Wednesday, March 12, 2008

Fed to the Rescue: Game Changer or One-Day Wonder?

Yesterday marked the Federal Reserve’s largest liquidity injection yet to banks and brokers. The Fed announcement produced Wall Street’s best day in five years. The Dow rocketed over 400 points. Stocks rallied around the world. The key question now becomes whether or not the news is a real game-changer or a one-day wonder. Here is some interesting stock market and economic insight on all this from last night’s Kudlow & Company.

Andy Busch, global FX strategist at BMO Capital Markets: The Fed action today [was] a very good thing. They needed to relieve part of this credit crunch in the repo market. You and I have talked about this before, it’s a very good thing. And I’m happy that the Fed did it. Obviously, the stock market is extremely happy. [But it doesn’t yet change fundamentals.] The key structure that’s underlying these markets is home prices. That’s the key thing that hasn’t changed yet. We haven’t seen home prices stop falling. But they’re getting close. I feel that in the next 2 or 3 months, we’ll see that occur. [If we see that occur, it is bullish for stocks], absolutely. That is the key thing. For all these ABS, mortgage-backed securities, the underlying security underneath these things is home prices. And if that stabilizes, then that gives us some sure footing where we can evaluate these securities and feel confident that we know what their prices are—and therefore all the companies that own this stuff…It does alleviate a major problem.

Don Luskin, chief investment officer at Trend Macro: Well, [the Fed] finally did the right thing. I only wish they’d done it in August…[But] they finally figured out how to do it. They finally figured out how to convert the excess supply of mortgage-backed securities that nobody wants, into T-bills that everybody wants. It’s a beautiful, risk-bearing arbitrage. The Fed has created a bridge across the chasm of risk to bring cash to people who need it. To bring T-bills to people who need it. It’s just an amazingly brilliant thing. The only problem is, this perfect treatment is being applied to a patient that’s already about three-quarter’s dead. So timing is everything, but at least they finally did it.

Stefan Abrams, managing partner at Bryden-Abrams Investment Management: I don’t believe this is time to unzip your wallet. What the Fed has done today is a terrific step…better late than never. But until we see credit default swap prices down, spreads in the corporate market, spreads in the mortgage market, spreads in the junk bond market, until we begin to see a resumption of more normal—and I won’t say totally normal—but more normal lending practices, the stock market is still hostage to the credit markets…I think [investors should] take a long lunch hour. There’s no need to rush here.