Bank Of England Cut Rates Again!

And the cuts continues: Bank of England Cuts Rates to Record Low of 1.5%

• The Bank of England cut interest rates by half a percentage point on Thursday to a record low of 1.5 percent as it battles to keep Britain from falling into a deep slump, and experts say borrowing costs will fall again next month.
  
  British interest rates have now fallen by 3.5 percentage points since October as policymakers caught on the hop by the severity of the downturn pull out all the stops to revive an economy facing its first recession since 1992.
  
  Rates in Britain never fell below 2 percent even during the Great Depression of the 1930s, underlining the scale of the current crisis hurting economies all around the world. In the United States, rates now range between 0 and 0.25 percent.
  
  Economists said the BoE would cut again next month and interest rates could even fall below 1 percent, perhaps alongside a signal they would stay very low for a very long period of time.
  
  "They are still in cutting mode but have taken their foot off the gas this month," said Alan Clarke, UK economist at BNP Paribas.
  
  The pound, down 15 percent against the euro since the BoE started its aggressive interest rate campaign in October, rose after the decision as many in the market had been pricing in a bigger move after the last month's 1 point reduction.
  
  Short sterling interest rate futures also turned negative as markets priced in less aggressive monetary easing ahead.
  
  The BoE itself gave little indication on what it would do next, besides saying that while the fall in sterling, and recent tax and interest rate cuts would boost activity this year, there was still a risk inflation would fall below its target unless rates came down from 2 percent.

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BOJ Cuts Rates!!

Is this unexpected? Nope!

It's a World CuT!

BOJ Cuts Rates, Pumps Funds to Ease Credit

• The Bank of Japan cut its key policy rate to 0.10 percent on Friday and moved to pump funds into the market to ease a corporate credit crunch as the yen's sharp rise and crumbling demand batter the economy.
  
  A dramatic rate cut by the Federal Reserve on Tuesday, which took U.S. rates below Japan's, and the yen's subsequent rise to a 13-year high against the dollar had ratcheted up government pressure for BOJ action to help an economy already in recession.
  
  Japan's government forecast earlier on Friday that the economy would not grow in the fiscal year from April 1, although a slew of stimulus packages would keep it from contracting.
  
  That contrasted with bleaker private sector predictions that the deepening global malaise will hit the export-driven economy hard. The government acknowledged, though, that Japan's recovery might be delayed if global conditions worsened.
  
  "Looking at employment and companies' financial conditions, in a broad sense the economy is in a very severe state," Finance Minister Shoichi Nakagawa told a news conference.
  

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With US Fed Rates At 0.25% (or Zero), Would US Turn Into A Japan Redux?

Houston, we are at ground zero: Fed Cuts Rates to Near 0%, Vows to Bolster Economy

• The Federal Reserve slashed its target for overnight interest rates to a record low of zero to 0.25 percent, and said it would employ "all available tools" to battle a year-long recession.
  
  The surprise move to lower its target for the benchmark federal funds rate from one percent puts the Fed in uncharted territory. Financial markets had expected the Fed to lower rates by no more than three-quarters of a point, to 0.25 percent.
  
  In its statement, the Fed underscored its committment to use extraordinary measures, including using its balance sheet to support the credit markets.
  
  "The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," the Fed said.
  
  The cut in the federal funds rate pushes it to its lowest level on records dating to July 1954, and the central bank said it would likely keep it at "exceptionally low levels for some time."
  
  "There is no more room to cut rates, as the target cannot go negative," said economist Chris Rupkey of Bank of Tokyo-Mitsubishi. "Quantitative easing will be the new way for the Fed to stimulate the economy going forward."
  
  In addition to the rate cut, the Fed said it was prepared to expand already announced large purchases of debt issued by government-sponsored mortgage agencies to support the battered US housing market.

Commentary from dearest Kathy, Fed Cuts Interest Rates to 0.25% and Formally Enters QE

• It is no surprise to see the US dollar selling off aggressively as it is now the lowest yielding G10 currency. This was the right move for a central bank that wants to be proactive and no longer just reactive. There is no point for the Federal Reserve to play games anymore by denying what is already being priced into the markets. Cutting interest rates to 0.25 percent was inevitable and they rather deliver this stimulus now than later. Fed funds were trading as low as 0.15 percent going into the FOMC meeting. The Federal Reserve expects to keep interest rates at “exceptionally low levels for some time,” and to employ all available tools going forward including the purchase of long term Treasuries. In other words, the Federal Reserve is telling us that they are formally moving to Plan B, which is Quantitative Easing.

So are we going to see a Japan Redux?

Back in September, I made the following posting: Comparing Past Japan's Financial Crisis With Current US Financial Crisis

I think it's appropriate that I reproduce what was highlighted then.

Here's an absolute cracker. The following article, Responding to Financial Crises: Lessons to Learn from Japan’s Experience from PIMCO compares the past Japan's financial crisis with current US Financial Crisis and focuses on the similarities and the differences between the two crisis.

Here are some interesting issues pointed out by Mr. Koyo Ozeki

Summary: The Four Phases of Japan’s Financial Crunch
Japan’s financial crisis persisted for nearly 14 years, from the burst of the economic bubble in 1991 until around 2004, but throughout that timeline there were transitions in the state of the markets and the nature of the crisis. Broadly speaking, we can divide the progression into four phases (Chart 1).

Phase 1 (1991–94): The real estate bubble collapsed, triggering an economic shock. The government responded typically with economic stimulus packages, such as public works projects.
Phase 2 (1995–96): Signs of instability appeared in the financial system. Even as banks failed due to financial difficulties, the government failed to come up with a comprehensive policy package that would address financial system issues.
Phase 3 (1997–99): The bankruptcy of major banks triggered a financial emergency. Through establishment of new laws and budgetary measures, the government nationalized failed banks and injected taxpayer money into large financial institutions. Even so, it was unable to resolve the situation.
Phase 4 (2000–04): The system again reached a crisis point due to the massive volume of excess debt held by corporations. The Financial Revitalization Program (“Takenaka Plan”) promoted the disposal of non-performing loans, and the government supplied public funds to tottering Resona Bank. These measures finally helped bring the crisis to an end.

==> The Q&A section was interesting.

Part 3: Questions and Answers Regarding Government Response

Q: Why did it take so long to resolve the crisis?
A: It took nearly 14 years from the burst of the Japanese bubble economy in 1991 until the financial crisis finally came to an end. There are several reasons for this unusually long timeframe.

Hopes for a turnaround in property prices: From the collapse of the bubble economy until the mid-1990s, most people assumed that real estate prices would eventually turn upward again. Policy makers were also focused on encouraging an economic and market recovery through fiscal stimulus measures such as public works projects.

Existence of colossal latent stock profits: At the start of the 1990s, Japanese banks had stock portfolios with unrealized profits amounting to nearly twice their net worth. This acted as a buffer for loss write-offs, encouraging a complacent stance that they could hold out until the real estate market made its comeback. The plunge in the stock prices in 2000 severely eroded these latent profits, and appraisal losses began to have a negative impact on profits. Banks and financial authorities gradually came to recognize the risks regarding the shares in their portfolios, and proceeded to trim their holdings.

Massive scale of the problem: Japan’s cumulative bad debt totaled an estimated 25–30% of GDP, while the value actually written off by financial institutions amounted to nearly 100 trillion yen (US$910 billion) or 20% of GDP. The large banks alone accounted for 75 trillion yen (US$680 billion) of this total (Chart 10). This exceeds the combined value of their net worth of 20 trillion yen (US$180 billion) and 14 years worth of net operating profits at 50 trillion yen (US$450 billion). They realized profits from their share holdings to supplement the portion that could not be covered by net operating profits. Though this conclusion is made in hindsight, it is clear that banks simply did not have the financial strength to dispose of these vast losses in a short period, and they had no choice but to take their time to write off debt using their annual earnings and unrealized profits.

Q: Why did the capital injections in 1998–99 fail to solve the problem?
A: At the time of the taxpayer money injections in 1998–99, authorities maintained the position that most of the major banks were fundamentally healthy, despite the fact that they were aware of the damage being done to bank capital by bad debt. At the same time, a credit crunch was becoming a serious issue as the banks turned increasingly reluctant to lend, and authorities provided public funds to ease the credit situation. They set their policy goals with this in mind, such as requiring banks to boost their lending to small businesses. These cash injections might be characterized as preventive actions, but because the policy had multiple objectives, it did not act as a genuine incentive to comprehensive bad debt disposal.

Q: Is rapid disposal really the key to early resolution of problem?
A: In responding to a crisis, authorities must 1) rapidly analyze the nature of the problem, 2) evaluate its scale, and 3) devise necessary measures. It is difficult to identify the precise causal relationship between financial system measures and a bottoming out in asset prices, but one lesson that can be learned from Japan’s financial crisis is that the delay in recognizing the problem during Phases 1 and 2 (1991–96) made the subsequent fallout even worse, and an underestimation of the situation’s severity and the authorities’ trial-and-error approach in Phase 3 (1997–99) caused the delay in settling the problem.

Q: How effective were the BoJ’s zero interest rate and quantitative easing policies?
A: Phase 4 of the crisis (2000–04) was a problem of surplus debt at private corporations. Under the surface, however, corporate fundamentals were improving rapidly (Chart 11). The ratio of net debt to EBITDA (earnings before interest, taxes, depreciation and amortization) in the corporate sector as a whole took a swift turn for the better, improving from 5.3 times in 1999 to 3.0 times by 2005. Reduction of capital spending mainly made debt repayment possible.

==>

Part 4: Implications for the Subprime Loan Crisis

Differences between U.S. Subprime Crisis and Japan’s CrisisBoth the subprime loan turmoil in the U.S. and the financial crisis in Japan resulted from a bubble created by the presence of surplus liquidity. However, there are several differences.

• 1. Complex structure of U.S. bubble: Whereas Japan’s bad debt problem stemmed from commercial real estate and excess corporate debt, the U.S. subprime problem involves a more complicated mixture of bubbles related to the housing market, financial institution business models and financial products for investors.

• 2. Speed of valuations: Japan’s bad debt was mostly bank lending, and valuations took some time as regulators conducted asset inspections. In contrast, the subprime loan problem involved securitized products, so market valuations were completed relatively quickly. The valuation of housing loans by commercial banks in the U.S. could take longer than securitized products, though, so we should keep a close eye on future developments.

• 3. Creditor nation vs. debtor nation: Japan is a creditor nation and does not rely on overseas financing, so its bad debt situation was an internal problem. The U.S. is a debtor nation, which complicates the matter. Also, U.S. housing loans and other securitized products are widely held by overseas investors, so the risk can easily spread to global markets. This will naturally impact how the government responds to the problem.

• 4. Scale of the problem: Japan’s bad debt problem on a cumulative basis amounted to a whopping 25–30% of the nation’s GDP (Chart 14), whereas the subprime problem is an estimated 5–10% of U.S. GDP. The difference in scale will likely affect the cost and speed of resolving the situation.

Do read the rest of the article here

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And Bank Of England Cuts The UK Banke Rates To Just 2%!!

Just out on Bloomberg News: Bank of England Cuts Key Interest Rate to 2%, Lowest Since 1951

• By Jennifer Ryan
  
  Dec. 4 (Bloomberg) -- The Bank of England cut the benchmark interest rate to the lowest level since 1951 as lenders rationed credit, pushing the U.K. economy deeper into a recession.
  
  The Monetary Policy Committee, led by Governor Mervyn King, reduced the bank rate by 1 percentage point to 2 percent, the central bank said in London today. The move matched the median forecast of 61 economists in a Bloomberg News survey. Sweden’s central bank also cut its rate today by the most since 1992.
  
  King discussed the possibility of lowering the interest rate to zero for the first time on Nov. 25 and said the biggest challenge he faces is renewing the flow of credit in the economy. Service industries, manufacturing and construction shrank at the fastest pace on record last month and house prices dropped 2.6 percent, the most since 1992.
  
  “There’s no sign that any of the data is in any way bottoming out, and it justifies big moves in interest rates,” said Grant Lewis, an economist at Daiwa Securities SMBC Europe Ltd. in London and a former U.K. Treasury official. “There are further cuts in the pipeline.”
  
  Investor speculation of interest-rate reductions pushed the pound to a record low of 86.75 pence per euro today. The currency was at 86.67 pence per euro as of 11:49 a.m. in London.
  
  The interest rate now matches the lowest in the central bank’s history. It was last at 2 percent when Winston Churchill’s victory in a general election made him prime minister for the second time.
  
  ECB Decision
  
  The U.S. Federal Reserve cut its key rate to 1 percent last month. The European Central Bank will reduce its benchmark by a half point to 2.75 percent at 1:45 p.m. in Brussels today, according to the median estimate of 56 economists in a Bloomberg News survey.
  
  The Bank of England’s move was the latest in a series of steps across the world today. Sweden’s Riksbank lowered its key rate by 1.75 percentage points to 2 percent. New Zealand’s central bank cut its rate by a record 1.5 percentage points to 5 percent, and Bank Indonesia reduced its rate to 9.25 percent from 9.5 percent.
  
  The U.K. benchmark may fall to zero early next year, forcing policy makers to consider other means of restarting bank lending and reviving the economy, former policy maker Willem Buiter said this week. Such steps may include expanding money supply and using it to finance government deficits or buying securities such as bonds or stocks, he said.
  
  ‘Acute’ Problems
  
  “U.K. rates could end up American-style because the problems in the financial sector are so acute,” said Lewis, the Daiwa economist.
  
  King said Nov. 25 that “close coordination” with the government is needed if the interest rate reaches zero and said the “most pressing” challenge facing policy makers is getting financial institutions to resume lending. Banks approved just 32,000 mortgages in October, matching the least since 1999.
  
  Interest rates below 1.5 percent “wouldn’t leave them with much scope for further cuts,” said Peter Dixon, an economist at Commerzbank AG in London. “We may have to see the bank looking at other measures.”
  
  Policy makers face a growing risk of missing their 2 percent inflation target as economic growth slows. King refused to rule out the risk of deflation when he presented forecasts in November, which showed a danger that consumer prices may start to fall across the U.K. economy. An index showing prices charged by services companies fell to the lowest since 2001 last month.
  
  Economic Outlook
  
  Recent reports indicate the outlook for Britain’s economy is worsening. Stagecoach Group Plc, owner of the U.K.’s biggest rail franchise, said yesterday it may cut jobs as earnings experience “downward pressure.” Bellway Plc, a homebuilder, said today its order book has halved after banks granted fewer mortgages and a separate report showed U.K. car sales plunged 37 percent in November from a year earlier, the most in 28 years.
  
  The U.K. economy may contract by 1.1 percent next year, the most since 1991, the Organization for Economic Cooperation and Development said Nov. 25. Gross domestic product fell by 0.5 percent in the third quarter, the first drop in 16 years.
  
  Services from banks to recruiters contracted at the fastest pace in at least 12 years in November, and manufacturing and construction shrank, surveys by the Chartered Institute of Purchasing and Supply showed this week. House prices fell 2.6 percent on the month, HBOS Plc said today.
  
  “This economy needs all the help it can get at the moment,” said Malcolm Barr, an economist at J.P. Morgan Chase & Co. who forecasts the benchmark rate will fall to 1 percent by May. “Their own analysis of the issue shows they need rates to be a lot lower.”

The Global World Cut is surely ON!!!

And the winner is the one to cut to ZERO??

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And The Global World CuT Continues!

Posted yesterday: Aussie Cuts Rates Big Time Again - The Global World Cut Is On!!

Today Thailand joins the game!

Published on Reuters: Global interest rate cuts to spearhead crisis fightback

• By Kitiphong Thaichareon and Angus MacSwan
  
  BANGKOK/LONDON (Reuters) - Thailand led a global charge to cut interest rates on Wednesday, with countries from Europe to New Zealand expected to follow in the next few days to fight an unrelenting financial crisis.
  
  South Korea took steps to help local banks through a cash crunch and U.S. Treasury Secretary Hank Paulson was reportedly debating if he should ask lawmakers in Washington for the second half of a $700 billion bank rescue package.
  
  Russian state bank VEB reportedly asked the Kremlin for a $34 billion cash injection in the latest sign that the major emerging market was also feeling the heat of a crisis that has forced the United States, Japan and Europe into recession.
  
  Pressure for big rate cuts in Europe and Britain grew with a survey that showed the euro zone's services economy fell deeper into recession in November than first thought.
  
  The Bank of Thailand slashed its main interest rate for the first time in 16 months to help an economy hit both by the global downturn and political unrest, cutting its main interest rate by a bigger-than-expected 100 basis points to 2.75 percent.
  
  Australia slashed rates on Tuesday and the euro zone, UK, Sweden and New Zealand all make rate decisions on Thursday.
  
  The Markit Eurozone Purchasing Managers Index for services companies, which covers banks to bars in the euro zone, plunged to 42.5 in November from October's 45.8 level, the lowest in the survey's 10-year history.
  
  It also showed inflationary pressures eased, making it easier for the European Central Bank to cut rates sharply.
  
  "There is ample room for the ECB to cut rates ... We think 75 basis points will be the compromise, but we would not rule out a cut by 100 basis points," said Juergen Michels at Citi.
  
  The equivalent survey for Britain showed its dominant services sector shrank in November at its fastest pace since the series began in 1996, boosting expectations the Bank of England will slash interest rates by a full point on Thursday.
  
  The Federal Reserve, which is also expected to cut U.S. rates again later this month, will release its closely-watched Beige Book of economic conditions later in the day.
  
  In Seoul, the Bank of Korea discussed buying more bonds off banks and easing rules on how much cash they must keep in reserve.
  
  South Korea's banks have been hard hit by the global crunch and concerns about the country's exposure to the crisis have forced the won down 35 percent against the dollar this year.
  
  CHINA COOLS ON HELPING OUT
  
  The Wall Street Journal reported U.S. Treasury Secretary Paulson might approach Congress next week to ask for the second half of a $700 billion bank rescue package.
  
  Paulson was on his way to Beijing to talk to Chinese officials. But he may not receive big promises of further investment, especially from China's sovereign wealth fund, which expressed a lack of confidence in the U.S. regulatory situation.
  
  Investors have looked to China for leadership because of its high growth rate and long-term economic potential but Beijing is focused on protecting its own rapidly-slowing economy.
  
  The chairman of China Investment Corp. said the sovereign wealth fund was "not brave enough" to invest in foreign financial firms and lacked confidence in the shifting U.S. financial regulatory terrain.
  
  "It's changing every week. How can I be confident?," CIC chairman Lou Jiwei said in Hong Kong.
  
  In the United States, automakers prepared to plead the case to Congress that they had a viable future.
  
  Ford Motor Co wants a $9 billion credit line. General Motors Corp asked the U.S. government to save it from failure by extending $12 billion in loans and another $6 billion in a credit line.
  
  Politicians worry that without government aid, the companies could collapse and millions of jobs would be lost.
  
  In Moscow, business daily Vedomosti said VEB bank, Moscow's agent in distributing some of its $200 billion crisis rescue package, has asked the government for an injection of 950 billion roubles ($34 billion).
  
  Global stocks spluttered and euro zone government bond yields hit a three-year low as gloomy economic news highlighted the case for more aggressive interest rate cuts.
  
  The FTSEurofirst 300 index of top European shares fell 1.5 percent in early trade with Britain's FTSE 100 index down 0.9 percent. Japan's Nikkei managed to eke out a 1.8 percent gain following a rebound on Wall Street on Tuesday.
  
  "Markets are not focusing on any of the good news and the good news is rates are being cut, commodity prices are coming down, stimulus packages are being put together and banks are being supported. But the market's feeling very depressed," said Justin Urquhart Stewart, investment director at Seven Investment Management.
  
  British merger partners Lloyds TSB and HBOS pledged to pass on interest rate cuts or increase lending to small businesses as pressure built on banks to boost lending.
  
  British Prime Minister Gordon Brown will tell banks later on Wednesday to lend to credit-starved small firms and families to help them through a recession.

The Global World Cut is ON again!!!

And the winner is the one to cut to ZERO??

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Aussie Cuts Rates Big Time Again - The Global World Cut Is On!!

On CNBC news: http://www.cnbc.com/id/28006771

On Bloomberg: Australia Extends Biggest Rate-Cut Round Since 1991

• Dec. 2 (Bloomberg) -- Australia’s central bank cut its benchmark interest rate by one percentage point, extending the biggest round of reductions since the nation was last in a recession in 1991.
  
  Governor Glenn Stevens lowered the overnight cash rate target to a six-year low of 4.25 percent in Melbourne today, the fourth reduction in as many months. Four of 21 economists surveyed by Bloomberg News forecast today’s move and 15 tipped a three-quarter point cut.
  
  Stevens said monetary policy is now “expansionary” to help restore consumer and business confidence, which has been battered by this year’s 44 percent slump in the benchmark stock index and the biggest drop in house prices since 1978. Three percentage points of cuts since September save borrowers with an average A$250,000 ($159,000) home loan more than A$500 a month.
  
  Today’s decision “is a vital element in the effort to ward off recession in Australia,” said Heather Ridout, chief executive of the Australian Industry Group, which represents the nation’s biggest companies.
  
  The Australian dollar traded at 63.78 U.S. cents at 4:48 p.m. in Sydney from 63.74 cents just before the Reserve Bank of Australia’s announcement. The two-year government bond yield rose 12 basis points, or 0.12 percentage point, to 3.05 percent.
  
  The S&P/ASX 200 stock index slumped 4.2 percent to 3,528.20 today. Banks led the declines.
  
  ‘Cut Warranted’
  
  “Weighing up the international and domestic developments of recent months, the board judged that a further significant reduction in the cash rate was warranted now, to take monetary policy to an expansionary setting,” Stevens said in a statement.
  
  While Australia’s economy has been more resilient than “other advanced economies,” recent evidence indicates that “a significant moderation in demand and activity has been occurring,” he added.
  
  Gross domestic product growth probably slowed in the three months through September to 0.2 percent from the second quarter, when it expanded 0.3 percent, economists forecast. That would cut annual growth to 1.9 percent, the smallest gain since the second quarter of 2002. The GDP report will be released tomorrow.
  
  Stevens and his board also cut the benchmark rate by a quarter point in September, followed by a one percentage point reduction in October and a three-quarter point adjustment last month. Today’s meeting is the last scheduled gathering of policy makers until Feb. 3.
  
  Global Reductions
  
  Central banks around the world are slashing interest rates in response to a global slump in demand. The Reserve Bank of New Zealand will probably cut its benchmark by a record 1.5 percentage points to 5 percent on Dec. 4, according to 10 of 17 economists surveyed by Bloomberg.
  
  The Bank of England and the European Central Bank will also lower borrowing costs this week, according to separate surveys.
  
  The Bank of Japan said today it would adopt temporary measures to help companies obtain cash as a deepening recession makes banks reluctant to lend.
  
  “I hope we don’t slip into negative growth, but you have to accept that it’s possible,” National Australia Bank Ltd. Chairman Michael Chaney said yesterday. “It’s in the interests of everybody for demand to be sustained at a reasonable level.”
  
  Unlike the U.S., Japan, Europe and the U.K., Australia’s economy has so far avoided a recession, boosted by a mining boom that has kept unemployment close to the lowest level in more than three decades. The jobless rate was 4.3 percent in October.
  
  Budget Deficit
  
  To buttress the economy, Prime Minister Kevin Rudd said last week that he may allow the government’s budget to slip into deficit for the first time since 2002.
  
  The government agreed with state leaders on Nov. 29 to spend A$15.1 billion, mainly on health and education, to generate 133,000 jobs. Rudd is also giving A$10.4 billion in cash grants to the elderly, first-home buyers and families.
  
  Rudd’s spending package, this year’s 27 percent drop in the Australian dollar and “significant policy stimulus will be supporting demand over the year ahead,” Stevens said today.
  
  Australia’s three largest banks reduced their variable home-loan rates after today’s central bank announcement.
  
  Commonwealth Bank of Australia, the nation’s biggest provider of mortgages, cut the interest rate for its standard variable mortgages by 1 percentage point to 6.7 percent. National Australia trimmed by the same amount and Westpac Banking Corp. adjusted its rate by 80 basis points.
  
  Property Market
  
  Next year will “see a significant shift in sentiment towards property investments, with many Australians taking advantage of the lower interest rates,” said Warren McCarthy, managing director of real estate company LJ Hooker.
  
  Recent reports show the economy is slowing as consumers and businesses trim spending. Company investment growth cooled in the third quarter, business confidence plunged in October to a record low and consumers were pessimistic in November for a 10th straight month. House prices fell 1.8 percent in the third quarter, the most in 30 years.
  
  “We welcome this substantial rate relief,” Australian Treasurer Wayne Swan told parliament today in Canberra. “This is a vital rate cut, delivered at a time when all our joint efforts are directed toward strengthening the economy.”
  
  The Reserve Bank expects the inflation rate will fall back within its target range of between 2 percent and 3 percent in 2010.

The Global World Cut is ON again!!!

And the winner is the one to cut to ZERO??

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What Now After World Rates Cut?

World markets had its World CuT ( I actually would prefer calling it World Cup 2008!) last night and of course the main question that a lot of folks want to ask is exactly what Chris Puplava had written in his market wrap, Are We There Yet?

Before we focus on what Chris had written, let's look at some short notes from CNBC's Bob Pisani.

• What an interesting trading day. Four observations:
  
  1) Markets rallied midday on comments from Mr. Trichet in Europe-he said they would "take appropriate decisions at any time." Traders interpret this to mean that Mr. Trichet is now clearly in the rate cut camp, and to providing "unlimited" liquidity. This is a big turnaround: Trichet turns dovish.
  
  2) Stock traders are fixed on the bond market, as traders want to believe that today's huge selloff in bonds means that the flight to quality trade is ending.
  
  This would be a big psychological boost, because stock traders want to believe this is a sign the credit markets might be in the process of unfreezing.
  
  3) We are so oversold, and there has been so much money lost, that a small but significant minority of professional traders are now LONG the market--they are standing in the bleachers cheering like crazy, because for them it is ALL IN time.
  
  There is a larger group--half of all traders--sitting on the sidelines waiting for some sign of a tradeable bottom. They do not have it yet, but that minority that is long is trying desperately to get the uncommitted group in.
  
  4) The most important development is the coordinated global action. First U.S. federal agencies began coordinating activities, then other countries began active intervention, now there is GLOBAL COORDINATION. Consider that we have had, in less than a week:
  
  --a UK bailout,
  --Fed buying commercial paper,
  --a Spanish TARP,
  --coordinated rate cuts,
  --deposit guarantees in Europe,
  --a banking sector support plan in Russia.
  
  Merrill Lynch's economist, Alex Patelis, summed it up best: "Unless we are assuming that global policy makers are incompetent, they will sooner or later get it right."
  
  Source: http://www.cnbc.com/id/27088304

Now let's look at what Chris had written.

• I still maintain that the markets will not bottom until next year and that the current recession we are in will likely not end until the second half of 2009. A brief explanation of these views from last week’s article is given below:
  
  Market & Economic Snapshot
  So there you have it. Credit markets remain frozen, the Federal Reserve is dropping B-52 dollar bombs (devaluing our currency), household net worth is declining, incomes are falling, and jobs are being lost to the tune of over a half million year-to-date. The economic tanker is clearly in recessionary waters that will not be calming until at least next year. What the Federal Reserve and government do from here will decide the depth and duration of the current recession but make no mistake, an economic recovery will not take place until next year as the economy will not turn on a dime.
  
  As such, any market bounce produced from reaction to the bailout legislation passing or some other government action will fade as quarterly earnings misses (losses), job losses, rising unemployment, and falling consumption reports come in. SELL STRENGTH!
  
  I have had a very pessimistic tone over the last few months and have likely depressed many readers. The chief reason was to help protect reader’s capital by staying out of the markets and using rallies to exit if one was still invested. Today’s WrapUp will be a bit more balanced as I will show that we are still not at “THE” bottom but rather at or near “A” bottom, as well as show the light at the end of the tunnel. Central banks are now acting in a coordinated fashion by lowering interest rates globally, and the markets crashing over the past two weeks means that we are likely at or near an intermediate-term bottom in the markets. Nothing goes down or up indefinitely as the 2000-2003 bear market showed us with several double-digit counter trend rallies, and we are due for one now as the current sell off is long in the tooth.
  
  While we are overdue for a corrective bounce we still have not seen the end to the current bear market. Valuations are still not near lows seen in previous bear markets, and historical intermarket timelines and relationships show that a bottom in the markets in the here and now is far too early relative to the state of the economy to be signaling “THE” bottom. Market participants would be looking past a very long and dark valley indeed if this is to be the bottom.

And yes Chri reckons that the current valuations are way too high!

• Valuations Still Too High
  In a late August WrapUp (The Worst is Yet to Come) I showed how analyst estimates for the S&P 500 were far too high and likely to fall significantly as corporate profit margins still remain near historical highs and with analyst accuracy near 16 year lows (Analysts’ Accuracy on U.S. Profits Worst in 16 Years). As such, I have looked at previous bear market bottoms (using 15%+ to define a bear market) and used the trailing price-to-earnings ratio (PE) using the previous twelve months of earnings rather than the leading PE ratio that uses suspect forward analyst earnings estimates......

And yes Chris also believes that US could be in for a 'deeper recession'..

• Historical Cycles
  Not only do valuations point to a final bottom months out, so too does the historical precedent of the stock market’s bottom in relation to economic variables. I believe the economy is entering deeper into a recession that is not likely to end until next year as multiple economic variables show below. For instance, the year-over-year (YOY) rate of change in nonfarm employment typically peaks 15 months prior to the onset of a recession and bottoms two months AFTER a recession has ended. With the employment YOY rate of change still plunging it is not likely that the recession is to end any time soon.

Chris then continues..

• If the recession is not likely to end until next year, looking at the relationship between stock market bottoms and recession conclusions will show that it is too soon for a current bottom in the stock market. It is common knowledge that the markets serve as discounting mechanisms and so stock markets typically peak prior to the onset of a recession and bottom prior to a recession’s end. Over the last forty years, the S&P 500 has peaked six months prior to the onset of a recession and bottoms five months prior to a recession’s end. The market has followed the historical average by peaking six months prior to the current unofficial recession that is likely to have started in January of this year.
  
  

Ah.. watch for the bear market rallies!!

• If I am correct that we are near an intermediate bottom in the stock market, and that the stock market is not likely to bottom until the first half of next year, then all is not lost. Bear market counter-trend rallies typically lead to double-digit advances that can allow investors to sell into to regain some of their capital that has been lost over the prior months. Raising cash and sitting tight until next year should allow one to enter into the market at much discounted prices and experience a rally off the conclusion to a bear market, which are typically explosive.

And his advice..

• Selling into an intermediate corrective bounce should help investors regain some of the capital that has been lost recently. I believe sitting tight until reinvesting in an eventual market bottom next year will go a long way in returning an investor’s capital back to pre 2008 levels, more so if one invests in tomorrow’s best bargains. Going forward, the above mentioned economic indicators that typically herald an end to recessions will be monitored closely. New developments over the course of the remainder of the year will help fine tune my forward estimates for the likely outcome in 2009. Stay tuned.

I've only highlighted some passages written by Chris. Do read the rest of his article in full here

And yes, I very much agree with what's said about Larry Kudlow. Out of all the folks at CNBC, I find him even more repulsive than Cramer! But hey, this is my personal opinion.

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Global Rate Cut!!!

Holy Cow!!!!

Central banks cut interest rates

• Six central banks - including the Bank of England - have cut their interest rates by half a percentage point.
  
  The UK rate move - which had not been expected until Thursday - puts the interest rate at 4.5% from 5%.
  
  The US Federal Reserve has cut rates from 2% to 1.5% and the European Central Bank (ECB) trimmed its rate from 4.25% to 3.75%.
  
  The unprecedented step is aimed at steadying a faltering global economy and slumping stock markets.
  
  The central banks of Canada and Sweden and Switzerland all took similar action in the co-ordinated move.
  
  China also cut its rate, but by 0.27 percentage points.
  
  European financial markets reacted well, pulling back some of the losses seen earlier on Wednesday.
  
  The last time the Bank of England cut rates in a special meeting was on 18 September 2001 - when rates came down from 5% to 4.75%.
  
  'Bold and decisive'
  
  The announcement came hours after the UK government unveiled plans for a £50bn rescue plan for UK banks.
  
  In the UK, some mortgage lenders immediately passed on the rate cut to borrowers - trimming their variable rates.
  
  Responding to the interest rate cut, UK manufacturers' group the EEF welcomed the " bold and decisive move" it hoped would "arrest the current crisis and collapse in confidence".
  
  "Coupled with the plan to shore up the financial system today's co-ordinated moves should help arrest the potential slide into depression," said the EEF's chief economist Steve Radley.
  
  And analyst Peter Warburton of Economic Perspectives said the rate cut was "fully justified by the depth of the economic crisis that the UK is now facing".
  
  "It has taken far too long for the government and the Bank of England to recognise the scale of threat posed by the seizing up of the credit system," he said.
  
  'Strong support'
  
  The Federal Reserve said that it had acted "in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures".
  
  And the ECB said it had felt able to act because "inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices".
  
  Although it did not cut its own rate - which is just 0.5% - the Bank of Japan expressed its "strong support" of the policy.

And many thanks to this global plunge protection effort.. the markets turned for the better.. for now!

-------------------

Some comments: From CNBC's Bob Pisani

• After closing at 1029, S&P Futures traded as low as 962 until the early morning, then rallied to as high as 1043 when the coordinated rate cut of half a point was announced, then moved all the way back down.
  
  Simply put, the S&P futures moved 8 percent in 4 hours. The hope is that burgeoning coffers, and a rare coordinated rate cut will finally get banks lending again.
  
  While most traders welcomed the cut, there were many who complained about the TIMING. This camp has been waiting--and waiting--for a huge down open on big volume. Never mind that the S&P 500 has dropped 100 points in the past three days--this apparently was not alarming enough for this crowd.
  
  Today, they thought, was the day it would have happened. If the Fed ONLY WOULD HAVE WAITED UNTIL NOON--after the market opened down big--we could have had a Clean Uncontested Reversal.
  
  The Fed, to this crowd, has thwarted this, so now we have Yet Another Muddled Short-Term Bottom. They are still waiting for the Big Washout.

Source: http://www.cnbc.com/id/27082904

Some comments from Kathy

• We have been literally begging the Federal Reserve, the European Central Bank and the Bank of England to work together to stem the bleed in equities and they have finally done it (What is the Fed Waiting For? And Panic Selling in FX Begs Coordinated Easing). For the first time since Sept 2001, central banks around the world have delivered a coordinated interest rate cut. Coming 2 days before the G7 meeting and 1 day before the ECB interest rate decision, their move sends a strong message to market that the central banks are holding nothing back in their attempt to unlock the credit markets, stabilize the stock market and stimulate growth.
  
  Given that the Bank of Japan stood aside, the move is bearish for USD/JPY. However the impact on the Euro and British pound is limited because the interest rate differentials between those currencies and the US dollar remain unchanged. Unprecedented is the buzz word in the financial markets these days and today’s rate cuts were nothing short of that.
  
  Unfortunately despite an initial rally in stocks, equities have given back all of their gains as investors believe that the actions by the central banks are too little too late. This is undoubtedly the right move for the central banks, but the right time to have made the rate cuts was last Friday after the TARP approval. Stocks continue to sell off because this has not solved the funding issue. The LIBOR - OIS (Overnight Index Swap) rate hit a record high indicating that credit is still tight. The Reserve Bank of Australia’s full percentage point rate cut earlier this week has raised the bar.
  
  Source: http://www.kathylien.com/site/japanese-yen/coordinated-interest-rate-cuts-too-little-too-late#more-1294

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Bill Gross Reckons US Fed Will NOT Raise Interest Rates

Bill Gross reckons that the US Federal Reserve will NOT raise interest rates.

In article on CNBC, Gross states the following reasoning.

• I don't think so,” he said when asked if he foresees a rate hike. "The concerns about inflation have got to be coming down ... with oil prices down maybe 25 percent from the peak. Other commodity prices, gosh, gold down 20 percent, silver down 10 percent today alone ... Those at the helm, so to speak, have to be observant of what's happening in the commodities sector, and that's been the biggest push in terms of inflation for the past six to 12 months."
  
  Though he sees uncertainty in the bond sector, Gross remain optimistic about the rest of the quarter.
  
  “I think the third quarter will be fine based on some technical adjustments with inventory and continued strong trade. But the fourth quarter and the first quarter of 2009 do not look good—it is all dependent upon housing prices.”
  
  Additionally, Gross said he's uncertain about when the housing market will hit bottom. As prices keep going down, he said, financial institutions need to continue raising capital, which complicates the economic outlook.
  
  “As the capital is raised, it raises interest rates and it stretches risk premiums and it forces asset sales, which perpetuates the cycle,” he said. “We need a new balance sheet to provide new capital and funds for the housing markets and the financial sectors.”

Source: http://www.cnbc.com/id/26225842

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Sunday Evening Exercise From The Fed

From CNN: Fed cuts discount rate - Sunday surprise

From Yahoo:

• The Federal Reserve, in an extraordinarily rare weekend move, took bold action Sunday evening to provide cash to financially squeezed Wall Street investment houses, a fresh effort to prevent a spreading credit crisis from sinking the U.S. economy.
  
  The central bank approved a cut in its emergency lending rate to financial institutions to 3.25 percent from 3.50 percent, effective immediately, and created a lending facility for big investment banks to secure short-term loans. The new lending facility will be available to big Wall Street firms on Monday.

And Asian markets plunge on Bear news

• SEOUL, South Korea (AP) -- Asian stocks plunged Monday after JPMorgan Chase said it would acquire troubled U.S. investment bank Bear Stearns. The U.S. dollar fell sharply against the Japanese yen.
  
  Japan's benchmark Nikkei stock index and Hong Kong' Hang Seng index both fell more than 4%. The Korea Composite Stock Price Index in Seoul declined more than 3%. Markets in Australia and New Zealand also fell.
  
  JPMorgan Chase said Sunday that it would acquire its rival in a deal valued at $236.2 million - or $2 a share and that the Federal Reserve would provide special financing for the deal.
  
  News of the acquisition of Bear Stearns, one of the world's largest and most venerable investment banks, came just before the opening of markets in Tokyo and Seoul.
  
  The buyout was aimed at averting a bankruptcy and a spreading crisis of confidence in the global financial system. The Fed and the U.S. government swiftly approved the all-stock deal.
  
  "We are worried about the next step," Shim Jae-youb, a strategist at Meritz Securities in Seoul, said of nagging concerns in Asia that the trouble in big U.S. banks was unlikely to be contained just to Bear Stearns.

On CNBC Markets Tumble on Shock Fed Rate Cut, Bear Stearns

• The plethora of financial news, coupled by a sinking dollar revived fears that a long-lasting global credit market crunch would claim more financial companies. Banks across the region were battered. Citigroup's Japan listing was down over 7 percent. Japan's Mitsubishi UFJ Financial, Hong Kong's HSBC Holdings, South Korea's Hana Financial, and Australia's Macquarie Group were all plunging.

Golfing? From article posted on Yahoo here

• A bankruptcy protection filing of Bear Stearns could have heightened anxiety in world financial markets amid a deepening credit crunch. So far, global banks have written down some $200 billion worth of securities slammed amid the credit crisis -- more write-downs could come. Last week, a bond fund controlled by private equity firm Carlyle Group faltered near collapse because of investments linked to mortgage-backed securities.
  
  JPMorgan's acquisition of Bear Stearns represents roughly 1 percent of what the investment bank was worth just 16 days ago. It marked a 93.3 percent discount to Bear Stearns' market capitalization as of Friday, and roughly a 98.8 percent discount to its book value as of Feb. 29.
  
  "The past week has been an incredibly difficult time for Bear Stearns," Schwartz said in a statement. "This represents the best outcome for all of our constituencies based upon the current circumstances."
  
  Wall Street analysts say the bid to rescue Bear Stearns was more than just saving one of the world's largest investments banks -- it was a prop for the U.S. economy and the global financial system. An outright failure would cause huge losses for banks, hedge funds and other investors to which Bear Stearns is connected.
  
  After days of denials that it had liquidity problems, Bear was forced into a JPMorgan-led, government-backed bailout on Friday. The arrangement, the first of its kind since the 1930s, resulted in Bear getting a 28-day loan from JPMorgan with the government's guarantee that JPMorgan would not suffer any losses on the deal.
  
  This is not the first time Bear Stearns has earned a place in Wall Street history. A decade ago, Bear Stearns refused to help bail out a hedge fund that was deemed "too big to fail." On Friday, the tables had turned, with the now-struggling investment bank in need of the same kind of aid.
  
  Bear Stearns was founded in 1923 and in recent years was best known for its aggressive investing in mortgage-backed securities -- and what was once a cash cow turned into the investment bank's undoing.
  
  In June, two Bear-managed hedge funds worth billions of dollars collapsed. The funds were heavily invested in securities backed by subprime mortgages. Until that point, subprime mortgage-backed securities were immensely popular with investors because of their profitability.
  
  The funds' demise and subsequent problems in the credit markets called into question Bear Stearns' ability to manage its own risk and the leadership ability of then-Chief Executive James Cayne. Critics of the company said Cayne spent too much time away from the office last year playing golf and bridge as the problems unfolded.
  
  Cayne is the same executive who refused to let Bear Stearns provide support as part of a Federal Reserve-led plan to rescue Long-Term Capital Management in 1998. His reticence was said to deeply anger some of his fellow Wall Street CEOs, and the episode came up every time Bear was reported to be in trouble in recent months.
  
  Cayne took over from the legendary Alan "Ace" Greenberg in 1993. Greenberg joined Bear Stearns as a clerk, working his way up through the ranks to eventually take over as CEO in 1978. Greenberg was known for his irreverent style, and his regular memos to employees were turned into a book called "Memos from the Chairman."

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The Quarter Point Cut

I was expecting half a point. I truly was but the US Fed decided to cut only a quarter and the markets, they of course plunged, free-falling in reaction to this news. The Dow ended up losing 294 points. ( Free fall after Fed cut )

And blogger Kirk had compiled 10 quotable quotes on his latest posting: Thoughts On The Fed

• "Thinking as a trader, the most counter-intuitive outcome here would be a resumption of the Santa rally and run into year end. It's just become my favored scenario, because it seems so outlandish after the Fed news." - Alan Farley
  
  "The assumption this afternoon is surely going to be that if the market falls so much on a day the Fed cut rates, then that has to be a bad sign going forward. I see the logic there, but logic usually doesn't have much place in the stock market. Going back to 1971, I checked for any time that the S&P dropped 1% or more on a day the Fed cut. There were only five instances that popped up, and the S&P formed at least a short-term low within two days four of those times. The best bet was had by waiting for an additional 1% - 2% of downside, then buying and holding for a few days or 2% - 5% upside." - Jason Goepfert
  
  "Aside from the declines seen on the FOMC day on the first trading day following 9/11, this is the worst decline on a Fed day since 1990. We went back and found all FOMC days in which the S&P 500 fell by more than 1% to see how the market has performed going forward. The results are positive for tomorrow and the next week, but negative from now to the next Fed meeting on January 30th." - Bespoke
  
  "I'll leave the berating of the Fed to others and will spend my energy trying to deal with this market. Things look very poor going forward. The technical conditions support further downside, and the Fed was really the only good positive catalyst we had going for us. Without that, we have some end-of-the-year seasonality that may help, but that is not a sure thing by any means." - Rev Shark
  
  "Fed members are probably amazed at the market reaction, believing that they not only did what seemed right on a policy basis but something close to market expectations. Wordsmiths need to come up with synonymous phrases for "behind the curve." I am sick of it already!" - Jeff Miller
  
  "With only a quarter-point cut, we will no longer be able to forestall the bankruptcies. Banks are holding on for dear life, homebuilders the same. But their lifeline just got choked and far fewer will live because of this. Lots of times people talk about stock traders being complacent. Lots of times you hear about bullish money managers that are way too excited about stocks. But I have never heard a statement from a more bullish group of people in my life. They genuinely think that inflation remains a big problem. I am aghast." - Jim Cramer
  
  "The Fed blew it once again. They are still behind the curve. Expect the bears to enjoy the fruits of the Fed's whiff as the A.I.R. pauses. They should just let me make monetary policy. Like 2000, 2004, and 2006 when I had major disagreements with their policy, I expect they will come around too little too late." - Robert Marcin
  
  "What is just breathtaking to me is that the Fed sees balanced risks between inflation and growth. I understand that the Fed is destined to be behind the curve (because it relies on past data to dictate policy that takes time to flow through the economy), but these guys are so behind the curve that they are getting lapped." - Dan Fitzpatrick
  
  "Dollars to donuts, perhaps literally, the FOMC couldn't cut fitty without invoking the wrath of foreign holders of dollar denominated assets. As it is, we're in a pretty pinch." - Todd Harrison
  
  "Boom Boom almost did the right thing. Had it spared us the pandering 1/4 point begged for by financial speculators, he would have finally shown the kind of stones that will be needed to guide us out of the current mess. Equities do not like it one bit, as well they shouldn't; the wimpy move is likely to worsen the credit environment and the financial markets as a whole could be in for a year-end pasting. So why do I suggest the Fed did the almost right thing? Because one cannot devalue its way out of a gigantic pile of debt. Companies, many companies, need to fail, go away forever, and allow those who have a business existing to once again prosper not on the back of borrowed money, but on the strength of real demand, rather than demand generated by a need to circulate make belief money. Had the Fed figured this out in 2001, by 2003 we would likely have forgotten the then recession. Instead it decided to try to fool everyone into believing that we could borrow our way into a permanent plateau of prosperity." - Fil Zucchi

And over at FinancialSense, market commentator, Frank Barbera, has penned a brilliant The End of Denial posting.

• So it is today. The US is entering a very difficult period, and investors need to be attuned to priority Number One—don’t lose valuable capital. This means being very attentive to potential risks, and looking always at both sides of the equation, and when initiating a trade, knowing in advance how much risk you plan to take, and precisely where you draw your line in the sand in order to get out. In rising markets, where the trend is strongly higher, it is easy to make money and everyone is a genius. In down markets, that algorithm is inverted, as down markets are designed to separate investors from capital, with the bottom of the downside cycle yielding the uncontrolled panic phone call to the trading desk -- “Get me out NOW!” This is the scene of despondency, desperation and capitulation which attends panic sell offs in down markets. In the chart below, we trace the human emotional side of the cycle for you, with this author’s opinion that right now, Denial marks the current stage for this cycle.
  
  
  
  Why Denial? Simply because despite the collapse of untold businesses, and the virtual shut down of key credit markets, markets have tried to look past the problems on the hope that the Fed or Powers that be would come riding to the rescue. Today’s market was significant, and all investors should take careful note. Today, was the first day that the stock market publicly questioned the Fed, in its own way saying, ‘things are really bad, so what are you going to do about it?” That is a sign of situational awareness, and that is a sign that we are moving from avoiding the recognition of the problem to confronting and peering toward the problem. Looking at the problem, the market sees fear, the next step in the down market, and for that reason, today represents a big psychological downshift for the stock market. Just how big, we cannot know, but the days ahead will tell the tale. It is been my experience in a now nearly 27 year career watching stock prices that the ‘persistency of selling’ is the key ingredient to watch over the next 5 to 10 days. Can the market bounce, can it sustain a bounce, how long can it sustain a bounce, or does it continue to crater all the way back to the November 26th lows?

And here is the Fed's statement posted at CNN: Read the Fed's statement

How now Brown Cow?

Is it really all gloom and doom with just a quarter point cut?

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The Double Double Cut!!

WOW!

The Circus finally ended. Here is the full FOMC statement.

Financial Sense Market Commentato, Frank Barbera certainly did not have any kind words to offer in his market wrap Fed's Reckless Bubble Blowing - Part II: Ben Bernanke and the Missing Bond Vigilantes?

• With these spreads already slipping into negative territory, the action today by the Fed sends a very negative message to global investors, that the US will not support its money. That is potentially the most dangerous concept any central bank can breed, and in that light, it seems that the level of outrage directed at the Fed should be that of a "scathing rebuke." We have moved from one serial bubble blower in “I didn’t get it! ” Alan, (see 60 Minutes interview last weekend) to now a man, who for the second time in a decade, seems to be steering the country toward yet another wrong choice.
  
  Before this one is over, if the Fed does not change course, we may all pay the penultimate penalty of having walked down the path toward hyper-inflation. The sheer arrogance of the Fed may not be in question today, especially by a gleeful US Stock Market smelling "bail out" for the insider cronies; but in a different reality, that of a burgeoning currency crisis six months down the road, with Fed credibility shot, the situation may have a much darker complexion. At that point, there may be little in which to rejoice.
  
  Personally, I had hoped that the new Fed Chair would be a man of greater character, and that much of the negative press associated with his prior academic writings was perhaps exaggerated. The action today resonates as being even more poorly thought out than Mr. Greenspan’s bathtub ruminations on Adjustable Rate Mortgages and more likely than not, serves as notice to one and all that we may be embarking on yet another new and grand Fed experiment; one in which we will all get to find out how many times an hour the price of coffee and T-Shirts can change value.

And the market, how they celebrated! ( See US Market Wrap 18th Sep 07 )

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How Now Brown Cow?

The Fed cuts its discount rate and the US Stocks Soars.

Over at FSO market wrap, Mr. Brian Pretti wrote the following:

• At the end of March of this year, I penned a discussion entitled, “It’s Delightful, It’s Delovely, It’s Deleverage!." If you don’t mind, just a quick snippet from the final paragraph of that piece to set the tone, if you will.
  
  “It's clear that market participants of today are wildly complacent about, or simply do not understand, the potential for risk in structured finance vehicles and the layering of levered investment, especially in the hedge community. The fact that a number of hedge funds were "surprised" to find they had sub prime exposure in their CDO investments simply tells us that even the masters of the universe do not have all of their hands around the question of investment risk. In straight up markets, there are few questions. But in the current environment, there will also be very few questions asked if meaningful downside is to unfold. Rather, those being hurt by leverage in what could become a punishing market environment will shoot first and save the questions for later. The double edge sword of leverage tends to evoke those types of responses. Little time for philosophical debate when one is losing money. Funny how that works.”
  
  So, about four and one half months after this was written, here we now stand today in full view of “the other side” of many a levered investment strategy...

Do give the rest or the article a read: Stress Management

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How Now Brown Cow?

In today's Financial Sense Market Wrap, market commentator address the issue of whether the long term interest rates are heading higher. Conclusion: Long Term Interest Rates are Heading Higher

• The recent market selloff was accompanied by a flight to the safety of Treasuries. Stocks down, bonds up – recently we’ve seen this seemingly day after day. However, it is important to note that in spite of this short term action, the long term trend in long interest rates has changed from down to up. Even though rallies in the bond market (interest rates lower) have been sharp and convincing, the long view supports the conclusion that long term interest rates are heading higher. One technical chart supporting this conclusion is illustrated below. Upward trending interest rates that occurred in the 1960’s finally topped in 1982. High rates of inflation accompanied the rising long term trend in interest rates. The secular bull market in stocks began in 1982, and this generally corresponded to the start of a long interest rate downtrend. Stocks bottomed when interest rates topped. From 1982 until recently, there was an active downtrend in long term interest rates; however, the trend of lower interest rates is likely over, and long term interest rates are likely in a young secular uptrend.

  
  

  

  
  

  Below is a weekly chart of the 10-year Treasury note yield from 1990 to the present. The bottoming of interest rates in mid-2003 was followed by a series of higher highs and higher lows shown on the right hand side of the chart. In spite of the current bond market rally caused by an apparent flight to safety, this was only sufficient to produce a settling back of interest rates to the 2-year (104 week) moving average (thus far). This “flight to safety” appears only as an insignificant tick in the far right side of the long term chart.

  
  

  

  
  

  Similarly, the 30-year Treasury note yield is illustrated below. The top annotated line simply connects the important interest rate highs, and the bottom line connects the important lows. It is apparent that the highs have leveled out, and the lows are now trending higher. Conclusion: The long term trend of long interest rates is higher. What would invalidate this conclusion? A decisive break of the trend of higher lows in the 10-year note yield (above chart), or a decisive break of the trendline defined as higher lows beginning in mid 2005 (below chart).

  
  

  

And the chart below says a thousand words!!!!!!!!!!!

Here's another article that's worth reading: Financial System in Jeopardy

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Rates Rally Gives Bounce to Markets

The Dow had a nice day as the Bulls fight back and FSO Market Commentator, Chris Puplava notes that the Interest Rate Rally May Be Over Short-Term, but Ripple Effects Will Only Worsen Housing Situation.

• The bond sell-off that began last month with the 10-year UST rising from a low of 4.602% on May 11th to a high of 5.316% yesterday may have reached a short-term top with the RSI near 90, the highest level seen in more than 20 years. Readings over 70 have marked peaks in interest rates previously (as marked below), and the current reading near 90 hints at either a pause or a pullback in rates.
  
  
  

Lastly, do give Ms. Claire Barnes, of Apollo Investment Management made the following remarks.

• Some commentators were reassured that US first quarter reporting passed without financial disaster, and concluded that new age financing had painlessly dispersed systemic risk. My suspicion, on the contrary, was that market-fundamentalist accounting is postponing the emergence of problems: judgment is no longer required to be exercised in provisioning, and prudence is deemed old-fashioned - instead we have "fair value", relying either on a mechanistic marking-to-market, by reference to last trade. The nature of niche markets is that when problems emerge, they first become illiquid (and even more easily manipulated); only later when other options have been exhausted can a single distressed-seller cause prices to fall off a cliff. I then discovered that US accounting rules require holders of CDO paper to value it with reference to questionable models (such as the aptly-named Monte Carlo simulations) from the far-from-disinterested rating agencies. 'I knew it was bad but...' says John Succo (must read). 'The levels at which investors are carrying [mortgage-backed securities] paper is not reflecting underlying reality as the holders simply hold their collective breath and the rating agencies ignore a worsening environment.'
  
  Before buying a money market fund or structured product, remember the old maxim:
  
  'More money has been lost reaching for yield than at the point of a gun.'
  
  And before assuming that a money market fund will be liquid when you need it, consider the Paper Chase.

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The US Interest Rate Issue

In today's FSO Market Wrap, Market Commentator, Chris Puplava addresses the interest rates issue. Wall Street Reconnects With Main Street

• The current equity slide may continue as Wall Street readjusts to Main Street reality amidst a rising interest rate environment and continued housing slump despite CNBC constantly suggesting a possible bottom. It’s anyone’s guess how far and long the markets will correct. But one thing has remained constant over the past year, and that is the market's ability to surprise to the upside. Private equity deals and M&A activity may put a floor under the markets, but this is less likely to be the case with rising interest rates that reduce their profit projections by raising the cost of borrowing debt to fund their deals. It seems as if all eyes have now turned from watching the Fed and China to watching interest rates, and movements in the Treasury markets may be the key indicator to determine when the correction in the markets may subside.

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