3 Huge Announcements

We are living in a time that is one for the history books. Yesterday, an already historic week was capped off with an incredible series of three announcements aimed to rebuild confidence in our financial system, provide liquidity and stop the systematic destruction of more of our country's major companies.

Money Market Funds

Banks have been either folding or on the brink of collapse, bonds are losing some or all of their value, and stocks are dropping at an alarming rate, all causing tremendous fear and anxiety for consumers and investors.

This fear caused a flight to quality (when stocks are sold in favor of less risky Treasuries) of such magnitude that the return on Treasuries was actually negative. That means, people are actually willing to pay money in order not to lose money...forgetting all about any type of return for their investment. And on Thursday, this panic lead to a modern day "run on the bank". $180 billion was taken out of money market funds due to a lack of confidence (money market accounts are not FDIC Insured). This resulted in a "breaking of the buck", which means that the Net Asset Value of some money market funds dropped below $1. Virtually all investors consider money market funds very safe and do not expect any change in the principal value, so a $1 invested will always result in a $1 balance plus any interest. But once the $1 valuation was broken, investors panicked and the flood gates opened. This caused the Treasury to step in.

Announcement #1 Friday morning was Treasury Secretary Hank Paulson announcement that the US government will guarantee money market funds. It should be noted that this does not include high yield, enhanced type, or riskier money market funds.

This action is helping settle the markets and, as a result, stocks around the world marched higher.

Illiquid Mortgage Debt

As we know, the mortgage mess has buried many companies including previous giants with long histories like Lehman, Bear Stearns, Fannie Mae & Freddie Mac. The big problem is that there are no buyers for this debt in the current marketplace.

Announcement #2 is the Fed's decision to create a market place for illiquid mortgage debt.

So the Fed is stepping in to create a vehicle to make these purchases of mortgage debt and provide a liquid marketplace. This is a brilliant move which has been very well received and should do a lot of long term good to help the housing and lending environment. Stocks around the world have responded very favorably to this.

Stock Shorting

The amount of greed in this market is incredible. Many short sellers have used currently illegal tactics such as "naked" short selling. This means they are shorting a stock without the required step of first borrowing it. It is the equivalent of an electronic store saying, "pay for what you take with the honor system". While some will actually pay what is due, there is no doubt that the store will be wiped out in a short period of time.

This has exacerbated the problem in financial stocks as they get unmercifully beaten down. This in turn hurts their balance sheet which also limits their ability to take on credit. And this is the vicious cycle we have been witnessing. Worse yet are the short sellers who sent armies of individuals to use scare tactics on message boards to convince people the sky is falling.

Announcement #3 was that the SEC placed a ban on short selling in 799 financially related stocks.

This ban will last through October 2nd and can be extended if needed in 30 day increments. Some other countries around the globe are also instituting similar bans. There are some very foolish politicians and others who are commenting on what a negative move this is, as well as saying there are legitimate short sellers. The problem is that they have failed miserably in policing this problem for a very long time. The SEC did the right thing here and hopefully this will add another level of calm to the current financial crisis.

The bottom line...

These 3 measures will not fix everything, but it sure looks like a step in the right direction. And while interest rates may suffer as a result...who cares. The health of our financial system and confidence that our hard earned savings will not be wiped out is far more important. What good is earning a paycheck if there is no place to safely save that money?

Mortgage Rates will undoubtedly continue their volatile ride - only time will tell...

Sincerely,

Charlie Christensen - Broker/Owner - CWC Financial
888-711-5454 Toll Free / charlie@cwcfinancial.com / 415-454-1130 Local