Market Overview: Set for Fresh Market Lows?

Includes: AIG, FNMA, QCOM, WFC
by: The Mole

The market seems to be sliding down the slope of hope as the great debt-unwind continues. The blame for sell off in the last two sessions is being laid at the foot of the old chestnut of hedge funds selling. The WSJ is reporting that one of the largest of these beasts, the giant Citadel is being asked for more collateral from its bankers and this has spooked market professionals.

Today’s Market Moving Stories

  • U.S. House Speaker Nancy Pelosi is reported to be considering a two-staged fiscal stimulus plan, with an immediate package worth some $60b-$100bn, to be followed up early 2009 by a sister measure which would include a “permanent tax cut”.
  • One of the Fed’s new regional presidents Kevin Warsh said sales and production data point to a weak Q4 and that the depth and duration of the economic weakness is highly uncertain. He added that official responses may not be enough to support the resumption of trend growth. Seems to me that the Fed is beginning to entertain the possibility that US rates may have to go to 0% at some point soon.
  • European leaders meet in Brussels today. The G-20 is due to meet next weekend.
  • South Korea cut rates again, this time by 1/4%.
  • WTI crude oil tumbled 4.57 yesterday and even briefly traded below $60 overnight on the back of a very gloomy world economic outlook report from the IMF that I mentioned in the Market Watch yesterday.

The ECB Have Their Heads In The Clouds
And what are we to make of the muppet show in Frankfurt yesterday. They cut by a mere 1/2%, saying that they will be back for another 1/2% cut next month. Why not front load it like the British? There were two moments in the press conference that are worth dwelling on.

When asked if the Euro wonderland was in recession, President Trichet answered “we will see”! The job of central bankers is to act proactively to prevent recessions, NOT to wait like rabbits in the headlights until their in-house economists tell them, "oh yes, we definitely are".

The second classic was their observation that there was no credit crunch in the Eurozone! Their reasoning was that the money supply data which they slavishly pore over tell them there isn’t. Just because the fire alarm isn’t going off doesn’t mean that the building isn’t on fire! Clearly Trichet has never heard of Goodhart’s Law which basically says that once you begin to overly rely or focus upon any economic variable (in this case, money supply data) it actually ceases to be of any use in predicting the future.

British Banks Refusing To Pass On Rate Cuts?
The Bank of England rose to the challenge and cut rates by 1.5%, bringing them to their lowest levels since the 1950’s. They’re below the ECB rates for the first time too. The real trick of course is to ensure that there is some trickle down effect from this to the broader economy. But this may not fully happen.

But there are suggestions that many of the UK’s main banks are refusing to pass on the rate cuts and have pulled their “tracker mortgages” off the market. The story suggests that when the new mortgage offers will be brought to the market that they will have significant increases in spreads over the BoE base rate and nasty upfront arrangement fees. It seems to me that Gordon Brown will need to use a tad more than moral persuasion to twist the arms of the high street banks for fear of The Sun starting on a fresh daily fat cat bankers rant.

Read about further reasons behind yesterday’s huge cut in Mr FT’s new piece on deflation.


  • It may already owe the taxpayer $81.2bn but there are reports that AIG is to have the terms of its bailout softened and the term extended by the Fed.
  • Wells Fargo (NYSE:WFC) has managed to raise $11bn in capital to fund its merger with Wachovia (NASDAQ:WB).
  • Fannie Mae (FNM) is poised to report a staggering quarterly loss of $20bn.
  • In techs Qualcomm (NASDAQ:QCOM) had some disappointing results after the bell with weak future guidance.

Data Today
It's all about the monthly non farm payrolls read from the U.S. at 13.30. Anecdotal reports, survey data and the weekly jobless all suggest that we may be in for a weaker than expected number today. Most forecasts have added about 50k to their initial –200k number, leaving the consensus at –250k. Watch the unemployment rate which is expected to tick up to 6.3%. Don’t forget to look out for any sneaky negative revisions from previous month’s data too.

Disclosures: None