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Five Things You Need to Know: Oh, THAT Excess Liquidity; Oh, THAT Liquidity Crisis; Oh, THAT Credit Crunch; Oh, THAT Excessive Risk-Taking; Oh, THAT Consumer Slowdown

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What you need to know (and what it means)!

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Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Oh, THAT Excess Liquidity

President Bush, hoping to reassure Americans about the economy and fend off Democrats' criticism of policies, yesterday said recent market turbulence is simply a necessary reaction to "a flood of liquidity that came into the market in the past couple years," according to the New York Times.

  • Speaking at the Treasury Department, with Treasury Secretary Henry Paulson, Mr. Bush said that his economic advisers would be "paying close attention as the market begins to readjust its assessment of risk" in housing and other sectors, the Times reported.
  • Asked about collapsing housing markets, and the risk further declines, he said: "In a way it's a necessary reaction to a flood of liquidity that came into the market in the past couple years."
  • During the same meeting with reporters, Bush also weighed in on the Fannie Mae (FNM) and Freddie Mac (FRE) portfolio caps issue saying, "Let's get them reformed first."
  • And he then took a shot at borrowers, noting that the housing crisis has occurred in part because they didn't read the "fine print" on their mortgages, the Times reported.
  • "There needs to be financial education measures in place," President Bush said.
  • Hmm, financial education measures.
  • If only there was some place, perhaps on the Internet, a Website, say, that features, I don't know, a cartoon bull and bear, and possibly some other characters like a turtle, a snake or a cow, a place where college students, children and even adults could go to learn about finance in an unintimidating, and entertaining environment... but where?


2. Oh, THAT Liquidity Crisis

Overnight European money market rates surged and the European Central Bank said it would provide unlimited funds at a below-market rate of 4% to avert a liquidity crisis, Bloomberg reported.

  • What liquidity crisis?
  • BNP Paribas Investment Partners, a unit of French bank BNP Paribas said it temporarily suspended three of its funds as a result of a current lack of liquidity in the market, the Wall Street Journal reported.
  • Oh, THAT liquidity crisis.
  • "The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating," BNP Paribas said in a statement, according to the Journal.
  • In response the European Central Bank injected €94.8bn into the money markets to shore up confidence in the financial system, the Financial Times reported, an unprecedented level of intervention.
  • As well, one of Germany's largest banks may have also been affected, the FT reported.
  • The Bundesbank was forced to deny rumors earlier this morning that it was holding emergency talks to discuss problems at West LB, the German state bank.


3. Oh, THAT Credit Crunch

The cost of borrowing dollars overnight jumped to the highest level in more than six years as the collapse of the U.S. subprime mortgage market made it harder for banks to secure funds, according to Bloomberg.

  • The Federal Reserve added $24 billion in temporary reserves to the banking system, the most since June, amid a surge in demand for cash from banks roiled by U.S.
    subprime loan losses, Bloomberg reported in a separate story.
  • The Fed split the additions into $12 billion in 14-day and the same amount in overnight repurchase agreements, or repos, operations.
  • The total is the most since $27.95 billion on June 4, Bloomberg said
  • In repos, the Fed buys U.S. Treasury, mortgage-backed and so-called agency debt from its 21 primary dealers for a set period, temporarily raising the amount of money available in the banking system.
  • Meanwhile, Home Depot (HD) cut the price range on its proposed 250 million share buyback, citing market conditions, the Wall Street Journal, reported.
  • HD is now planning to buy back stock through a modified Dutch auction at $37 to $42 a share, compared with the range of $39 to $44 a share announced last month, the Journal said.
  • The company also said there are ongoing discussions with the three private-equity firms that have agreed to buy the company's wholesale construction-supply business about restructuring the deal.
  • "These discussions could result, among other things, in material changes to the terms and financing of the transaction, including a reduction in the $10.325 billion purchase price.," the company said.

4. Oh, THAT Excessive Risk-Taking

Some commercial paper - short-term notes either issued by companies or backed by assets such as inventories or loans - may be more risky than thought, and actually contain mortgage-backed securities backed by subprime loans, the Wall Street Journal reported.

  • "This is supposed to be the most highly liquid portion of the market," Jon Thompson, investment officer of structured finance at Advantus Capital Management, which has $18 billion in assets, including money-market funds, told the Journal.
  • "The fact that some residential mortgage-related conduits have stopped issuing paper and some are extending past their maturity dates signals you're in the first part of some trouble."
  • Money-market managers could start switching into more short-term Treasury paper and agency discount notes, which yield less than asset-backed commercial paper but would likely present less risk, Thompson added.
  • "The fact that mortgage loans could be causing grief in the commercial-paper market underscores how widely Wall Street packaged and then sold this kind of debt among investors," the Wall Street Journal noted ominously.
  • But look, Wall Street doesn't just fabricate demand for this kind of stuff.
  • Wall Street sells products that investors demand.
  • And why were investors demanding riskier assets?
  • In search of higher yields.
  • And why were yields of so many things so low?
  • See Today's Number One.

5. Oh, THAT Consumer Slowdown

Retailers posted weaker than expected same-store sales amid softness at apparel shops, a sign that consumption may be slowing.

  • Seven of the nine chains in Thomson Financial's teen/child category reported weaker-than-expected results, the Wall Street Journal noted.
  • And 11 of the 14 chains in Thomson's apparel categories missed weak expectations.
  • The same-store sales results weren't uniformly negative.
  • Wal-Mart (WMT) reported a 1.9% increase in U.S. same-store sales in July, the high end of last month's 1% to 2% guidance.
  • Costco (COST) posted a 7% increase, beating expectations with the help of international same-store sales, which jumped 10%.
  • Target (TGT) reported a 6.1% increase, near the middle of its 5% to 7% forecast.
  • For more on Retail Sales read Minyanville Professor Jeff Macke's Retail Roundup.
No positions in stocks mentioned.

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