next week, next month, next quarter, and next year. Another word for it is being short-sighted.

Fortunately, there is a strong minority of Wall Street participants who actually do focus on the future and how the landscape is likely to change. Eventually, that latter group does prevail, but in the near-term it is usually the former group that steals all the headlines.

So, for now, the short-sighted cynics who focus on the economy in September and last week will rule the roost and project their doom and gloom out to infinity. Let them have a few more days or even weeks of glory, because their days are numbered.

The stimulus freight train is on its way and is accelerating.

-- Jack Krupansky

Same old same old

Why is the stock market so weak today? Sure, there are valid questions about the economic outlook, but the current stock market is driven far more by trader sentiment and technical trading than about either economic or business fundamentals.

When the market gets pushed down (by short-selling and short-term selling by hedge funds and in-house proprietary trading at the big banks) too far too fast, traders and speculators then reverse their trades and push the market the other way. And when the market rises (due to short-covering and short-term speculation by hedge funds and in-house proprietary trading at the big banks) too far too fast, such as on Monday, traders and speculators once again reverse their trades and work to push the market back down.

This is also known as range-trading or trading in a range. Range traders and speculators use technical charts to guide them as to "support" and "resistance" levels where they establish and reverse positions.

What does it all mean for serious investors? Absolutely nothing! It is all noise or "friction" that may or may not make a few extra bucks for people who get the turning points right (so-called market timing), but ultimately has no impact on the longer-term market trends.

In short, the market movement today or on Monday has nothing to do with long-term economic or business fundamentals and everything to do with business as usual on Wall Street.

True investors should avoid the "show" -- unless you are one of those crazy people who actually enjoy getting sick on rollercoasters.

-- Jack Krupansky

Municipal money market fund yields still quite high but continuing to drift back down to earth

The federal tax-free Fidelity Municipal Money Market fund (FTEXX) reached a high 7-day yield of 5.77% two weeks ago, but is now back down to 2.77%, which is equivalent to a 4.26% taxable 7-day yield in the 35% tax bracket or 3.85% for the 28% tax bracket. The so-called "freeze" in so-called inter-bank lending continues its thawing process. In other words, the big bank bailout is making good progress at restoring the flow of credit.

I would note that a bunch of taxable money market funds are still showing up with much higher yields than the Fidelity Select Money Market fund (FSLXX) 7-day yield of 2.75% and the Fidelity Money Market fund (SPRXX) at 2.98%. According to Crane Data, there are at least four funds in the 3+% range and one at 4.75% that are supposedly taxable.

The $64 billion question is how long this pricing anomaly will continue or whether in fact this is part of "the new world financial order." It has been a month since municipal money market funds leaped above 3%. And it has been over a week since the Federal Reserve slashed its target rate to 1.50%.

Seriously, we may in fact be entering a new financial "order" in which people actually think about actual risk and actual quality rather than the fantasy world of the credit boom years where just about everything was considered almost as safe as Treasury debt.

Note: If you are tempted to move your money to one of these high-yield money market funds, be aware that you will not be covered by the Treasury guarantee program for money market funds since that program only covers the balances you had in any given account and specific fund as on 9/19. That sucks, but it is reality.

See: Treasury's Temporary Guarantee Program for Money Market Funds including the FAQ.

-- Jack Krupansky

Nassim Taleb: current crisis was a White Swan, not a Black Swan event

Black Swan author Nassim Taleb says that the current crisis was actually a white swan event rather than a black swan event since he saw it coming and it was bound to happen. A Bloomberg article by Stephanie Baker entitled "Taleb's 'Black Swan' Investors Post Gains as Markets Take Dive" tells us that:

... Taleb said he saw the banking crisis coming.

"The financial ecology is swelling into gigantic, incestuous, bureaucratic banks -- when one fails, they all fall," Taleb wrote in "The Black Swan: The Impact of the Highly Improbable," which was published in 2007. "The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup."

Taleb said the current crisis is a "White Swan", not a Black Swan, because it was something bound to happen.

"I was expecting the crisis, I was worried about it," Taleb said. "I put my neck and money on the line seeking protection from it."

The article goes on to tell us how unhappy Taleb is with Wall Street's approach to risk management:

Taleb is angry that Wall Street is continuing to use traditional tools such as value at risk, which banks use to decide how much to wager in the markets.

"We would like society to lock up quantitative risk managers before they cause more damage," Taleb said.

-- Jack Krupansky

Now you tell us... DOH!!!

One lingering anxiety over the financial bailout is that the relevant government agencies may not have taken obvious, preemptive steps much earlier when they would have made a huge difference. For example, I was reading a Reuters article by Karey Wutkowski entitled "FDIC program covers $1.9 trillion in debt, deposits" which discusses the new FDIC program that fully guarantees business transaction deposit accounts and tells us that:

Bair said the extra guarantee for transaction accounts "definitely would have made a difference" for Wachovia. She said the North Carolina bank experienced a serious liquidity issue after business transaction accounts fled the firm.

Sure, Wachovia had other problems as well, but it would be a shame if one of the primary factors causing them to "collapse" was simply that FDIC did not introduce the new program a month or two earlier.

We do in fact need a blue-ribbon investigation panel to determine which agencies were effectively asleep at the wheel or otherwise distracted when they could have been highlighting to policymakers the need for urgent reforms.

So, here is an interesting test case. Because FDIC monitors banks fairly closely, they knew in advance that depositors were fleeing Wachovia, but who should they have brought this problem to to get permission to fix it, or did FDIC have this authority all along and is this in fact an instance of gross negligence by the head of the FDIC and her staff? Or, is Treasury responsible for FDIC and the fault is theirs? My suspicion is that it is all FDIC's responsibility and that their lawyers were simply reading their charter a little too narrowly.

OTOH, maybe we do not actually need as many big banks as we had (and maybe still have), so the fact that one of the "extra" banks is now gone could be a distinct benefit. We will know in about five years or so.

-- Jack Krupansky

Ho hum, another day of progress in the bank bailout

Seriously, the big bank bailout has finally reached the stage where real, dramatic, hard-core progress is being made on a daily basis, and the process is now getting a bit tedious and boring. It was quite exciting and challenging to sort through the mess when it was a real storm, but now that the "patient" is being treated, even dramatic progress has an anti-climactic feel to it.

I am enjoying the elevated money market fund yields that are caused by dislocations in the commerical paper, variable rate demand note, and repo markets. This may continue for a couple more weeks until the new Federal Reserve commercial paper program kicks in. The repo market should also settle down as the bank recapitalization program kicks in.

I did pick up a little more Microsoft stock today as part of my automated monthly dollar-cost averaging investment program with Sharebuilder that buys a fixed dollar amount on the second Tuesday of each month. I was really looking forward to it on Friday when the market was down so much and really bummed-out when the market soared on Monday. Luckily, tech stocks dipped today and my automatic order executed at ony 1.20% above the closing level which was -5.49% below the Monday close. Intel reported semi-decent querterly results after the close, so tech stocks may see a bump, at least at the open or in the pre-market.

Otherwise, my finances are mostly on auto-pilot.

Incidentally, Microsoft is currently yielding 2.16%, which is competitive with the average money market fund yield.

-- Jack Krupansky

Gasoline prices keep falling like a rock

While everybody bounces between agony and ecstasy over the (seemingly) excruciatingly slow process of the big bank bailout, meanwhile consumers are (silently) reaping the benefits of the crude oil and wholesale gasoline "bailout" of speculators -- "bailout" as in the speculators are bailing out of their positions and the prices of crude oil and wholesale gasoline have been falling like a rock, although they did bounce strongly today. Crude oil is still down around $82. Retail gasoline price declines have continued to accelerate, with the AAA Daily Fuel Gauge Report price falling over 4 cents today to $3.206.

November RBOB unleaded gasoline futures are at $1.9428, indicating that retail prices are headed for $2.54 to $2.59 within a few weeks, about 65 cents below the current price level.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

-- Jack Krupansky

My new bank is now... a new bank

There were rumors this weekend that Banco Santander, the part-owner of my bank, Sovereign Bank, would acquire the whole bank, and now the news is that the rumors were correct. The press release on Sovereign's web site is entitled "Banco Santander to Acquire 75.65% of Sovereign Bancorp it Does Not Currently Own for Approximately US$1.9 billion":

October 13, 2008

Banco Santander, S.A. (NYSE: STD) and Sovereign Bancorp Inc., ("Sovereign") (NYSE: SOV), parent company of Sovereign Bank ("Bank"), announced today that Banco Santander will acquire Sovereign in a stock-for-stock transaction. Santander currently owns 24.35% of Sovereign's ordinary outstanding shares. The Capital and Finance Committee composed of independent directors of Sovereign requested that Santander consider acquiring the 75.65% of the Company it did not currently own. The Capital and Finance Committee evaluated the transaction and recommended the transaction to the full Board.

Under the terms of the definitive transaction agreement, which was approved by the Executive Committee of Santander and unanimously approved by the non-Santander directors of Sovereign, Sovereign shareholders will receive 0.2924 Banco Santander American Depository Shares (ADSs) for every 1 share of Sovereign common stock they own (or 1 Banco Santander ADS for 3.42 Sovereign shares). Based on the closing stock price for Santander ADSs on Friday, October 10, 2008, the transaction has an aggregate value of approximately US$1.9 billion (EUR 1.4 billion), or US$3.81 per share. The transaction meets Santander's criteria for acquisitions, both strategically, by significantly enhancing the geographical diversification of the Group, and financially, with a projected net profit for Sovereign of $750 million in 2011.

Juan R. Inciarte, Executive Board Member of Banco Santander, stated, "This acquisition represents an excellent opportunity for Santander and for Sovereign. We know Sovereign very well. It is a strong commercial banking franchise in one of the most prosperous and productive regions of the United States, with high growth potential, which will further diversify Banco Santander's geographical reach. We look forward to working closely with Sovereign's senior management and welcoming the entire Sovereign team to Santander."

Ralph Whitworth, Chairman of the Capital and Finance Committee of Sovereign's Board of Directors, said, "Given the unprecedented uncertainty in the current market environment and the challenges facing Sovereign, we believe this is the right transaction at the right time for Sovereign. We considered our options and this transaction very carefully and believe that it provides stability and upside potential for Sovereign, its shareholders, customers, employees and other stakeholders. We know Santander well and look forward to working with them to close this transaction."

The transaction is subject to customary closing conditions, including necessary bank regulatory approvals in the U.S. and Spain and approval by both companies' shareholders. Relational Investors, LLC has agreed to vote its 8.9% of Sovereign shares in favor of the transaction. In addition, all of the non-Santander directors have agreed to vote their shares in favor of the transaction. Banco Santander will call an Extraordinary General Meeting of the Bank's shareholders to approve a capital increase and issuance of approximately 147 million new shares, or approximately 2% of Banco Santander's capital. The transaction is expected to close in the first quarter of 2009.

About Banco Santander

Banco Santander, S.A. (SAN.MC, NYSE: STD) is the largest bank in the euro zone by market capitalization and was fifth in the world by profit in 2007. Santander engages primarily in commercial banking with complementary activities in global wholesale banking, cards, asset management and insurance. Founded in 1857, Santander had as of June, 2008, EUR 918,332 million in assets and EUR 1,050,928 million in managed funds, more than 80 million customers, 13,000 branches and a presence in some 40 countries. It is the largest financial group in Spain and Latin America. Through its Abbey subsidiary, Santander is the sixth largest bank in the United Kingdom, and is the third largest banking group in Portugal. Through Santander Consumer Finance, it also operates a leading franchise in 20 countries, with its principal focus in Europe (Germany, Italy and Spain, among others) and the U.S. In the first half of 2008, Santander registered EUR 4,730 million in net attributable profit, an increase of 22% from the previous year, excluding capital gains. For more information, see www.santander.com.

What this will mean for banking at the retail level remains to be seen, I but I would not expect a lot of change in the near future, especially before the deal closes in the first quarter of 2009. I will evaluate my own personal banking situation in a few months and then decide whether to find yet another "new" bank.

Overall, this is probably a good thing, but since the resulting bank will be larger and more stable, it could mean downwards pressure on account yields.

-- Jack Krupansky

Wow! What does the historic stock market rally really mean?

The dramatic stock market rally today might seem to be a sign that people are now convinced that the global bailout plans will work, but the simple truth is that the market gains were what they were due to only one thing: short covering. This was a dramatic but classic example of an old-fashioned short squeeze, where too many speculators over-sell and over-short a market far beyond fundamentals and normal market demand. This is also called selling exhaustion, where everybody who might have sold has sold and all it takes is a little upwards pressure for alert traders and speculators to sense the change and reverse their positions and bet on the upside. Short-sellers then have no choice but to buy at any available price. What this really means is that short-selling is too big a force in the market and overwhelms normal market activity, resulting in a very dysfunctional market with such increadibly wild price swings.

I would argue for an outright ban of short-selling, or at least severe restrictions so that it can never again overwhelm normal market transactions.

Or, maybe it would just be sufficient to regulate hedge funds and eliminate the problem at its source.

-- Jack Krupansky

Church sign

In these days of crisis and financial misery, everybody needs a church. I just made this one up with the Church Sign Generator:

-- Jack Krupansky

Unlimited funding?

The headlines and media articles made it sound rather extreme, "Unlimited Funding" (e.b., Bloomberg with "Fed Says ECB, Others to Offer Unlimited Dollar Funds"), but the latest program from the Federal Reserve and other central banks is in fact not unlimited. In fact, the Fed did not even use the word unlimited. While it is true that the central banks are not putting a dollar limit on how much they are willing to lend, banks are in fact practically limited by the amount of good collateral that they have on hand to pledge in return for a loan from a central bank.

The relevant language from the Federal Reserve announcement:

Counterparties in these operations will be able to borrow any amount they wish against the appropriate collateral in each jurisdiction.

Sure, "borrow any amount they wish" sounds like "unlimited" borrowing, but that is ignoring the constraint of "against the appropriate collateral" which immediately follows. Maybe you could consider it to be fine print, but the media persists in remaining in exaggeration mode for this financial crisis.

So, a proper layman's summary of the program is that banks can now borrow from the Federal Reserve any amount up to the value of their assets that can be pledged to the Federal Reserve as collateral.

Note that MBS and mortgages can in fact be pledged as collateral to the Federal Reserve. It is up to the bank to set the value of its collateral. I have no idea what procedures must be followed by banks when valuing illiquid collateral for the Federal Reserve. My guess would be that it is the same process that is required for FASB accounting and FDIC rules, but that begs the question of interpretation of "mark to market."

But in any case, this new Fed lending program will not allow banks to borrow more than 100% of the value of their collateral.

-- Jack Krupansky

Two banks fail but depositors are 100% covered even for excess over FDIC limits

The bad news is that two banks failed on Friday and were taken over by the FDIC. The good news is that the FDIC transferred 100% of depositors funds to the new banks, even for amounts over the FDIC coverage limits.

The banks:

• Meridian Bank, Eldred, Illinois

All depositors of Meridian Bank, including any with deposits in excess of the FDIC's insurance limits, will automatically become depositors of National Bank, and they will continue to have uninterrupted access to their money. Depositors will still be insured with the new institution. Therefore, there is no need for customers to change their banking relationship to retain deposit insurance.

• Main Street Bank, Northville, Michigan

All depositors of Main Street Bank, including any with deposits in excess of the FDIC's insurance limits, will automatically become depositors of Monroe Bank & Trust, and they will continue to have uninterrupted access to their money. Depositors will still be insured with the new institution. Therefore, there is no need for customers to change their banking relationship to retain deposit insurance.

The bottom line here is that people really do not need to be afraid of their bank failing, especially if you are under the FDIC coverage limit, which is now $250,000.

-- Jack Krupansky

Gasoline prices are falling like a rock - update

Update: Since I posted this yesterday, the AAA Daily Fuel Gauge Report shows the average retail price for a gallon of regular unleaded gasoline has fallen another 4.4 cents to $3.247.

This means that gasoline has fallen over 20% from its peak on July 17, 2008.

---

While everybody agonizes over the (seemingly) excruciatingly slow process of the big bank bailout, meanwhile consumers are (silently) reaping the benefits of the crude oil and wholesale gasoline "bailout" of speculators -- "bailout" as in the speculators are bailing out of their positions and the prices of crude oil and wholesale gasoline are falling like a rock. Crude oil fell almost $9 on Friday, with wholesale unleaded gasoline faiiling over 22 cents a gallon. Retail gasoline price declines have started to accelerate as well, with the AAA Daily Fuel Gauge Report price falling almost 6 cents today to $3.291.

November RBOB unleaded gasoline futures closed at $1.8070 on Friday, indicating that retail prices are headed for $2.40 to $2.45 within a few weeks, about 85 cents below the current price level.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

-- Jack Krupansky

Gasoline prices are falling like a rock

While everybody agonizes over the (seemingly) excruciatingly slow process of the big bank bailout, meanwhile consumers are (silently) reaping the benefits of the crude oil and wholesale gasoline "bailout" of speculators -- "bailout" as in the speculators are bailing out of their positions and the prices of crude oil and wholesale gasoline are falling like a rock. Crude oil fell almost $9 on Friday, with wholesale unleaded gasoline faiiling over 22 cents a gallon. Retail gasoline price declines have started to accelerate as well, with the AAA Daily Fuel Gauge Report price falling almost 6 cents today to $3.291.

November RBOB unleaded gasoline futures closed at $1.8070 on Friday, indicating that retail prices are headed for $2.40 to $2.45 within a few weeks, about 85 cents below the current price level.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

-- Jack Krupansky

Need to address credit card debt as part of the financial crisis

One of the looming issues standing in line to be addressed in the financial crisis is consumer credit card debt. The basic problem is that with consumers losing jobs and facing mortgage payment problems, credit card payments are slipping. A secondary effect is that missing payments or slipping credit scores cause consumer credit card interest rates to rise sharply, which only causes the problem to get worse in a tightening downwards spiral. What is needed is a simple government-sponsored moratorium that temporarily limits credit card interest rates to something in the 5% to 10% range, puts a hold on late fees, and permits consumers to miss payments for the duration of the temporary program. Balances and the modest interest would accrue, but consumers would not be dinged and the credit card firms would not be dinged for delinquent debt during the duration of the temporary program, which might last for six months, a year, or maybe even 18 months, until the U.S. economy is clearly out of recession and clearly expanding at a healthy enough pace for consumers to have new jobs to resume payments, and time for consumer mortgages to get repriced so that consumers are no longer missing credit card payments simply due to difficulties with mortgage payments. Credit card firms should also be under a moratorium to keep delinquent accounts rather than send them to collections during the temporary period.

-- Jack Krupansky

Good news: GM may divest of GMAC as part of deal to merge with Chrysler

According to an article in The Wall Street Journal cited by an Associated Press article by Tom Krisher entitled "Chrysler, GM discuss merger, acquisition", GM is contemplating a deal to acquire Chrysler that might involve shedding GMAC. That would be great news, allowing GM to focus on retooling of manufacturing for new hybrid vehicles rather than being distracted by anxiety over consumer financing in GMAC that is also exposed to residential mortgages. The odds of a deal are rated at 50-50, but I suspect the pressure on GM will only increase in the coming days.

If the deal does go through, the next step that is needed is for private equity firm Cerberus, current owner of Chrysler and a 51% stake in GMAC, to turn GMAC into a true bank holding company and participate in Treasury efforts to shed "toxic" assets. The net result would be a very interesting new financial institution.

Then, what we need is for GE to do the same thing with GE Capital. GE really needs to focus on industrial infrastructure operations rather than being distracted by an in-house "bank." Maybe Cerberus can help out here as well.

-- Jack Krupansky

Paul Volcker: a voice of sanity in a sea of inanity

Paul Volcker, chairman of the Federal Reserve from 1979-1987, had a good op-ed piece in The Wall Street Journal entitled "We Have the Tools to Manage the Crisis - Now we need the leadership to use them." He gives a credible review of the current problem and how to get out of it. He concludes:

There is, and must be, recognition of the essential role that free and competitive financial markets play in a vigorous, innovative economic system. There needs to be understanding, in that context, that financial ups and downs -- and financial crises -- will be inevitable, even with responsible economic policies and sensible regulation. But never again should so much economic damage be risked by a financial structure so fragile, so overextended, so opaque as that of recent years.

Bravo!

That last phrase is the key key, the opaqueness of the financial structure that kept so many people from really seeing the underlying risks. OTOH, there actually wasn't anything opaque about "the housing bubble", but there was incredible, monumental, unbelievable opaqueness about the fact and extent to which Wall Street and the big banks became dependent on bubble-priced assets and their ulta-opaque derivatives and with so much opaqueness about the risks of those assets to the financial system itself.

-- Jack Krupansky

Does the big spike in the VIX fear index signal the bottom of the bear market?

Traditionally, the CBOE Implied Market Volatility Index or VIX, also known as "the market fear index", spikes up sharply when market sentiment is most negative and usually indicates a market bottom and the transition from a bear market to a bull market. Unfortunately, VIX (or actually the market) frequently has a mind of its own and there is no precise science to VIX analagous to calculating missile or artillery trajectories in the face of gravity. There are frequently a whole series of sharp spikes over a few days and only the last is the final signal of a turn in the market.

The composition of VIX was adjusted in September 2003, so we actually have not seen a true panic and capitulation with the new VIX. In theory, the older data has been adjusted to mesh cleanly with the new VIX methodology, but I am unpersuaded and will remain so until we have a full-blown panic (ala 1987 and 1998) behind us.

The old VIX hit 140 on October 20, 1987. Old VIX hit 48.56 on October 8, 1998, but spiked above 45 four times before hitting that final high that marked capitulation.

New VIX hit 64.92 today and has closed above 45 on six occasions recently before today. It closed above 50 three times before today. That is clearly a greater degree of panic than in 1998.

In the Summer and Fall of 2002, new VIX closed above 45 only one day, barely, and another earlier day almost to 45, and above 40 on ten occasions before beginning a new bull market. The final spike was only up to 42.13. Actually, this was with old VIX, but the old data has been adjusted to mesh with new VIX.

In short, from a historical perspective the current VIX spikes are definitely panic-level and worse than 1998, but not as bad as in 1987. Ultimately, it is not the spikes themselves that mark the market turn, but some external catalyst that reverses sentiment. Despite the level of the latest spike, quite literally anything could happen.

Personally, I think there may be a fair degree of ongoing panic dumping of mutual funds by nervous retail investors and they are unlikely to know anything about VIX and simply keep dumping until they are no longer in the market. And hedge funds and short-sellers will piggyback on that selling pressure until it finally peters out.

There is another way to achieve true, market-turning capitulation and that is simple, old-fashioned "selling exhaustion", where everything who is going to sell has done so and the selling simply stops, dead cold, and traders notice that and begin buying again without fear that somebody is sitting there ready to start selling again. The problem is that there are always short periods where selling stops for various logistical reasons and then starts up again as the logistical obstacles are removed. And, sometimes people really do intend to hang in there, but simply run out of time and sell even though the market has made a clear turn. Or maybe a mutual fund starts selling again because retail investors get nervious based on some news report and dump shares.

-- Jack Krupansky