Market update: 10 17 08

As we’ve been saying for a month or so…the financial crisis is taking front page but eventually people will begin looking at the real economy again and when they do they will see numbers that paint a very weak picture. Yesterday the Philadelphia Fed Index (an index that tracks manufacturing in the Philadelphia Federal Reserve district) posted its biggest drop in over 18 years. The survey expected a -10 reading and the index actually posted a -37.

This morning’s numbers on Housing Starts and Building Permits were the latest in a long line of economic releases that were worse than expected. Based on the prospect of a global economic slowdown oil is trading at $70 a barrel. That is down an astounding 52% from the high it posted over the summer.

Equity Index futures are pointing to a lower open for stocks.

The big news of the day is that Libor rates are beginning to decline. All it took was a massive and coordinated global effort which saw unlimited dollar loans to European banks and blanket guarantees of bank debt…piece of cake right? Un-freezing the inter-bank lending market is a primary goal of this effort. 3-month Libor is off about 9% from its high. That is a welcome sight as it indicates that some of the counter-party fear that has gripped the inter-bank market is beginning to wane.

Commodities are mirroring the drop in crude oil prices as the global economy slows. The Goldman Sachs Commodity Index has cratered from its high. It is down 52% over the last few months.

Fed Funds futures are trading with a 100% chance of a cut at the 10/29/08 meeting. 58% of the probability is assigned to a 1.00% level for the overnight rate after the next meeting. We’re in a spot now where the chatter is about the Fed needing to lower rates but running out of room to do so.

There has been a lot of friction in the markets over the last two months. Generally that friction has been very positive for buyers and not great for those needing to sell. I would expect this friction to continue for some time. There are some signs that the financial markets are moving toward a more normal operating state. Libor funding costs are a positive sign, when banks are willing to lend to each other the system gets lubricated with cash. Interbank lending is a necessary function. It will take some time before all is calm and trading desks begin stepping back into the market…in the interim we continue to find some very inefficiently priced securities that are making buyers happy.

If you have any questions on this material or if there is anything you need just let me know.