Stocks Up, Market Searches for a Bottom and the Credit Crunch Starts to Ease

Written by OTCPicks.com

Equity markets had a nice positive day on Monday as credit markets showed signs of thawing. A critical measure of lending between banks, the three-month Libor rate fell significantly providing signs that credit is again beginning to flow freely and renewing investor hopes that the worst of the financial crisis may be over.

You may not have heard much in your investing lifetime about the Libor rate but have been hearing your fill about it for the last month. Libor stands for the London interbank offered rates and measures what banks charge each other for overnight, 1 month, 3 month and longer term loans. Over the last month as credit has tightened up and banks started refusing to lend to anybody and the credit system froze up. Thanks to the aggressive actions of global central bankers in the last few weeks the credit crisis seems to be easing. Their actions have included activities to pump dollars into the monetary system to pump up liquidity, give various types of loans to banks, take equity stakes in banks, offer to buy up bad loan portfolios, took an equity stake in AIG, offered higher FDIC account protection levels and similar guarantees for Money Market accounts, and many other relevant activities. Thankfully these confidence building efforts have finally begin to have effect in the equity markets as investors try to get their nerves back under control and see a little stability in equity markets.

The chart above is the one month Libor Index chart and it shows the precipitous rise of the Libor rate around September 15th that peaked around October 10th, and since then has been coming down culminating in the biggest drop in nine months today.

The 3-month Libor marched lower for the sixth day in a row, falling to 4.06% from 4.42% Friday, according to Dow Jones. Last week, the 3-month Libor surged to 4.82% – the highest since mid-December 2007. By comparison, it was under 3% about a month ago.

Together with the recent rise in 3-month T-bill rate, that should be taken as a positive sign. It may also increase the odds for a stock market bounce from current oversold levels.

Most major stock markets climbed today. The Dow was up 413.21% for a 4.67% gain, the S&P 500 was up 44.85 points to 985.40 for a 4.77% gain. The Nasdaq Composite was up 58.74 pints to 1770.03 for a 3.43% gain, and the Russell Small Cap Index was up 20.41 points to 546.84 for a 3.88% gain. Almost all sector indexes were up today with the biggest movers oil and gas. The U.S. dollar also rebounded.

Energy stocks took off when crude oil jumped 3.3% to $74.25 as traders seemed to be betting that the OPEC will cut production by up to 6% at an emergency meeting scheduled for this Friday.

Finally Catching a Break

Monday’s nice upswing follows weeks of market turmoil and chaos since the Lehman Brothers collapse in mid-September. We still can’t figure out after all the bailouts that the Federal Reserve and Treasury, Congress and the White House have pulled out of their respective posterior regions in the last few weeks, why in the world they would just let Lehman Brothers go down without a whimper. A hugely costly and amazing set of market safeguards and counter measures have been enacted with hundreds of billions at stake and they did nothing for Lehman. Go figure. Time will tell what happened there as Lehman kind of was the catalyst that started all this mess a little over a month ago.

The United Nations’ International Labor Organization on Monday also came up with some seriously cheery news when it said that "20 million jobs will disappear by the end of 2009 because of what the financial crisis has done to the global economy."

Global governments have promised $3.3 trillion to guarantee bank deposits and bank-to-bank lending, to take stakes in banks, buy toxic assets, provide loans, and help with monetary liquidity.

Economic Distress Likey Means Trouble for McCain

Fear and anger about the U.S. economy will likely cost the Republicans in the November elections. History is on the Democrats side with incumbents typically losing in times of economic destress. Most pundits agree that this is the biggest global financial challenge since the Great Depression so it is unlikely the Republicans can stand in the face of this national and global crisis of
confidence.

International Economic Hula Hoop

Globally South Korea announced a $130 billion rescue package and China reported that their economy is likely to slow down considerably in the third and fourth quarters. In India, the central bank unexpectedly cut its key lending rate for the first time in more than four years.

American Express Results

One indicator of how the crisis is affecting the real economy came as American Express, the fourth-largest U.S. credit-card issuer, reported a 23 percent decline in its third-quarter income from continuing operations as it set aside more money to cover credit losses.

Investors had looked to American Express for indications of whether wealthier people were cutting back on spending or falling behind on payments. The company said delinquencies on its cards had crept higher as the financial crisis weighed on some consumers’ ability to pay their bills.

Comments
by Bernanke

Bernanke was on the hill testifying before the U.S. House of Representatives budget committee and had the following comments, "With the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate.

Bernanke also said he was encouraged by improvement in credit conditions, but it was too soon to draw conclusions. The White House said it was open to a stimulus plan and would look to Bernanke for guidance.

Bernanke’s endorsement of a new stimulus was the first time the chairman of the Fed — the U.S. central bank — had explicitly endorsed such a package.

The White House also appeared to be warming to the idea of another spending program, and for many months, Democrats in Congress have been pushing for a second economic stimulus measure.

Bernanke said the government’s recent efforts to combat the credit crisis,
including plowing $125 billion into nine banks, appeared to have averted a significant banking meltdown. There were some "encouraging signs" that the steps taken so far were helping to unfreeze credit markets, although it was too soon to assess the full effects, he said.

The Federal Reserve has lowered its benchmark interest rate by 3.75 percentage points in the past 13 months as the financial havoc has been wreaked in the general economy. Its next policy-setting meeting is scheduled for October 28-29, and economists and investors widely expect another trim from the current rate of 1.50 percent.

Oil and gas prices have fallen sharply in the face of a global recession and should bring inflation levels down to levels consistent with price stability. U.S. consumer inflation peaked at a year-on-year rate of 5.6 percent in July and has since receeded to 4.9 percent last month so inflation is not as much of a threat when faced with further lowering of interest rates.