naked capitalism

US equity markers were already having a very good day, even by the standards of recent high market volatility, where big snapbacks have become normal after sharps declines. But the very good day turned into a stunner after the announcement today of record commercial paper sales yesterday. The Dow rose 890 points, with a near hyperbolic rise at the close, and the S&P 500 was up just over 7%.

From the Wall Street Journal. Note how cautious the article is, which has not been fully revised from its mid day version, when the Dow had been up as much as 600 points and an end of session retreat was still possible:

Rallies in overseas shares and favorable news at two blue-chip companies boosted market participants’ mood early in the session. Some of that enthusiasm has lingered, although many players remain on the sidelines, trying to discern how deep and how long the global economy’s slowdown will run.

“The market is moving around right now, but there’s absolutely no liquidity,” said Michael Davis, an independent trader active in Treasury and stock-index futures at the Chicago Board of Trade. “The investment banks aren’t playing right now,” due to their recent struggles to survive….

At the same time, the stock market lately has often been plagued by forced selling among hedge-funds and other deep-pocket players, who have to raise cash to cover margin calls as the market goes down. While such activity has often produced avalanches of selling lately, some veteran investors are still looking for a one-time market plunge, accompanied by big volume, to confirm that the forced selling has truly run its course, paving the way for a more sustained rally.

“There are still people hanging on by their fingernails who need to be moved into the sell column,” said Michael Farr, president of the Washington money-management firm Farr, Miller & Washington. “I’m a buyer in waiting. I know what I want to buy, but Ihaven’t seen the wash-out that I want to see first.”

This is the revised version (same link) as of ten minutes later:

The Dow Jones Industrial Average leapt 889.35 points, or 10.9%, to 9065.12, aided by gains in all 30 of its components. The rally was its second-best this month, behind only the 936-point leap on Oct. 13 to break a painful eight-day losing streak.

Rallies in overseas shares and favorable news at two blue-chip companies boosted market participants’ mood early in the session. That enthusiasm briefly wavered after the release of downbeat economic data, but came roaring back as the closing bell approached, with buyers rushing in either to rebalance beaten-down portfolios or to place speculative bets at bargain-level prices.

“People are starting to take a long-term view, and the long-term looks pretty good,” said Anthony Conroy, head trader at BNY ConvergEx, a New York brokerage.

Alluding to the Dow’s steep decline from it’s year-ago record, he said: “If you went to Macy’s and you saw that all the merchandise was 45% off, people would be buying like crazy. That’s what’s going on in the stock market right now.”

Heading into the end of October, the Dow has plunged 17%, on track to register as the worst month in its history. But that plunge has whetted bargain hunters’ appetites and forced some money managers whose funds are required to hold a certain percentage of money in stocks to come back into the market as the time approaches to mail month-end statements.

At the same time, some participants remain concerned that trading volume has been light, making it difficult to gauge investors’ level of conviction that the gains can continue. Exchange-only volume at the New York Stock Exchange on Tuesday was slightly below the month-to-date average of 1.7 billion shares.

“The market is moving around right now, but there’s absolutely no liquidity,” said Michael Davis, an independent trader active in Treasury and stock-index futures at the Chicago Board of Trade. “The investment banks aren’t playing right now,” due to their recent struggles to survive.

Note that highs on low volume, from a technical standpoint, say a rally is tenuous and subject to reversal. However, one positive sign was the the recent lows were seeing fewer and fewer new lows for individual stocks.

Bloomberg reports on the big improvement in the commercial paper market:

Sales of longer-term commercial paper soared 10-fold after the Federal Reserve began buying the corporate IOUs, a sign that the central bank’s efforts toward unlocking the market may be working.

Companies yesterday sold 1,511 issues totaling a record $67.1 billion of the debt due in more than 80 days, compared with a daily average of 340 issues valued at $6.7 billion last week, according to Fed data. The central bank probably absorbed about $60 billion of the total, said Adolfo Laurenti, a senior economist at Mesirow Financial Inc.

“That’s the very first really good news in quite some time,” said Laurenti, who is based in Chicago. “It’s probably something the government can do and the normal investor would not otherwise do.”

The Fed began buying commercial paper from companies yesterday to reduce rates, lure back investors and unlock the market, which seized up last month following the bankruptcy of Lehman Brothers Holdings Inc….

Companies sold $232 billion of commercial paper yesterday, the most in five years, with 29 percent maturing in more than 80 days, according to Fed data. That’s the biggest percentage on record and compares with a previous high of 13 percent in 2002.

The previous daily record for commercial paper due in more than 80 days was set on Oct. 10, 2003, when companies sold $32.9 billion of the debt, according to Fed data.

The Fed today set the rate it’s willing to accept for 90-day unsecured commercial paper at 2.89 percent, including a 1 percentage point credit surcharge, up 0.01 percentage point. The 90-day secured asset-backed rate is 3.89 percent, according to Fed data compiled by Bloomberg. The rates are set under the Fed’s Commercial Paper Funding Facility and are available on CPFF.

“The facility is helping to free up money for investors to place in other assets and it is also reducing the corporate sector’s dependency upon bank credit, freeing up money for the inter-bank market,” Tony Crescenzi, chief bond-market strategist at Miller Tabak & Co., in New York, wrote today in a note to clients…

The commercial paper market shrunk by $366 billion, or one- fifth, to a three-year low of $1.45 trillion from Sept. 11 to Oct. 22, its worst slump on record, Fed data show. During the last recession seven years ago, the commercial paper market declined 17 percent from its then peak in December 2000 to September 2001, according to Fed data.

The surge in borrowing longer-term means more issuers, especially financial companies, will have fewer funding concerns through the end of the year, Laurenti said. The Fed is absorbing some of the “stress” in the market by buying debt from higher- rated companies, while distressed issuers are still locked out, he said….

“Commercial paper yields are adjusting, volumes across the maturity spectrum are expanding and maturities have lengthened, although we are still far from what might be called `normal’ conditions,” Ryan said today at a Securities Industry and Financial Markets Association conference in New York, according to prepared remarks….

The average yield financial companies paid yesterday to issue 90-day commercial paper plunged 70 basis points to 2.55 percent, or 1.05 percentage points more than the target lending rate, according to the Fed, signaling the program may be working.

Historically the rates are about the same. Financial company yields reached a nine-month high of 3.99 percent on Oct. 6. By contrast, non-financial issuers paid 1.95 percent yesterday.

While this is good news, it is also important to recall that banks tighten up on lending to each other even in normal times in December to square their books, and last year, the crunch started early, in the first two weeks in November, leading the Fed to implement its first emergency program, the Term Auction Facility. These CP sales will bridge lending over the year end. We will soon see how much conditions improve in other short term markets.