A plan by major banks to lump some of their more toxic assets into a debt super fund is giving Wall Street a case of indigestion. Couple that with the sting of record oil prices, and a so-so day turned into a sea of chop.
"You're seeing anything financial-related getting smoked," said one trader. The trader says the fund may ultimately solve the problems in the asset-backed commercial paper market. But he also said it could also keep interest rates high as the debt issues are unwound adn the very creation of the fund spooked investors because it appears there could be deeper problems.
Citigroup is adding to the gloom with its comment that consumer credit should weaken in the fourth quarter after mortgage delinquencies accelerated. Citi reported a 57% drop in earnings as expected, in large because of writedowns and losses in fixed income.
Citigroup along with JP Morgan Chase and Bank of America said they were developing this super fund with other banksto act almost as a holding tank for structured investment vehicles (SIVs). The plan was encouraged by the Treasury Department, but there are no government funds or guarantees involved. The SIVs would otherwise potentially have faced liquidation at bargain prices, which would impact the bank balance sheets.
SIVs are off balance sheet funds which make money issuing short-term debt to buy long-term, higher yielding assets. Demand for the short-term debt evaporated this summer, as investors were unwilling to buy debt that might be backed by bad mortgages.
"It's a 'Franken fund,' reanimating old securities," says CNBC's Rick Santelli. "It's all a matter of time and accounting. There's definitely another side of this fund that ought to be probed, prodded and examined."
"How's the market going to deal with this? Is it going to be a flight to quality that's going to push down rates? Or is it going to be the grim reaper of where real pricings and rates ought to be. Is the market going to boost interest rates because that fund in essence is going to try to boost prices?" Santelli says.
Santelli says there's signs that money is leaving the equities market today, heading to the safety of Treasuries.
As oil breaks new records above the $86 mark, MF Global senior vice president John Kilduff says he's pushing his oil price target to $100 by year end. Kilduff had been forecasting $83 a barrel and previously told us he thought the price would trade back down after hitting that level.
Now, "We're saying $100 before the end of the year. We think the stars are aligned for further price rises in crude oil because of a number of factors," said Kilduff who is a CNBC contributor. "There's no signs of an economic slowdown. Certainly, there's tremendous strength out of Asia...On the geopolitical front, this Iraq Turkey situation looks real in terms of actual military action."
Kilduff also said he believes there's a chance of some U.S. action against Iran. "If it's going to occur, it's going to occur this quarter," he said. If that happens, Iran would retaliate by shutting off Gulf oil or threatening the straits of Hormuz. Even without Iran, he still expects oil to touch the $100 mark.
"I still think we're reaching a breaking point. I thought it was $83 but it's not $83. I don't think we'll be at $100 for long, but we're heading into the 90s and we'll get to the $100 mark. We'll see lower prices in 08 but not for now," he said.
Checkout the video below with John Kilduff, energy analyst at MF Global, and CNBC's Bill Griffeth on how high oil can go.
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