Following the provision of emergency Fed funds to Bear Stearns, via JPMorgan, there seems to be a growing consensus on two points:
- Bear is going to get broken up/sold; Friday’s move was a temporary arrangement, with an implicit Fed guarantee extended to JPMorgan.
- The Fed is likely to cut interest rates by 100bp next week.
It’s also clear that some people have made a good deal of money out of Bear’s demise, as this eye-popping chart from Data Explorers, showing stock on loan jumping from 16 per cent in February to almost 24 per cent now:
Data Explorers also run an interesting blog, Short Stories.
Some snap strategists’ comment:
Don Rissmiller from Strategas Research
With the Bear Stearns bailout, the Fed continues to support markets – while they have been unwilling to support prices (eg, buy mortgage securities), they have been very willing to support the functioning of the system (discount window borrowing, TAF, TSLF). The Fed is clearly fulfilling it’s “lender of last resort” function, though this event ahead of the financials’ earnings reports indicates that 1) the financial crisis is still continuing, and 2) the financial system remains very fragile as confidence is not present.
John Kemp at Sempra Metals
Fed monitoring markets closely…Implied guarantee to use all necessary means to prevent sharp drop in equities or risk aversion…
Divyang Shah of Commonwealth Bank
The market is now pricing in a significant probability that the Fed could cut rates by 100bps next week. The comment from the Fed that they are watching market developments closely suggests that even though the Fed meeting is next week the Fed could still cut intermeeting. Central scenario is for the Fed to cut rates following their meeting next week but other scenarios should not be ruled out in the current environment.
Here’s some tub-thumping from Ron Hays of Hays Advisory
It is hard to be rational in today’s changing cultural world. It took a massive wake-up call to be the catalyst to start painting the picture of the 21st century. The “wake-up” call started with the 1997 currency crisis. Remember, it is easier to see this stuff in hindsight, but that crisis brought the fire-engines out, eager to provide whatever was needed to put out that fire. They certainly doused the flames, or maybe a better description would be they doused one set of flames while igniting another. The demise of Long-term Capital Management, the default of the Russian bonds brought us up to 1998, and other fires have continued to bring the emergency fire engines out. Douse, ignite, douse, ignite. The biggie, however, was the Terrorist Attack on 9/11, when coupled with the deflating of the Technology bubble (remember Y2K and all that extra liquidity). The Fed pulled out all the stops—cutting their fed funds target from 3 ½% to 1 ¾% in the next 4 months. From ultra tight to ultra liquid, and thus was born the seeds to today’s panic. It is our contention that today’s Federal Reserve is being run by a new Chief, and one that we are still believing and hoping will be the Master Fireman. If our confidence is right, history will show he knows when to raise his bets, and then when to hold ‘em. Greenspan never did. It is our contention that today’s Fed Funds Target is just right, and that the seeds for the returning economy is already in the ground. The good thing, and we all can be so thankful, that Chief Bernanke has a phenomenally smart Co-Chief Paulson who has had great years of experience in putting fires out before they destroy the building. All Greenspan had was Rubin.
