Federally Funded Thursday

Gee, I guess $100 oil is good for the economy!

Central Banks around the World have joined in a coordinated effort to avert what the WSJ is trumpeting as the "Worst Crisis Since the '30s, With No End Yet in Sight" despite the fact that the Hang Seng made a dramatic turnaround mid-day to end up closing flat off a 1,400-point gap down and the Nikkei reversed half of their losses into the close.  I'm not saying the crisis is over but I sure am going to say that sensationalist headlines during a crisis are no help and a sophisticated investor like Rupert Murdoch certainly knows this don't you think?

What does the man who controls what half the "free" World reads in the papers and hears on the news have as an agenda?  Well, money is very cheap, Rupert can borrow at record lows.  Restrictions are off, the government will greenlight any merger or purchase at the moment, happy to save anything, any way they can and properties of all types are as cheap as they've been in the past 5 years – all good news for a Billionaire entrepreneur trying to expand his vast empire indeed!  I'm not going to rant about this, I did at the time he bought the Journal and it's all over now, we just have to live with it…

I'll just leave it off with Mr. Murdoch's photo essay, entitled "Markets in Turmoil."

The NYTimes went with the headline "Central Banks Coordinate Global Effort" – a slightly different spin on the picture that what we are getting from the Journal.  What exactly is a "coordinated global effort"?  Well the Fed authorized a $180Bn expansion of its swap lines, which allows banks to borrow at lower rates as well as extending loan windows from 28 to 84 days and doubling existing swap lines with the ECB and the Swiss National Bank (who do not disclose depositor information).  Brand new swaps have been set up with the BOJ ($60Bn) and the BOE ($40Bn) and even the Bank of Canada ($10Bn) so, if you want dollars – your bank probably has them!

Central banks in Japan, Australia and India pumped a further $28 billion into money markets while China relaxed its monetary policy for the second time this week.  South Korea sold dollars in the swap market and said it would try to halt the slide in bond prices, the Philippines intervened to support the peso and Taiwan warned it could use a state fund to prop up stocks as markets see-sawed across the region.  In a joint statement, the central banks said "these measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets. The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures."

"The intervention does not directly address the key problem … banks' desire to hoard cash and their reluctance to lend to each other."  said Laurence Mutkin, head of European interest-rate strategy at Morgan Stanley in London, wrote in a research note  Aside from being inflationary (oil is up to $101 pre-market and gold has flown to $884, up 14% from yesterday's open), this latest dollar dump by "Helicopter Ben" and company (gee, who could have seen this coming?) has pretty much emptied the Federal piggy bank.  A year ago the Fed held about $800Bn in Treasury securities and this week, after today's new pledges, we have plunged to just $200Bn in the Federal piggy bank.

"The tally is so low that it is becoming imperative for the Fed to take actions to enlarge its balance sheet," said Tony Crescenzi, a strategist at Miller Tabak in New York.  As we get closer to zero, the Fed loses the ability to control inflation in a big way so, unfortunately, oil and gold are still the way to go at the moment as a dollar hedge but, as I said in last night's post, you may be better off putting your money in dividend paying equities, like the examples we used, than you are in a bank as they should inflate right along with the dollar so we'll keep an eye out for more well-hedged strategies that can help out in these troubled times.

On the bright side, nervous investors snapped up a fresh $40Bn of 35-day Treasury bills yesterday at rates that briefly dipped below zero in yesterday's trading (investors pay the Fed to hold their money).  Today the Treasury will aution off another $60Bn, this is more than they need to run the government and that extra money gets parked at the Fed.  The program "will give the Fed the ability to conduct further operations to support financial market functioning, should the need arise," said J.P. Morgan Chase economist Michael Feroli.

I mentioned above that Asian markets came well off their lows but that doesn't mean they didn't suffer severe damage.   Japanese banks were hit very hard with many losing more than 5% as many of them are creditors of LEH and were left holding a very large bag when our government decided that Lehman was not too big to fail – payback on that one will likely be a bitch!  SNE dropped 8.7% on a GS rating cut to neutral from buy.  "It's very much 'follow-the-leader' rule being in effect right now," said Howard Gorges, vice chairman at South China Brokerages in Hong Kong. "There is too much uncertainty still, but there is quite a good chance that we are close to the bottom. Once people feel that the worst problems have been dealt with and that the coming problems are relatively minor," the markets were likely to stabilize, Mr. Gorges said. "We aren't there yet," he added.

We've been watching the FXI as a way to play a possible bottom in China and after the close this morning Chinese authorities announced they will eliminate the tax on stock purchases. Investors will still pay the stamp duty, as it is known, when they sell stocks, so some gentle directional encouragement there. Also, Central Huijin Investment Co., a unit of Chinese sovereign wealth fund China Investment Corp., will buy shares in three state-controlled banks, Xinhua reported. The three banks are Industrial and Commercial Bank of China, China Construction Bank, and Bank of China, all key FXI holdings.  Additionally, China's state-asset regulator will encourage state-owned companies to buy shares in their listed units, according to a message on its Web site.

Rather than plays on the FXI directly, the play we looked at in yesterday's chat was taking puts on the FXP, an ultra-short ETF for the FXI.  That index was at $78 on August 28th and rocketed up to $145 in yesterday's trading.  The Oct $120 puts, for example, were $10.60 but will likely open higher this morning.  These are very volatile and dangerous contracts though, not for the feint of heart!

Over in Europe, Lloyds sealed the deal to buy HBOS for $22Bn, locking up 28% of the UK lending market under one roof in the British leg of the "Highlander" economy.  As recently as 2001, Lloyds was blocked from buying smaller Abbey Mortgage on the basis of monopolizing the market – what a difference a financial crisis can make for the big boys as Lloyds is getting HBOS for $12Bn less than they would have had to pay for Abbey!  European markets are trading modestly higher ahead of the US open while global investors hold their collective breath, waiting to see if $200Bn dumped by the Fed today is enough to keep our equities above the fatal 25% line.

New SEC rules are in effect to reign in short sellers and it may have the impact of widening spreads on options contracts for a while so be very careful looking at your bid/ask spreads.  This can also wreck havoc with your virtual portfolio balance as the VIX fluctuates wildly as well and it is not a good time to be in a lot of high premium positions.  It remains to be seen what effect the SEC changes will have on the markets and investors may be very disappointed if the answer is "not much."

Not much sales of SUVs in America but 1.6M of them were sent to Russia in the first half of the year as that oil-rich nation has been snapping them up.  Russia pays about half what the rest of Europe pays in gas, although the recent market crisis may still slow that trend in the second half.  We were watching CEG in chat the other day as it plunged to $18 and it looks like they were, in fact, getting way too cheap as Warren Buffett has decided to made an offer through his MidAmerican Energy Holdings Company at $26.50 a share.   Buffett's involvement should give that sector a nice boost today.  KFT will replace AIG on the Dow as of 9/22 and will be flying today, this is good as the Dow was too financially heavy anyway. 

There is no miracle cure, we are still in a tough market and it's a long way to normal – be careful out there!