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Market Insider: Bail Us Out -- But Will It Work?

The House's vote Friday on the $700 billion financial bail out package hangs over a market increasingly worried the credit crunch is stalling the economy.

But before the vote, the big item for markets Friday is the September employment report, due at 8:30 a.m. Economists expect a loss of about 105,000 non farm payrolls, and traders have been speculating if that number is bad, it could help tip the Fed's hand toward a rate cut in the near future.

"I think they will cut. It's just a question of timing, and when. Tomorrow's employment number is going to be bad -- 100,000, 125,000. I don't know if that's enough to push them over the top," said Mark Zandi, chief economist at Moody's Economy.com. "Odds of them moving before the next meeting are rising very quickly. Assuming the House passes the rescue plan, they may decide to wait because the market should react positively to that."

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There are growing expectations that the Fed will slice as much as a half point off its 2 percent target Fed funds rate, before its Oct. 28 meeting. "I think the Fed's view, and it's a correct view, is that lower interest rates aren't going to make a big difference in terms of unclogging the commercial paper market. They are attacking that with all kinds of lending facilities and increased swap lines," he said.

The House session starts at 9 a.m. and its vote on a bill similar to the one it rejected Monday is expected during the day. The Senate adopted the bill Wednesday.

"If the House doesn't pass it, it would be a mess and that could be the impetus for cutting rates," said Zandi.

Other data released Friday includes ISM non manufacturing data, reported at 10 a.m. Traders will no doubt be discussing Thursday's vice presidential debate, as the election gets closer and therefore more important to the market.

Markets Mayhem

The Dow was slammed Thursday, falling 348 or 3.2 percent to 10,482. The S&P was off 4 percent at 1115. Commodities fell, and the dollar surged 1.6 percent against the euro after the European Central Bank indicated it could move toward a rate cut.


Credit markets remained under intense stress. LIBOR, the bank-to-bank lending rate, continued to creep higher, with the three-month reaching 4.208 percent. The 10-year Treasury rose 1-1/32, at the same time lowering its yield to 3.646 per cent and the two-year yield fell to 1.640.

Investors worried that the lending environment was damaging the ability of companies to find funding, creating a deeper slowdown across corporate America.

Worries about a global slowdown dragged down commodities, and materials stocks were the worst performers, falling 8 percent.

Oil fell $4.56 per barrel or 4.63 percent to $93.97. Energy stocks were another poor performer in the rout, tumbling six percent.

The Chicago Board of Options Exchange's Volatility Index shot up 16 percent to more than 46. The VIX is watched closely as a fear meter. "It's telling us that this bill better pass. It's highlighting the fact that even if it does, it may not be enough to correct the current situation," said Dan Deming, a trader at the CBOE with Stutland Equities. Deming trades the VIX, and his comments were echoed by traders I spoke to in other markets Thursday.

The VIX's current reading implies that investors believe stocks could continue to make 300 point daily moves in October. "It's saying the volatility is certainly in the market for quite sometime. Especially, in the way it's getting to this new range. We're basically trading at all-time highs," Deming said.

Credit Crunch, Crunch

But it was the inability of companies to find funding that is a growing worry across all markets. The Fed released new data that showed outstanding commercial paper shrunk for the third week, falling a record $94.9 billion. The commercial paper market is crucial to the operations of companies which use it for short term funding.

At the same time, borrowing from the Fed's expanded discount window skyrocketed, reaching a record $409.52 billion Wednesday from $262.34 billion the prior week. "It astounds. We've never seen anything like this. Obviously, the Federal Reserve has extended a lifeline to the financial system," said Miller Tabak's Tony Crescenzi on Fast Money.

"It's not as if those who borrowed in the commercial paper markets are going elsewhere. That's why they're going to the Fed. We've seen in the last three weeks no bond issuance...$7 billion of company bonds sold ... and typically we'd see $60 billion. Banks aren't lending, and we know that from statistics. When people say the credit markets are frozen, it's not just an expression. It's the real deal," he said.

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The National Association of Corporate Treasurers, is a professional organization of treasurers, who are charged with keeping a corporation's financial machine rolling. Its members are some of the biggest companies in the country. On Thursday, the group had an informational call with about 100 members to discuss the impact of the credit crunch.

Edward Liebert, treasurer of Rohm And Haas, is NACT's chairman and he explained some of their concerns. He said commercial paper market is available to companies with the highest credit quality, but for those that have less than perfect ratings, the market is closed.

"It's quite an array of challenges we are facing," said Liebert. He said bank financing has also become an issue. Lead banks are no longer willing to cover for others in a syndicate, and this has disrupted or slowed down some lending. "It's not a given that if a company wants to draw its credit lines, it's going to be given," he said.

In a world where banks are wary of lending to each other, some lending just isn't happening. "It may result in you not getting the funds the day you need it, so you have to be more proactive and plan ahead of time," he said

Liebert said conditions are tough, and this credit contraction feels unique. But "I didn't have the sense that any of those participating in the conference call felt like they were faced with near death right now," he said.

Questions? Comments? marketinsider@cnbc.com

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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