Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Five Things You Need to Know: Main Street Feels What Wall Street Has Yet to Acknowledge

By

Interest rate cuts are not making their way through to the economy.

PrintPRINT



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

1. We Are Living in Interesting Times

We are living in interesting times today, and not in the good way. But there's still an air of excitement on Wall Street this morning, largely because of expectations that the Federal Reserve will cut interest rates by the most since 1984.

Fed Fund Futures are fully pricing in a 100 basis point cut today - it's doubtful Chairman Ben Bernanke will disappoint - but is that really supposed to make us feel good?

In October 1984, then-Fed Chairman Paul Volcker slashed the Fed Funds rate from 11.75% to 10%, a 175 basis point move. A 100 basis point move today would be the most since Volcker's cut, but the gravity of the two situations couldn't be more different. Volcker's cut reduced the Fed Funds rate by a mere 15%. A 100 basis point cut today would slash it by 33%. The magnitude speaks volumes.

Pay close attention to the statement today. It is likely we will see some interesting language and additional actions from the Federal Reserve. This is far from over.


2. Main Street Feels What Wall Street Has Yet to Acknowledge

If Wall Street is excited by the prospects of a rate cut, Main Street is decidedly less enthusiastic. Why? Probably because Main Street feels what Wall Street has yet to acknowledge - that these interest rate cuts are not making their way through to the economy as the Federal Reserve has been hoping they would.

A USA Today poll shows 76% of those polled believe the economy is in a recession. Presumably, the other 24% are either employees of the Federal Reserve's 12 district banks, or economists.

Interestingly, 59% of those polled said they believed we could slip into a depression lasting several years. The sample must have included a large representation of history buffs, because not since the Great Depression have so many economic policy tools and credit-boosting acronyms been utilized by the Federal Reserve.


3. Bond Losses Continue to Spread

An article on Bloomberg this morning highlighted a nearly 10% decline this month in a $4.9 billion alternative money market fund managed by Charles Schwab (SCHW). The Schwab YieldPlus Fund fell 9.9% this month and is down 11% this year, according to Bloomberg.

Ultra-short bond funds were marketed to investors as a higher-yielding alternative to money-market funds, the article noted. These funds buy short-term debt, including some subprime securities.

The Schwab fund reportedly was 38% invested in non-subprime mortgage securities that were not guaranteed by Fannie Mae (FNM) and Freddie Mac (FRE), with about 9% in subprime loan bonds. According to Bloomberg, 34% was invested in corporate bonds.

As if to highlight precisely what Ben Bernanke and the Federal Reserve are facing as they meet today, Kim Daifotis, chief investment officer of fixed income at Schwab's fund unit, and Randall Merk, executive vice president, wrote in a shareholder letter dated March 10 that, "The fixed-income markets continue to suffer from a lack of buyers for many types of securities."


4. Oh, the Irony

While all eyes are on the Fed today, we'll be watching the Visa (V) initial public offering planned for today. The $17 billion offering could potentially be the biggest in U.S. history, eclipsing the AT&T Wireless Group's (T) $10.6 billion offering in 2000. Yes, 2000. Good timing, eh?

The irony of the world's largest a credit card network debuting on the same day that the Federal Reserve Open Market Committee is meeting to try and stave off the largest debt crisis since the Great Depression with what may be the largest interest rate cut in more than 20 years is not lost on us.


5. $$$ MAJOR FINANCIAL INSTITUTION - CHEAP! $$$

Bear Stearns (BSC) stock is up more than 50% as we write this, above $7 a share, far higher than the $2 price JP Morgan (JPM) is being bankrolled by the Fed to pay for the company. What gives?

We've heard all the usual suspects; short covering, bondholders racing to buy the debt to protect themselves from common shareholders balking at the deal, etc. etc. But perhaps something else is afoot? While bidding on a $6 Million Dollar Man action doll on Ebay this morning we noticed this:

< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE