Dow Up 890 After Ten-Times Increase in Commercial Paper Sales

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.

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  1. Flávio Botelho

    All the difference from last week in Commercial Paper comes from the Fed. How that can be seen as positive?
    Certainly short-term Fed is keeping the Zombies alive, but on the long run?

  2. Anonymous

    “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.”

    Over the last two weekends, I was in Sears and some other stores. A lot of things were 50% – 80% off in Sears, and people still weren’t buying. Some stores have plenty of customers, but some stores are pretty much empty.

  3. s


    Totally agree. Siorry, but to characterize this as anything other than another subsidy is missing the point. And looking to the equity market for an indication of anything is still otherworldy. Of note, GS rallied a meager 0.74% in the face of a near 10% rally. So much for beta.

    The Treasury is about to embark on an unprecedented campaign of issuing debt. The bigger issue here is Undersec treasury comments today trying to rally the Agency paper saying the US Govt basially backs the debt. Maybe we should just beg the Chinese to buy it. How totally pathetic. And why exactly do the Chinese have a responsibility to anyone other than their people?

    The US has adopted the mantra that we have to save ourselves to save you. Let’s see how that plays out.

  4. Anonymous

    I liken this to a patient who stops taking their antibiotics right after the symptoms disappear only to have the disease resurge but this time resistant to the treatment. The real economy is falling apart but we can’t even talk about being is a recession only that it is ‘looming’. When the Feds bring the interest rates near zero and people still keep their wallets shut where will they be then? Relying on consumers spending into infinity for the long run is not going to work.

  5. a

    I agree with Flavio et al. Instead of zombie banks we are now going to have zombie companies as well. This has to be a technical move in search of a fundamental reason – with the rabbit/reason pulled out of the hat being commercial paper. But it makes no sense.

  6. Hedge Trader

    I agree with sentiments expressed above, how can driving down rates to below levels where they would clear encourage investors to buy? Its also not clear that large issuance of government bonds wont make the situation worse. Conventional wisdom seems to be that issuing large amounts of US Treasuries will drive Treasury yields higher and narrow credit spreads. However given a finite amount of available cash to invest the extra isuance will need to be absorbed somehow. If investors seek safety of US Treasuries the net result will be wider spreads on everything else as the government crowds out corporate issuers.

  7. Anonymous

    A nice start in Europe helped sentiment on the opening. The Dax was up 8%, and closed up 11%. Too bad the Volkswagen short squeeze, which drove the
    price up 93%, accounted for most of it (following a
    150% rise yesterday). Oh well, ignorance is bliss.

  8. Anonymous

    What does one make of this lovely excerpt from Blackstone’s head honcho?

    ” “There has been an amazing achievement” by governments,
    he said. “The world we were looking at three weeks ago was
    really a virtual end-of-the-world scenario in terms of the
    collapse of global finance. Now we have much more stable global
    financial institutions that will work their way back into
    functionality and health.””

  9. bena gyerek

    hmmm.. i have a bad feeling this may be the bottom after all. bad because i am still sitting in cash.

    in any case, i sense that the recent wave of forced selling by hedge funds is over for now, at least until they get closer to their quarterly redemption dates. so this rally may have legs until hedge funds decide to “top pick” (or when markets are beaten into submission by the relentless barrage of bad news from the real economy).

    if my pension fund did not require two days notice, i would have bought back into equities yesterday afternoon when the emerging markets currency crisis failed to materialise.

  10. Yves Smith

    Anon of 4:44 PM,

    I had a similar reaction without the evidence of store traffic. I recall well that in past bad downturns (early 1980s, early 1990s), store markdowns of 75% were normal.


    We do not give investment advice here, just cautionary warnings, since Benoit Mandelbrot said, “Markets are much, much riskier than the standard theories assume.”

    Are you old enough to remember the late 1970s/early 1980s? No one believed in stocks save the diehards. And until the mid-1990s, most investors cared about dividend yields, or at least gave them very serious consideration in their analysis. And dividends are very likely to be cut from current levels by many companies.

  11. Don

    From Alphaville, I didn’t get this one:

    “Is this the real reason for today’s equity market gains?

    From an email currently circulating the City of London:

    Gut wrenching declines in US and global equity markets during October coupled with bond market outperformance will undoubtedly require MASSIVE monthly asset rebalancing by US pension funds –- rotating OUT of bonds and INTO stocks. This may have a profound “short-term” impact on performance of risk assets since the required rebalancing appears to eclipse even the large rotation after the 1987 stock market crash. As a very simple example, we asked our quant colleague (xxx) to analyze a balanced portfolio targeting 40% domestic bonds (SBBIG Index) and 60% equities.

    We assumed that the equity portion is comprised of 75% domestic stocks (MXUS Index) and 25% EAFE international equities (MXEA Index). The attached rebalancing calculations based on closing levels last Friday (Oct 24) suggest that US pension funds would need to reduce bond holdings by a WHOPPING -4.1% while increasing equity allocations by a corresponding +4.1%, all by the close of business at month-end on Halloween Friday (Oct 31).

    Price action could be bloody scary given terrifying poor liquidity in these markets. For historical perspective, the second largest monthly bond-stock rebalancing rotation was 3.4% in October 1987. Most importantly, US equities did manage to stage a +10.5% during the last four trading days of October 1987 while bonds struggled. As it turns out, that marked the bottom for US equities for the next month and probably helped stocks find some needed footing in 1987.
    Bottom line: BEWARE the potential bounce in risk assets due to bond-stock rotation this week. FX risk trades may also tend to recover a little lost ground.”

    No wonder investing is so bad. You can’t even change your strategy to fit the circumstances.

    Don the libertarian Democrat

  12. Anonymous

    High-yield corporates were only up about 1%. The bond market seems to be very skeptical about this rally.

  13. Anonymous

    The sentence: “Any one document being out of order means the shipment will be rejected, even if the shipment itself is in fact exactly what the buyer wanted” shouldn’t that be”Any one document being out of order means the PAYMENT will be rejected, even if the shipment itself is in fact exactly what the buyer wanted”

  14. Sev

    So out of 67 billion 60 was the FED bailout. I call BS. Bond levels are horrible and what happens when we take away the crutch? Eastern Europe still has to settle out and more and more beggar thy government capital needs are coming down the pipe. A temporary reprieve but not stablizing in the least.

  15. Viv

    It’s just a bear market rally. It’s wave up, followed by a huge wave down that will see us breach the 2002-2003 lows in the market. Have any problems really been resolved? are banks lending freely again? Is the economy booming? NO. I am assume this was just a short covering rally.

  16. doc holiday

    Here are a few toe tappers to set your mode:

    Jack Hylton – Happy Days Are Here Again

    Also Feel: Let The Good Times Roll – The Cars

    This is just dandy, the good times are here again and so are 1000 point mkt swings — as banks like Goldman are now in the local banking business, where they can now continue the old game of swapping hedged positions in commodity trading with money market deposits in pension funds and with FDIC savings accounts — but relax, The Fed says it’s covered with bets they have (in the works).

    This new lotto infected stock market backed by The Fed Casino is something I’m sure a huge amount of people will bet their farms on and why not, because, after all, Happy Days are here again, with more jobs, bigger homes, bigger SUVs, bigger supersized meals, bigger clothing, bigger thongs and bigger better thinking with unlimited debt and credit all in one comfortable global payment, now available at your local ATM. ** Past Performance is No Guarantee of Future Results

    So long sad times
    Go long bad times
    We are rid of you at last

    Howdy gay times
    Cloudy gray times
    You are now a thing of the past

    Happy days are here again
    The skies above are clear again
    So let’s sing a song of cheer again
    Happy days are here again

    Altogether shout it now
    There’s no one
    Who can doubt it now
    So let’s tell the world about it now
    Happy days are here again

    Your cares and troubles are gone
    There’ll be no more from now on
    From now on …

    Happy days are here again
    The skies above are clear again
    So, Let’s sing a song of cheer again…

    [Music and Lyrics by J. Yellen and M. Ager]

    ** Someone get that LHC turned back on!

  17. Matt Dubuque

    Yesterday claims were made that the Fed’s foray into CP was a failure.

    Much of today’s rise is being attributed to the SUCCESS of that same operation.

    In reality, it’s still to soon to tell definitively. This is an extremely turbulent environment with scores of variables, and to conclude that because one thing follows another sequentially means that it was CAUSED by it is the classic error of post hoc ergo propter hoc.

    Think. Reflect. Study trends and new data with patience.

    Matt Dubuque

  18. Yves Smith

    Anon of 6:50 PM,

    Your suggested revision, while technically correct, would confuse readers without further elaboration.

    The bank representing the buyer refuses payment because the documentary requirements have not been met. Transfer of title to the shipment is conditioned on receipt of payment. Therefore, the rejection of the L/C results in the shipment being refused (unless the parties find a way to remedy the deficiency, and as mentioned, practice is all over the map as to whether that can be done and how easy that is to do).

  19. UrbanDigs

    The Feds CP facility is a good one. Look, Im not one to say I am behind all the facilities and actions taken so far, but I dont have much to say now do I.

    I wrote about this facility on the 17th and that it was being widely anticipated by the street and firms and viewed as a nice help to CP markets. I also wrote that I wanted to be long ahead of the launch of the facility.

    Dont be surprised if the rally surprises a few on the upside in duration. We came down hard, and bear market rallies are fierce. If the fed cuts less than 50 bps tomorrow or if GDP is way worse than expected, the rally is likely to be short lived. Personally, I think the fed should hold off on rate cuts for a better time, if anything, saying that its not needed yet.

    For now, with all these actions, and being down very hard in past 4-6 weeks, its hard to not to nibble on some longs, and cut back on shorts. If the rally lasts, the short covering will power it further and so on. There will be a nice new shorting opp soon, but Im waiting for it

  20. Fred

    Great posts and comments – this site will be close to the top of the list of sites I visit on a frequent basis throughout the day


  21. Anonymous

    I love this blog as much as the next person. Quite frankly though this information is much too heady for one person to work a full – time job, manage a family and community and keep up with it. Things are, most definitely, out of control…and the only thing I can think to say is that the Market has becom HAL….

    to quote HAL in 2001 a Space Odyssey…

    [on Dave’s return to the ship, after HAL has killed the rest of the crew]
    HAL: Look Dave, I can see you’re really upset about this. I honestly think you ought to sit down calmly, take a stress pill, and think things over.

  22. Anonymous

    Bottom? There are many more shoes to drop. CDS, CDOs, emerging markets, etc. It would also be surprising if the decent was only so far. I suspect it’s just another Bear rally. IF you can time it right you can make money. I know I am not very good with timing. The bottom arrives when people stop looking for the bottom, when the news stop talking about the markets because nobody is interested.

  23. Anonymous

    “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.”

    If im broke and deep in debt, Im not buying anything.

  24. Anonymous

    Flavio and his concurring commenters have this right. There is nothing here but the Fed buying paper at below market rates. I can’t see any reason to get excited. As for the rise in the Dow today, Felix Salmon at got it right when he said that nobody really knows what the price of a stock should be right now.

  25. Richard Kline

    Regarding when the ‘recession’ will be announced, the delay in that is profoundly influenced by the US election; as such it has everything to do with American politics in general and Republican governance in particular. It isn’t that simple, but it is that plain. We will have the recession announced soon, in mid-November, when it will be designated ‘the Democratic recession’ in some quarters.

  26. Juan

    Richard, wasn’t there some funny business at the NBER during the just-a-few-years-ago recession? I vaguely recall a change in weightings with GDP becoming more prominant while metrics such as unemployment became relatively less consequential.

    Anyway, the Chicago Feds _National_ Activity Index three mos moving average (CFNAI-MA3) has been negative for 29 consecutive months, falling to recession levels since November of last year.

    Everybody knows the U.S. has been/is in recession,,,political and MSM denial assists to further the well earned delegitimization of those ‘estates’.

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