Fed's refreshing move

How can i not blog today?

We had the best day of the year by far, with Dow up more than 400 points! In a refreshing move at unleashing much-needed liquidity to the system, the Fed announced a Term Securities Lending Facility (TLFS), which provides for a line of up to USD 200 bn in treasury securities against collateral from its 20 prime dealers (banks, agencies etc) in the form of MBS and other AAA paper. What does this mean?

1) For starters, this is literally a stamp of assurance from the Fed that it does not see the MBS/ABS securities go to zilch in value (which is what the market seemed to think apparently, given the run on Financial sector shares)
2) This also means big players like C, GS, MER and even smaller players (including troubled ones like Thornburg and Caryle) can loan treasury securities by providing AAA MBS paper (this includes paper sold by banks, Freddie Mae, Fannie Mac) as collateral. They in turn can loan these treasuries to investors in return for cash...thus providing much needed liquidity to these players.

This has been by far the best move by a central agency to address the situation in a sane manner. Rate cuts won't take us far and would in turn put us in danger of a staglation. Subsidies to in-difficulty borrowers would address part of the issue, but in a non-meritocratic way.This brilliant move by the Fed was even more powerful since it was coordinated with the ECB, Bank of England etc...each of them provding additional liquidity building measures totalling over USD 45 bn. There might be some feeling this Fed move is again reactive, but no one has been anyway good at predicting the depths to which the MBS and ABS markets have fallen...even the larger debt market in general. Who would have imagined economic confidence in US waning to such an extent that default swaps on German bunds start getting priced lower than that on US treasuries?? We are in an abnormal economic situation; and any balanced moves by the Fed to address the liquidity crunch will help stabilize the market and bring credit and lendign back on track. This would not remove credit issues, but would at least provide more breathing room for the large players.

Financials were up big time, with Citi leading with a 9%+ gain. Troubled players like Thornburg also saw big upside moves. I feel most of the financials have enough momentum now to erase the near-term decline they had over the past 2-3 weeks. However, the FOMC announcement on rate cut next week might provide a damper - I don't think a sane Fed would try to appease the market with a 50 bps+ cut. This might cause short term negative momentum. I just hope the Fed plays the move along with good forward looking commentary to ease market jitters.

In addition to the good news from the Fed, consumer confidence index measures from Germany and supply/ manufacturing indices from Germany and Japan provided enough hint that all's not bad. Europe and Japan still seem to keep enough momentum - meaning well for most of the large global US corporations and money center banks. Bad for the dollar perhaps, since stregnth in Europe means ECB or Bank of Engalnd would not be forced to come down form their hawkish rate stances. However, once the Fed controls unbridled rate cut expectations next week, the dollar should rally back to 1.45-1.48 levels against the Euro again.

On the micro-side, if you had locked on to January calls at strike 25 for C early today, its difficult to imagine you would lose money by year end!