Economic & Market Update: September 15, 2008

“And the Spiral Continues”

Chip Norton, Managing Director of Fixed Income & Economic Analysis

Last Week’s Highlights:

Stocks:                               Dow end Friday 11,412

Bonds:                               Treasury 10-yr 3.73%

Oil:                                    $103 per barrel

Dollar:                               $1.41 vs. euro

PPI                                    Big drop due to oil

Economics This Week:

Date      Item                                  Est.                     Comment

9/16      CPI                                    0.2/-0.2             Drop on energy expected

9/16      FOMC                               Unchanged        With turmoil, cut could occur

9/17      Housing Starts                 950k                    Slight uptick seen

9/18      Leading Indicators         -0.2%                   Down, but better than July

Clearly, today will be yet another historic milestone for the market with the end of two Street giants – Lehman Brothers and Merrill Lynch. The failure of Lehman Brothers also, again, put the Federal Reserve and Treasury in emergency mode trying to stabilize the markets Monday with a number of liquidity measures. In addition, the FOMC meets this week. Estimates last week pointed toward no policy change, but the current turmoil changes everything and a 25 bps to 50 bps rate cut may be in the works. 

Yes, regardless of how long you’ve been in the business (or not), this is surreal.  With events moving so rapidly, it’s hard for us to provide full details. Below are a few bullets written early Monday morning. What we do know is that the Fed, Treasury, and banking leaders are taking extraordinary steps to calm the market. This is why it will be important not to take rash, panic-driven actions during this period. One could look at this as, finally, the beginning of the end to the uncertainty that has plagued the markets this year. Consolidations will occur just as they have for every other industry and, hopefully, what comes out the other side is a tighter, less leveraged financial industry. In the meantime, the question that is the Monday buzz is who is next in line for the death spiral. If AIG does not find its cash infusion, or at least a solid lending facility, it too could be facing the fate or Lehman and Merrill. This will be a busy and historic week, to say the least.

Monday Morning Bullet Points:

-Lehman Brothers – Founded 850 – files for Chapter 11 bankruptcy. Details are still coming in on how the bank will dispose of assets and how investors are impacted.

-Merrill Lynch – Founded 1914 – bought by Band of America for approximately $50 billion

-AIG Founded – Founded 1919 (initial) – is on the verge of collapse barring Fed intervention

-The Federal Reserve has opened the liquidity gates – Accepting equity and investment grade debt as collateral, the Term Securities Lending Facility expands to $200 billion,

-The European Central Bank (ECB) is providing liquidity. There is talk the Fed may lower the Discount rate and possibly even the fed fund rate if conditions deteriorate.

-Special Fund – A $70 billion special bank loan reserve fund set up by consortium of 10 banks to provide liquidity. The consortium of 10 banks said that any member can borrow up to a third of the fund, to which each is contributing $7 billion.

-Oil prices plunged to $94 on reduced demand and less than expected damage by hurricane Ike. [BTW, did you ever expect “plunged to” and $94 to be used in the same sentence when speaking about oil?]

-The dollar is showing stability trading near $1.41 vs. the euro.

-The Dow is set to open 200+ points down – futures down over 300 overnight.

-Bonds have a huge “flight to quality” rally with the 10-yr Treasury yield trading at 3.51%

Out of respect for our colleagues in the financial services sector and the investors caught up in the current market turmoil, we opted to not post a “Lighter Side” today.

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