Unprecedented Government Action
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This just came to me via an Adobe Reader Document from a brokerage house. I don't have a web site to copy and I agreed not to identify the source. The chart mentioned below did not transfer to this post, sorry. Later,
Catdaddy
September 19, 2008
Unprecedented Government Action
Overnight the U.S. Government announced three major steps in an effort to restore confidence in the battered financial
markets. First, a new government entity will be established to buy pressured illiquid instruments from troubled
financial institutions. Second, they will guarantee Rule 2a-7 money market funds (funds that trade $1 in $1 out) and
provide liquidity to the commercial paper market utilized by the money market industry. Finally, they are banning
short selling in the shares of 799 financial companies until October 2 with an option to extend it 30 days.
These drastic measures were necessary as fears were growing a run on the $ 4 trillion held by money market funds
could be in the making as approximately $180 billion exited money market funds yesterday. The fear was evident by
the action in the T-Bill market as T-Bills traded at negative yields at one point in the day as investors sought the safety
of this short term government investment. Futures on the S&P 500 are indicated almost 4% higher in pre-market
trading after a 4.17% gain in Thursday’s trading. The overseas markets were up sharply with gains of 7.7% on the
FTSE, near 4% on the Nikkei. The Russian stock market which had been closed for two days after a massive declined
was halted again after a 20% gain.
The new government entity is rumored to be similar to the Resolution Trust Corporation (RTC). The RTC fund was
established to orderly liquidate or sell problem assets after the failure of the Savings and Loan industry and insolvency
of Federal Savings and Loan Insurance Corporation (FSLIC) in the late 1980’s to early 1990’s. This new fund will
allow institutions to transfer in problem assets from their balance sheets. The government will liquidate these
instruments in an orderly fashion instead of the current disruptive forced selling taking place in the market place that in
some part, caused the demise of Lehman Brothers, the government take over of AIG, the fire sale sell of Merrill Lynch
and was threatening to force a sale of Morgan Stanley.
The short sell ban could trigger a massive rally in the heavily short financial sector. The unbelievable volatility in these
issues over the past few days will continue.
Rumors of the potential rescue fund fueled a massive 4.17% rally on Wall Street yesterday. The morning began with
news of a massive global liquidity injection by the World Central Banks as they aggressively tried to ease market fears.
The S&P 500 rallied 2.4% in early morning trading before selling resumed. The gains quickly turned into a 2% loss
before a massive afternoon rally. Shares traded hands at a staggering 77% rate ahead of the 50 day moving average on
the big board NYSE. If the pre-market 4% gain holds this morning the S&P 500 would have rallied an unbelievable
10% since the lows intra-day yesterday.
The reversal in the S&P 500 came as this widely followed index had declined 13.70% since August 11th on an intra-day
basis and coincide with long term technical support (see chart) drawn from the congestion areas of 2001 and 2004.
Monthly Chart of the S&P 500 1986-2008: During the November 2001 to April 2002 period the market traded
sideways between 1052 and 1176 before breaking down. Three monthly closes occurred near 1140-1150. From
January 2004 to November 2004 the market once again traded sideways in a similar range (1062 to 1163) while
registering three monthly closes in the 1130 to 1140 range. Connecting the 2001 and 2004 closing prices creates
the top of the channel. The S&P 500 reversed near these levels on Thursday (1133). The bottom of the channel is
constructed using the monthly low prices and is near 1060 to 1080 area. If the top line does not hold the bottom
level would be the next level of technical support.
Chart Courtesy of William O’Neil + Co. Inc.
Sorry, but the chart didn't transfer...
Although the odds are high the equity market has seen its lows for this bear market we would not panic buy in early
trading today. Once the euphoria of all this news dies down in the coming weeks investors will once again focus on the
current weak economic conditions as well as concerns of how much this bailout will cost the taxpayer in the long run.
These factors could cause some pull backs. We also will need to see a follow-through day to confirm the turn in the
market.
AI
