Busch: Everything's Coming Up Roses
Like snow in Chicago, the good news just keeps falling today for the equity markets.
That's right, I said good news.
Let's start overseaswith New Zealand and Switzerland. The central bank of NZ, the Reserve Bank of New Zealand is expected to cut rates today by 100 basis points. This will take their overnight rates down to 4.0% with the OIS market pricing in another 100 basis points of rate cuts out 1 year. The Swiss National Bank has decided to step into the void left by the European Central Bank and help out it's Eastern European neighbors. The SNB has entered into a currency swap arrangement with the Hungarian National Bank (NBH) to provide Swiss franc funding to banks in dire need of access to capital.
To the US with what is perceived as a short term positive by the markets, the current Obama administration's stimulus plan. Today, the US House of Representatives will vote affirmative on their version of the stimulus plan with $825 billion over 3 years filling the goodie bags of all those voting yeah. For now, the dewy eyed Congressmen and women are ignoring the costs of $140,000 per job created. Hey, but who's counting? The Senate is looking at a $900 billion plan.
Next up, the Federal Reserve. Today, they meet and discuss the state of the economy. This group is by far the brightest hope for a sustained recovery as they have learned the lessons of the 1930s and will keep their collective foot on the monetary gas. Look to see if they provide additional insight into their quantative easing program. Currently, they have spent 23% of the $100 billion allocated for buying debt issued by Fannie Mae , Freddie Mac , and the FHLB. Also, they have spent $53 billion of the $500 billion allocated for buying mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. On the downside, this did balloon their balance sheet from $892 billion in December of 2007 to $2,121 billion in January of 2009. But who's counting?
The US Treasury is facing difficult choices in dealing with the "toxic assets" or TA that remain on banks balance sheets, but they apparently have come up with a plan. These TA are more commonly known as mortgages or derivatives of mortgages. The prevailing belief is that there is $1 trillion worth of these still declining assets that are preventing banks from engaging in new loans even after they received TARP injections. As I wrote several weeks ago, the US Treasury is developing a plan that the FDIC would oversee to create an institution that would purchase these assets and remove them from the bank's balance sheets to free up lending. (Note the WSJ Bair interview.) This is providing a positive pop to all the banks and the financial sector of the equity market today.
Lastly, Wells Fargo and AIG have announced some good news as well. AIG is in talks to sell an asset they own that others actually have interest in buying. The ILFC airline leasing group has drawn interest from sovereign wealth funds and this would help with repaying the US government. Wells Fargo announced earnings and they beat the street by 8c. Interestingly, they also announced a trend you will see much more of: they will not take any additional TARP money. With the Citigroup fiasco over the new plane purchase, most financial institutions should be loath to take loans that bring on the TARP inspector general.
After the surprise 6.5% jump in existing home sales, the good news appears to be pouring out and equities continue their rally.
Truly, the only thing we have to fear is Congress or the US government making policy mistakes.