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Farrell: The Power of Liquidity

A total of 483 U.S companies have raised $150 billion via sales of common stock or convertible securities so far this year according to Trim Tabs, an outfit that follows such stuff. The pace has increased recently since in the first quarter only $13.8 billion of paper had been sold.

This week a large offering by American Airlines of both common stock and convertible bonds was easily placed. Placing airlines securities in a troubled economy is not a normal thing. And the re-opening of capital markets is not limited to corporate America. The Eurasian Development Bank (don't worry - no one else knows what it is either) planned on selling $500 million in bonds the other day and received bids for ten times that amount. Banco Brandesco in Brazil got $3.4 billion in bids for its offering of $750 million in debt. And over $20 billion in Initial Public Offerings (IPO's) have recently been filed. Not in the U.S., but in Brazil. Even California which is in the basket case category has been able to successfully market over $8 billion in notes. The huge ocean of liquidity sitting on the sidelines is anxiously looking for a home. When compared to near zero interest rates on short term paper a lot of opportunities can look appealing.

Euro Zone industrial orders were up 2.6% in July after being up 4% in June. While still down 24% from a year ago, it looks like the third quarter GDP for the 16 countries that share the euro will be positive, but marginally so. Since the consensus for Q3 GDP for the U.S. is +2.9%, I feel the dollar's slide against the euro will come to an end. Foreign exchange markets are worried that the quantitative easing in the US and the surge in government borrowing will debase the dollar. It may, but those concerns are not being reflected in the bond market. There was strong reception for Wednesday's offering of $43 billion of 5-year notes. The bid to cover was an above average 2.4 times (the last five auctions for paper of this maturity was 2.2 times) and the indirect buying was 44.8% with the last five auctions averaging 43%. Mortgage applications were up 12.8% last week (to the highest level since last May) which makes some sense since the average 30-year fixed rate mortgage fell below 5% to 4.97%. Even though auto sales so far in September have plunged from the incentive induced pace of August (running about 9 million on an annual basis versus a run rate of 14 million in August) the head of Ford feels vehicle sales will be 11 million in 2009, 12.5 million in 2010, and 14.5 million in 2011.

  • Ford CEO says US Market Looking Good

The Fed did as expected and held rates constant. They said the economy has picked up, conditions in financial markets have improved, housing activity has increased, and household spending seems to have stabilized. But since there are still ongoing job losses, sluggish income growth, and tight credit, "Economic conditions...warrant exceptionally low levels of the Federal Funds Rate for an extended period of time." They did push back the completion of the $1.25 trillion program to purchase mortgage backed securities to the first quarter of 2010, which was expected. That will give them time to gradually slow the rate of purchases down and allow the market to adjust-or not.

  • Some Bailout Money Will Never Be Recovered: Watchdog

The stock market is now up 25 out of the last 28 days. Wow. I wish I could enjoy it more. _______________________________________