The Fear Index
The spread between the fed funds rate and 3-month T-bills reversed back into the danger area above 1 percent. The shift from long-term to short-term maturities contributed to falling T-bill yields, but the widening spread demonstrates that investors continue to shun inter-bank and commercial paper markets, preferring the safety of treasuries.
Banks And The Dow
The Dow Jones Industrial Average closed more than 2 percent higher, rallying on news that JPMorgan had exceeded earnings expectations. The response is strange as the New York-based bank reported earnings of $2.37 billion — a fall of 50 percent. And the situation would have been far worse but for a $1.5 billion pretax gain from the sale of its share in the recently listed Visa Inc. (NYSE:V) (Associated Press). We need to remind ourselves that:
- this is a bear market;
- there is strong overhead resistance at the former primary support level of 12800;
- sharp rises are typical of a bear market rally — while in a bull market retracements are sharp and prices tend to advance at a more measured pace.
The Fed faces the worst financial crisis since the 1930s, with banks forced to raise new capital, in order to maintain their capital ratios, at the worst possible time. The cost of capital is at its highest in a bear market. Banks have also borrowed record amounts from the Fed. Discount window borrowings now exceed total bank reserves — with a further $100 billion advanced through the Term Auction Facility. Available data goes back to 1960 and the previously recorded high for borrowed reserves was 32% (of total reserves) in 1984.
Pronouncements that the crisis is close to an end appear premature.