Farrell: A Bottom? Be Careful Before You Say Yes

Little advertised and poorly understood was the Fed's decision yesterday to provide unlimited dollar funding to the world's financial system through dollar swap lines established with three European banks.

There was a limit on the number of dollars that could be accessed before this. To illustrate how tight that market had become the last $20 billion auction for dollars drew $80 billion in bids. The dollar is still the worlds reserve currency and many European banks had fueled their growth with dollars. Forget the mechanics, but without this move by the Fed a country could guarantee only its own bank loans. With unlimited swaps into dollars whatever debts you choose to guarantee can be so done.

The "cram down" nature of the Treasury's decision to invest $125 billion into the largest nine banks removes the potential for any stigma attached to applying for the investment. Hundreds, if not thousands, of other banks can apply to be part of the program and will not taint themselves by doing so. If JPM and the other big guys are in the club then it's a club I want to join. The 5% dividend going to 9% provides an incentive for the banks to buy themselves out when they can.

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There have been real signs of capitulation the last few weeks. We knew there was large scale redemption of mutual funds underway. That is normal behavior during stressful market times. What we didn't know was the extent to which hedge funds were bailing out of the market. The papers today carry stories of many hedge funds that just got out of the kitchen and went to cash.

Also, the margin calls major industrial figures got is highly unusual. Viacom, Chesapeake Energy , Tesoro, Boston Scientific and XTO Energy all saw their execs hit with forced sales to pay off debts.

While it would be nice to think that the recent moves mark a bottom in the market, I think caution is called for. Major reversals like we saw yesterday, and indeed starting with Friday's recovery part way through the day, usually run out of steam and a test of the recent lows is likely. Expect the euphoria to continue for a while, but rebalancing portfolios during up markets is a good idea.

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