Markets: The Issues "Floating Around" Today

For the last two weeks, it hasn't mattered if the market is up, down, or flat going into the last hour; the prevailing trend has been to attempt to sell the market toward the end of the day, even if the market ends positive.

Today there are several issues floating around:

1) On the heels of Citi raising capital,there are rumors that other banks and financial guarantors may also have to raise capital.This would obviously be dilutive and would dump additional stock on a market that is already having trouble digesting financial stocks. Note the considerable commentary circling around Freddie Mac today, to the effect that they will shortly announce a secondary stock offering.

Of course, the speculation that there will be additional write-downs due to mortgage losses from Citi and others is very much in the air.

2) Fed Pres Evans, a voting member, is sounding reluctant to cut rates. He said, "While the risk is still present of notably weaker than expected overall economic activity, given the policy insurance we have put in place I don't see this as likely." This is the part of the Fed that is looking merely at economic activity, but remember the markets are betting that the Fed has given enough indication that financial market stability is a key issue for them. Most are betting the Fed will cut again. A significant minority believe that the Fed needs to be EXTREMELY aggressive, cutting 50 basis points each of the next two sessions.

3) Continuing concern about the extent of emerging market growth in 2008. Bears point to Cisco today: long considered a safe haven, breaking to new lows today. First, it was concern about U.S. enterprise spending; now emerging market growth.

A bigger issue is now the future of the securitization industry in general. It isn't just mortgages that are securitized: credit cards, student loans, and even the real estate industry, where it is applied to pools of leased property, use securitization to free up liquidity so the money can be redeployed. If it becomes difficult to sell any of these loans, liquidity that is critical for the modern functioning of credit markets since the 1970s will dry up.

This is why some are advocating a radical approach: the government should step in and find some way to shore up the securitization business. Most think this is not feasible; indeed the government does not even guarantee Fannie Mae or Freddie Mac pools of mortgage securities. Still, the chorus of those calling for more drastic action is growing.

Questions? Comments?