Posted by: Ben Levisohn on October 14, 2008
Following yesterday’s breathtaking moves, the Dow finished today down 76.62. While investors certainly would have liked to see another big up day — remember the market opened up around 300 points this morning — a off day was not unexpected. Yesterday’s move was the equivalent of a sprinter deciding to run a mile and needing to take a breather.
More importantly, however, is the fact that we are in a credit crisis, with the stock market taking its cues from the debt markets. And while the signs appear at least slightly optimistic, there’s still plenty of ground to cover before the crisis can be declared over. “The rally was not the be all and end all,” said Barry James, of James Investment Research.
The good news is that Treasuries sold off slightly today, with prices dropping around 1.5%, as investors decided to take a little cash out from under the financial-world equivalent of the mattress and invest it elsewhere.
Unfortunately, that elsewhere was not in the bond markets. For weeks, it’s been nearly impossible to find anyone looking to buy bonds, especially as the dealers — Wall Street’s former investment banks — have left the market and no one has stepped in to make markets. Markets behave a little better today, but the Treasury Department’s moves have been “no game changer, I can tell you that,” says the Patterson Capital Corporation’s Joseph Patterson. “It’s better than scary, but it’s still treacherous.”
Municipal bonds, long considered one of the safest areas to invest, continued their long slide (they’re now yielding around 1% more than Treasuries, and that’s before their tax benefit is considered). “The government’s moves to provide capital to financials is a positive for credit sectors overall,” says Benjamin Thompson of Samson Capital Advisors. “But it will take awhile to work its way through the system and impact individual sectors like municipals.”
But the real test will come in the short-term lending markets. Libor, the interest rate that banks charge each other to lend, dropped 16 basis points today, to settle at 4.64%. But Libor still has a long way to drop before it hits anything near normal levels. Before Lehman Brother’s bankruptcy, Libor traded around 2.8% and historically, it trades near the Fed Funds rate, which is currently 1.5%.
The commercial paper market, where companies turn for their short term lending, appeared to ease up slightly, after coming almost to a complete halt last week. As the Wall Street Journal reported:
On Tuesday, in the asset-backed segment of this market, a trader at a primary dealer said he had processed orders for $6.3 billion and that 30% of this was for paper that matures later than 30 days.
On Friday, asset-backed commercial paper trading volumes stood at about $5 billion, of which 95% was for paper that matured in just one day.
But even a return of functioning credit markets won’t necessarily signal the end of investor worries. “We were in crash mode,” says Egon Zehnder International’s Robert Sloan. “But after you relieve the crash mode, you have to start dealing with the fundamentals.”