Stock Preacher

The revival of markets for bonds backed by auto and credit card debts is expected to be underscored today when the US Federal Reserve reveals details of its latest loans to investors in asset-backed securities. The Fed offers cheap funding every month to investors in such bonds under its term asset-backed securities loan facility (Talf), an emergency measure meant to support the markets through which hundreds of billions of dollars in consumer loans are financed. This month, Fed funding will be available for investors considering buying US$12B in eligible asset-backed securities sold by the likes of American Express, Bank of America, General Electric, Nissan and Ford. Read more

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US President Barack Obama will nominate Ben Bernanke to a 2nd term as Chairman of the US Federal Reserve Tuesday, keeping him on the job of guiding the world’s largest economy out of its deepest downturn since the Great Depression. Bernanke, whose appointment to a new, four-year term as head of the US central bank must be confirmed by the Senate, has flooded crippled financial markets with hundreds of billions of US$s in Fed liquidity and stepped in to attempt rescues of failing financial institutions such as Bear Stearns and AIG. Obama’s Democrats control the Senate, but Bernanke has faced criticism from lawmakers of both parties who say he has gone too far in extending Fed support that will be difficult to unwind, threatening future inflation. Investors have generally given Bernanke high marks on the job and had widely expected him to be kept on by Obama, although the announcement was not expected until later this year.

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The economic outlook is improving, but US stocks’ rally that began in March may run into an obstacle or two this week as investors will assess data on new and existing home sales that could point to whether the battered housing sector has bottomed, and they will keep an eye out for profit forecasts or warnings as Y 2009 Q-2 comes to a close. The US Fed is expected to leave rates unchanged after its two-day meeting ends Wednesday, but investors will check its statement for clues on the central bank’s economic outlook going forward.

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Stephen Friedman, chairman of the New York Federal Reserve Bank’s board of directors, resigned last Thursday amid questions about his purchases of stock in his former firm, Goldman Sachs. Mr. Friedman, a retired chairman of Goldman Sachs who has led the New York Fed’s board since January 2008, said he quit to prevent criticism about his stock buying from becoming a distraction as the Fed battles a severe US recession. “Although I have been in compliance with the rules, my public service motivated continuation on the Reserve Bank Board is being mischaracterized as improper,” he said in a letter of resignation to New York Fed President William Dudley. “The Federal Reserve System has important work to do and does not need this distraction,” Friedman said.

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The US Federal Reserve bought US$7.541B of Treasuries in its second outright purchase of U.S. government debt in three days as part of the central bank’s efforts to lower consumer borrowing rates. The majority of the purchase was US$5.625B of the 1.375B note due March 15, 2012, that was issued this month. Seven of the 18 securities maturing from April 2011 through April 2012 listed for possible acquisition were bought, according to the Federal Reserve Bank of New York Web site. Central banks in the US, UK and Japan are buying government debt in the latest step to broaden efforts to unfreeze credit and end the recession after cutting benchmark interest rates close to zero.

The Fed bought US$7.5B in debt on March 25, the first purchase since the early 1960s by the central bank under a US$300B plan announced March 18. “The Fed’s monetization of government borrowing is in economic terms a hugely powerful liquidity tool,” said Lena Komileva, head of Group of Seven market economics in London at Tullett Prebon Plc, the world’s second-largest interdealer broker. “It also helps to address investor fears, by depressing government yields and private sector borrowing costs and signaling a firm commitment by the Fed to keep monetary liquidity flowing for a long time.”

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With at announcement Fed Chairman Ben Bernanke is signaling that he clearly understands the severity of the US economic situation and is willing to take “all” necessary action as he lives up to his nickname “Helicopter Ben.” In last week’s Federal Open Market Committee Meeting, the Fed announced that it would spend another US$1.1T to purchase debt securities, specifically Treasury notes, in open market operations. This is an extremely aggressive attempt to re-inflate the economy, and it should encourage bank lending, and the closest thing to running the US money printing press full on and throwing money out of helicopters…The consensus is that US Fed’s action will provide a necessary “kick” to the US economy and stock markets in the short term. Remember, take what the market gives.

The Big Q is that the long term effects from this action may cause even more problems. Steve Forbes once said: “If printing money alone can create wealth, then poverty stricken Zimbabwe (a country plagued by hyperinflation) would be the richest country in the world.” So in the short run, Bernanke’s actions will help stimulate the economy and the stock market, but the long-term picture isn’t bright.

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