Once, Twice, Three Times a Bottom…

Time for another chapter in the saga of capital destruction we call the stock market.

Just in time for the negative GDP number everyone has been waiting for, the market is finding a bottom.  It may not be the ultimate bear market bottom, but it’s probably the bottom for 2008.  As we noted in We’re sure scared now…bringing it all together, “Historically, a retest of the lows develops within a few months to verify the strength of the bottom.  Hitting the exact lows again is not a necessity, but a second significant down move usually at least comes close.  This offers a great time to pick up relative strength leaders as they separate from the pack.”

We have seen not only one, but two tests of the lows since that writing, in the broad market indices.  Neither one of those tests completely reached the initial low, but both were violent and low enough to be considered valid.  The updated chart of the Dow Jones Industrial Average shows pullbacks of 1,500 and 1,100 points respectively, with both lows about 300 points above the initial low of October 10.

What has developed now is a trading range.  Not exactly bullish, but much better than the ski slope drop of the last few months, October in particular.  Seasonality is also about to turn positive as the November through April time period is historically the best six months of the year for the markets.  November itself is one of the best single months to be invested.

So how do we decide what to do?

There are several options here really.  Trading range strategies are particularly profitable in times of high volatility.  Selling premium and initiating spreads are some preferred options trading strategies for this kind of market environment.  For long term investors, picking up relative strength leaders near the lows is a great strategy.  Many stocks have been unfairly punished and are now wildly undervalued.  For indexers or 401k investors that have protected their assets with bond funds and stable value funds and cash, start moving it back in on these bad days as long as the lows hold.  For aggressive traders, we know there are some serious mean reversion trades already started.

What we must all keep in mind is that we do not know if the lows will hold or not.  As long as they do, buy them but don’t commit all of your capital at once.  Take little bites and dollar cost average into positions, especially if you are not trading.  There are many great opportunities here, but there will be many in the future also.  Don’t let yourself get stopped or margined out (heaven forbid) when you should be buying more.  The amount of forced liquidation by hedge funds is not something that is knowable by anyone.  It is creating great prices, but it could carry much further if the selling continues to feed upon itself.  If the trading range is broken to the upside we would become more bullish and would start to look at the 50 day, 200 day and 80 week moving averages as resistance.  Another bullish clue we are looking for is for volatility to drop, specifically the $VIX needs to drop under the 20 day moving average which has provided support since the breakout in early September.

Statements from the Federal Reserve

Release Date: October 29, 2008

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

Release Date: October 29, 2008

For release at 3:30 p.m. EDT

Today, the Federal Reserve, the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore are announcing the establishment of temporary reciprocal currency arrangements (swap lines). These facilities, like those already established with other central banks, are designed to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well managed economies.

Wall Street’s ‘Disaster Capitalism for Dummies’

14 reasons Main Street loses big while Wall Street sabotages democracy

By Paul B. Farrell, MarketWatch
Last update: 7:10 p.m. EDT Oct. 20, 2008

ARROYO GRANDE, Calif. (MarketWatch) — Yes, we’re dummies. You. Me. All 300 million of us. Clueless. We should be ashamed. We’re obsessed about the slogans and rituals of “democracy,” distracted by the campaign, polls, debates, rhetoric, half-truths and outright lies. McCain? Obama? Sorry to pop your bubble folks, but it no longer matters who’s president.

Why? The real “game changer” already happened. Democracy has been replaced by Wall Street’s new “disaster capitalism.” That’s the big game-changer historians will remember about 2008, masterminded by Wall Street’s ultimate “Trojan Horse,” Hank Paulson. Imagine: Greed, arrogance and incompetence create a massive bubble, cost trillions, and still Wall Street comes out smelling like roses, richer and more powerful!

Yes, we’re idiots: While distracted by the “illusion of democracy” in the endless campaign, Congress surrendered the powers we entrusted to it with very little fight. Congress simply handed over voting power and the keys to trillions in the Treasury to Wall Street’s new “Disaster Capitalists” who now control “democracy.”

Why did this happen? We’re in denial, clueless wimps, that’s why. We let it happen. In one generation America has been transformed from a democracy into a strange new form of government, “Disaster Capitalism.” Here’s how it happened:

*Three decades of influence peddling in Washington has built an army of 42,000 special-interest lobbyists representing corporations and the wealthy. Today these lobbyists manipulate America’s 537 elected officials with massive campaign contributions that fund candidates who vote their agenda.

*This historic buildup accelerated under Reaganomics and went into hyperspeed under Bushonomics, both totally committed to a new disaster capitalism run privately by Wall Street and Corporate America. No-bid contracts in wars and hurricanes. A housing-credit bubble — while secretly planning for a meltdown.

*Finally, the coup de grace: Along came the housing-credit crisis, as planned. Press and public saw a negative, a crisis. Disaster capitalists saw a huge opportunity. Yes, opportunity for big bucks and control of America. Millions of homeowners and marginal banks suffered huge losses. Taxpayers stuck with trillions in debt. But giant banks emerge intact, stronger, with virtual control over government and the power to use taxpayers’ funds. They’re laughing at us idiots!

Buy American. I Am.

By WARREN E. BUFFETT
Omaha

The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So … I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A short history of modern finance

Link by link
Oct 16th 2008
From The Economist print edition

The crash has been blamed on cheap money, Asian savings and greedy bankers. For many people, deregulation is the prime suspect.

THE autumn of 2008 marks the end of an era. After a generation of standing ever further back from the business of finance, governments have been forced to step in to rescue banking systems and the markets. In America, the bulwark of free enterprise, and in Britain, the pioneer of privatisation, financial firms have had to accept rescue and part-ownership by the state. As well as partial nationalisation, the price will doubtless be stricter regulation of the financial industry. To invert Karl Marx, investment bankers may have nothing to gain but their chains.

The idea that the markets have ever been completely unregulated is a myth: just ask any firm that has to deal with the Securities and Exchange Commission (SEC) in America or its British equivalent, the Financial Services Authority (FSA). And cheap money and Asian savings also played a starring role in the credit boom. But the intellectual tide of the past 30 years has unquestionably been in favour of the primacy of markets and against regulation. Why was that so?

Each step on the long deregulatory road seemed wise at the time and was usually the answer to some flaw in the system. The Anglo-Saxon economies may have led the way but continental Europe and Japan eventually followed (after a lot of grumbling) in their path.

It all began with floating currencies. In 1971 Richard Nixon sought to solve the mounting crisis of a large trade deficit and a costly war in Vietnam by suspending the dollar’s convertibility into gold. In effect, that put an end to the Bretton Woods system of fixed exchange rates which had been created at the end of the second world war. Under Bretton Woods, capital could not flow freely from one country to another because of exchange controls. As one example, Britons heading abroad on their annual holidays in the late 1960s could take just £50 (then $120) with them. Investing abroad was expensive, so pension funds kept their money at home.

Once currencies could float, the world changed. Companies with costs in one currency and revenues in another needed to hedge exchange-rate risk. In 1972 a former lawyer named Leo Melamed was clever enough to see a business in this and launched currency futures on the Chicago Mercantile Exchange. Futures in commodities had existed for more than a century, enabling farmers to insure themselves against lower crop prices. But Mr Melamed saw that financial futures would one day be far larger than the commodities market. Today’s complex derivatives are direct descendants of those early currency trades.

Bailout becomes buy-in as feds move into banking

Tuesday October 14, 9:43 pm ET
By Jeannine Aversa, AP Economics Writer

Government moves into banking — to the tune of $250 billion — as the bailout becomes a buy-in

WASHINGTON (AP) — Big banks started falling in line Tuesday behind a rejiggered bailout plan that will have the government forking over as much as $250 billion in exchange for partial ownership — putting the world’s bastion of capitalism and free markets squarely in the banking business.

Some early signs were hopeful for the latest in a flurry of radical efforts to save the nation’s financial system: Credit was a bit easier to come by. And stocks were down but not alarmingly so after Monday’s stratospheric leap.

The new plan, President Bush declared, is “not intended to take over the free market but to preserve it.”

It’s all about cash and confidence and convincing banks to lend money more freely again. Those are all critical ingredients to getting financial markets to function more normally and reviving the economy.

The big question: Will it work?

There was a mix of hope and skepticism on that front. Unprecedented steps recently taken — including hefty interest rate reductions by the Federal Reserve and other major central banks in a coordinated assault just last week — have failed to break through the credit clog and the panicky mind-set gripping investors on Wall Street and around the globe.

We’re sure scared now…bringing it all together

A historic level of fear, even panic, has developed as forced liquidation is removing some players from the market completely. Another difficult lesson in leverage and risk management for some really bright folks. Brings to mind one of my favorite quotes, compliments of John Maynard Keynes, “The market can stay irrational longer than you can stay solvent”.

Irrational may be a mild description for what we’re seeing in the markets currently.  After a 1,000 point range on Friday from top to bottom, the Dow Jones Industrial Average added almost another 1,000 points Monday.  Clearly the selling was overdone on the downside and the market was drastically oversold after a 3,000 point decline from top to bottom in the previous eight trading sessions.  Thankfully, those nasty shorts decided to take some profits and get the rebound started Friday morning.

We wouldn’t consider this the all clear signal however.  Historically, a retest of the lows develops within a few months to verify the strength of the bottom.  Hitting the exact lows again is not a necessity, but a second significant down move usually at least comes close.  This offers a great time to pick up relative strength leaders as they separate from the pack.

The correlation noted in Here we are again? 2001 vs. 2008, Is it really 2001 again? and Back to the future again and it’s not pretty has finally culminated in the fear based washout we have been looking for.  Admittedly, it was at much lower levels than we expected, but the timing was almost perfect.  The rebound in 2001 started on the morning of Friday, September 21 at 944.75 on the Standard & Poor’s 500 (SPX).  The rally continued on Monday and Tuesday of the next week, covering a respectable 75.54 points or 8% from the lows.  Another 20 points were added by the close of the week after a brief rest on Wednesday and Thursday. By the end of the following week, another 30 points had been added (for a total of 126.63 points or 13.4%, from the lows).  Two weeks later, the net gain was flat after a brief run over 1,107.  Sideways trading then developed until a clear break over 1,100 in the first week of November.  Around Thanksgiving, the new high of 1,163 had brought the market back from the lows by over 23%.  The rest of the year saw a peak gain of only 10 more points in the first week of December.  A final 3.5 points was all that was left for the first week of the new year, as an intermediate top at 1,176.97 was found.  That top was tested again in late March of 2002, after a 100 point (8.7%) drop into late February.  That was all she wrote for that bounce however, as the SPX found new lows at 768 in October, finally the low for the entire bear market.  Patient buyers were rewarded as the final retest of the lows completed a massive head and shoulders bottom in March of 2003 at 789.

In 2008, the rebound started on the morning of Friday, October 10 at 839.80 on the SPX, almost three weeks behind schedule.  So far, the monster rally of Monday, October 13 has added 167.13 points or 19.9% from the lows.  A morning look at the futures market suggests another 20 or so points may be in the works for Tuesday.  In just three trading days, this bounce has covered almost the entire distance of the rebound in 2001-02, on a percentage basis.  The preceding decline was also much more violent as the SPX dropped from 1,300 to the lows at 839.80 (35.4%) in just six weeks.  In 2001, the fall drop was 28.2% over 16 weeks.

What Does it All Mean

If history holds, only a small portion of this bounce is behind us and there will be plenty of opportunities to get in at decent prices.  The first leg of this rally is past, but the second leg could be just as profitable.  At the very least, consolidation will develop following these monster gains.  This will give nimble traders the ability to buy the dips.  Long term investors are almost guaranteed to get another chance at prices near the lows in the coming months.  The key is to watch overhead resistance, and there is a ton of it.  Fibonacci retracements, moving averages and previous lows all will take their bite from the rally.  Don’t forget The Significance of the 400 day (80 week) moving average indicates we are still in a bear market.  No other long term indicators have given buy signals either.

One more market comparison to consider is the crash of 1987 which found its low on Tuesday, October 20.  This price action may actually be more appropriate considering the violence of the decline.  This October “crash” market dropped 35.9% in 8 weeks, bounced 19.8% in two days, then dropped back to within a few percentage points of the low in early December.  The market then totally recovered within two years.

Europe puts more than US on the line for banks

Monday October 13, 4:48 pm ET
By Angela Charlton and Emma Vandore, Associated Press Writers

Europe puts $2.3 trillion, far more than US, on the line for banks and stocks soar

PARIS (AP) — Europe put $2.3 trillion on the line Monday to protect the continent’s banks, a figure that dwarfs the Bush administration’s $700 billion rescue program, in its most unified response yet to the global financial crisis after a stumbling start.

The pledges by Britain and the six countries that use the euro helped soothe stock markets, along with a promise by top central banks to provide unlimited short term dollar credits.

The action by Germany, France, the Netherlands, Spain, Portugal, Austria and Britain came after weeks in which the governments often acted at cross purposes and sniped at each other — a piecemeal approach that failed to stop steep and frightening slides on financial markets.

“The time of each one for itself is fortunately over,” French President Nicolas Sarkozy said, following a Cabinet meeting that approved France’s spending in the framework of the plan.

“United Europe has pledged more than the United States,” added Sarkozy, who has taken a lead in getting the cooperation.

The pledged money will not go into a collective pot. Instead, governments were deciding individually how much to commit to supporting their own banks under broad guidelines agreed at a summit Sunday. The sums are considered a maximum, and might not all be spent if the financial crisis eases.

About $341 billion of the European pledges was earmarked to be spent on recapitalizing banks by buying stakes.

The pledges put a price tag on the package agreed to Sunday by the 15 countries that use the euro. They agreed to individually guarantee bank refinancing until the end of next year, rescue important failing banks through emergency cash injections, and take other swift measures to encourage banks to lend to each other again.

Stock markets rebounded Monday after the European decision and other weekend efforts to find solutions to the financial crisis, which has crushed major banks in both the U.S. and Europe and battered stock exchanges worldwide.

Is the era of easy credit over for the long haul?

Sunday October 12, 9:48 pm ET
By Adam Geller, AP National Writer

As easy credit dries up, a nation reliant on debt navigates a new financial landscape

An inflatable gorilla beckoned from the roof of Don Brown Chevrolet in St. Louis, servers doled out free bowls of pasta and a salesman urged potential customers to “come on up under the canopy and put your hands on” a new set of wheels.

But sitting across from a salesman in a quiet back room, Adrian Clark could see it would not be nearly that easy. This was the ninth or tenth dealership for Clark, a steamfitter looking for a car to commute to a new job. Every one offered a variation on the discouragement he was getting here: Without $1,000 for a downpayment, no loan.

“It’s just rough times right now,” Clark said. “Rough times.”

For Clark, and for a nation of consumers heavily dependent on credit, there are growing signs that those rough times could prove to be more than just a temporary problem, that they could be the beginning of a stark, new reality.

Is America’s long era of easy credit over?

Experts say that even when the current credit crunch eases, the nation may finally have maxed out its reliance on borrowed cash. Today’s crisis is a warning sign, they say, that consumers could be facing long-term adjustments in the way they finance their everyday lives.

“I think we’re undergoing a fundamental shift from living on borrowed money to one where living within your means, saving and investing for the future, comes back into vogue,” said Greg McBride, senior analyst at Bankrate.com. “This entire credit crunch is a wakeup call to anybody who was attempting to borrow their way to prosperity.”

A prolonged period of tighter credit is ahead, experts say.

US to invest directly in banks: Paulson

by Adam Plowright Fri Oct 10, 10:12 PM ET

WASHINGTON (AFP) – The US government plans to invest directly in US banks for the first time since the Great Depression, Treasury Secretary Henry Paulson said Friday, expanding the focus of the government’s 700-billion-dollar rescue plan.

“We’re going to do it as soon as we can do it and do it effectively,” Paulson said when asked about an equity-buying plan.

“There’s no doubt in our mind, given the magnitude of the issue … that we can use the taxpayers’ money more effectively and efficiently … if we develop a standardized program for making, encouraging equity participation,” he added.

A 700-billion-dollar US government rescue plan approved last week had initially focused on the problem of liquidity for banks by offering to buy up their toxic assets.

Paulson’s comments demonstrate how the Treasury, after initially resisting the idea, now recognizes the need and attraction of direct investments in struggling banks which are unable to raise new capital from private investors.

Analysts and officials say there is a precedent for the US government buying equity in the Reconstruction Finance Corporation created during the Great Depression when thousands of banks failed.

The rescue plan, called the Troubled Asset Relief Program (TARP), has so far failed to calm investors or restore confidence in the financial system. The leading indices for the US stock market tumbled 18 percent over the week.

Implementation is taking time because of the complexity of the problems, but Paulson said officials were “working around the clock to deal with this.”

The secretary of state has warned that the first purchases of toxic assets could take several weeks and he gave no timetable for the equity purchase program. He also declined to comment on the amount of money that would be spent on buying toxic assets compared with equity.

Buffett boosts wealth to top Gates on Forbes list

Fri Oct 10, 2008 2:28pm EDT
By Michelle Nichols

NEW YORK (Reuters) – Billionaire investor Warren Buffett is again the richest American, deposing Microsoft (MSFT) co-founder Bill Gates, after Forbes magazine recalculated the fortunes of some of the 400 wealthiest Americans.

The magazine took another look at the fortunes of some of the billionaires on its Forbes 400 list to assess the effect of the worst financial crisis since the 1930s Depression and released a select list naming some of those hit hard.

But while 17 billionaires on Forbes list lost more than $1 billion in the past month, Buffett managed to boost his wealth by $8 billion to $58 billion, pushing him ahead of Gates, whose fortune fell to $55.5 billion from $57 billion.

Gates had been ranked No. 1 on the Forbes 400 list for the past 15 years with his Microsoft fortune.

Buffett made his money by building his company Berkshire Hathaway Inc (BRK.a) into a $199 billion conglomerate that invests in undervalued companies with strong management. Late last month his company said it would invest $5 billion in Goldman Sachs Group Inc (GS).

“We chose to focus on some of the more high-profile billionaires on The Forbes 400, and print a sampling of those who lost over $1 billion during the month of September,” said Forbes senior editor Matthew Miller.

The Next Meltdown: Credit-Card Debt

Rising rates are accelerating credit-card defaults and soured debt could further undermine the financial system

by Jessica Silver-Greenberg

The troubles sound familiar. Borrowers falling behind on their payments. Defaults rising. Huge swaths of loans souring. Investors getting burned. But forget the now-familiar tales of mortgages gone bad. The next horror for beaten-down financial firms is the $950 billion worth of outstanding credit-card debt—much of it toxic.

That’s bad news for players like JPMorgan Chase (JPM) and Bank of America (BAC) that have largely sidestepped—and even benefited from—the mortgage mess but have major credit-card operations. They’re hardly alone. The consumer debt bomb is already beginning to spray shrapnel throughout the financial markets, further weakening the U.S. economy. “The next meltdown will be in credit cards,” says Gregory Larkin, senior analyst at research firm Innovest Strategic Value Advisors. Adds William Black, senior vice-president of Moody’s Investors Service’s structured finance team: “We still haven’t hit the post-recessionary peaks [in credit-card losses], so things will get worse before they get better.” What’s more, the U.S. Treasury Dept.’s $700 billion mortgage bailout won’t be a lifeline for credit-card issuers.

The big firms say they’re prepared for the storm. Early last year JPMorgan started reaching out to troubled borrowers, setting up payment programs and making other adjustments to accounts. “We have seen higher credit-card losses,” acknowledges JPMorgan spokeswoman Tanya M. Madison. “We are concerned about [it] but believe we are taking the right steps to help our customers and manage our risk.”

But some banks and credit-card companies may be exacerbating their problems. To boost profits and get ahead of coming regulation, they’re hiking interest rates. But that’s making it harder for consumers to keep up. That’ll only make tomorrow’s pain worse. Innovest estimates that credit-card issuers will take a $41 billion hit from rotten debt this year and a $96 billion blow in 2009.

Those losses, in turn, will wend their way through the $365 billion market for securities backed by credit-card debt. As with mortgages, banks bundle groups of so-called credit-card receivables, essentially consumers’ outstanding balances, and sell them to big investors such as hedge funds and pension funds. Big issuers offload roughly 70% of their credit-card debt.

But it’s getting harder for banks to find buyers for that debt. Interest rates have been rising on credit-card securities, a sign that investor appetite is waning. To help entice buyers, credit-card companies are having to put up more money as collateral, a guarantee in case something goes wrong with the securities. Mortgage lenders, in sharp contrast, typically aren’t asked to do this—at least not yet. With consumers so shaky, now isn’t a good time to put more skin in the game. “Costs will go up for issuers,” warns Dennis Moroney of the consultancy Tower Group.

Sure, the credit-card market is just a fraction of the $11.9 trillion mortgage market. But sometimes the losses can be more painful. That’s because most credit-card debt is unsecured, meaning consumers don’t have to make down payments when opening up their accounts. If they stop making monthly payments and the account goes bad, there are no underlying assets for credit-card companies to recoup. With mortgages, in contrast, some banks are protected both by down payments and by the ability to recover at least some of the money by selling the property.

Federal Reserve and other central banks announce reductions in policy interest rates

Joint Statement by Central Banks

Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.

Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.

Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.

Federal Reserve Actions

The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.

Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.

The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-3/4 percent.  In taking this action, the Board approved the request submitted by the Board of Directors of the Federal Reserve Bank of Boston.

Information on Actions Taken by Other Central Banks

Information on the actions that will be taken by other central banks is available at the following websites:

Bank of Canada
Bank of England
European Central Bank
Sveriges Riksbank (Bank of Sweden)
Swiss National Bank (51 KB PDF)

Statements by Other Central Banks
Bank of Japan (65 KB PDF)

2008 Monetary Policy Releases

Dow finishes below 10,000 for first time since ’04

Monday October 6, 8:26 pm ET
By Joe Bel Bruno and Tim Paradis, AP Business Writers

Despite big afternoon rally, Wall Street finishes below 10,000 for first time since 2004

NEW YORK (AP) — Wall Street joined in a worldwide cascade of despair Monday over the financial crisis, driving the Dow Jones industrials to their biggest loss ever during a trading day. Even a big afternoon rally failed to keep the Dow from its first close below 10,000 since 2004.

The sell-off came despite the $700 billion U.S. government bailout package, which was signed into law Friday after two weeks in which traders had appeared to count on the rescue as their only hope to avoid a market meltdown.

At its worst point, the Dow was down more than 800 points, an intraday record. The stock market rallied during the final 90 minutes of the trading day, and the Dow finished down about 370 points at 9,955.50.

The average is down almost 30 percent from its all-time high of 14,164.53, set a year ago Thursday.

Speculation among traders late in the session that the market’s pullback had been severe enough to force the Federal Reserve into taking other steps to soothe the markets helped stocks rebound from their lows.

“If you can’t say that we’re oversold now I don’t know what you say. You’re at least due for a bounce if nothing else,” said Bill Stone, chief investment strategist for PNC Wealth Management.

The global plunge in stocks was under way well before Wall Street ever woke up. In Japan, the Nikkei average lost more than 4 percent. And then the losses spread across Europe — nearly 6 percent for the FTSE-100 in Britain, 7 percent for the German DAX and more than 9 percent for France’s CAC-40.

U.S. options fear gauge soars to record close

Mon Oct 6, 2008 5:54pm EDT

By Doris Frankel

CHICAGO, Oct 6 (Reuters) – An index regarded as Wall Street’s fear gauge surged to a record close on Monday as investors clamored for protection in anticipation of more stock market turmoil on worries over the widening credit crisis.

The Chicago Board Options Exchange Volatility Index .VIX, or VIX, surged to a record high of 58.24 before easing back to close up 15.31 percent to 52.05.

“This is absolutely amazing. The elevated VIX is reflecting that people are unsure about every financial relationship they have ever known not only in the U.S. but worldwide,” said Joe Kinahan, chief derivatives strategist at thinkorswim Group.

Persistent strains in the credit markets added to nervousness about the wider economic outlook, while a spate of bank rescues in Europe heightened worries about the stability of global financial institutions.

“Not only are the U.S. banks in financial trouble but it appears that the European and foreign banks may be in worse trouble due to the credit crisis,” Kinahan added.

The Dow Jones industrial average .DJI dropped 369.88 points to fall below 10,000 for the first time in four years. The Standard & Poor’s 500 index .SPX fell 3.85 percent to 1,056.89.

The VIX, which reflects investors’ consensus about anticipated stock market volatility over a 30-day period, tends to move inversely to the S&P 500 benchmark, and spikes upward when the market posts sharp losses.

The record level in the VIX on Monday reflects a change in the index made by the CBOE in 2003 to provide a more precise reading on stock market conditions, basing the index on the prices of the more popular S&P 500 options.

The old VIX, introduced in 1993, is based on S&P 100 options, a smaller basket of stocks. That index, the VXO .VXO ,also hit a multiyear high on Monday, closing up 14.95 percent at 59.50, after scoring a new peak of 66.42.

“With today’s high on the VXO of 66.42, it is safe to say the uncertainty now exceeds all times in recent history, with the exception of the crash of 1987 when the old VIX hit 150.19 briefly and remained above the current levels until about Oct. 29, 1987,” said Randy Frederick, director of derivatives at Charles Schwab in Austin, Texas.

Wells Fargo agrees to buy Wachovia, Citi objects

Friday October 3, 6:19 pm ET
By Sara Lepro, AP Business Writer

Wells Fargo agrees to acquire Wachovia for $14.8 billion; Citigroup demands Wachovia nix deal

NEW YORK (AP) — A battle broke out Friday for control of Wachovia (WB), as Wells Fargo (WFC) agreed to pay $14.8 billion for the struggling bank, while Citigroup (C) and federal regulators insisted that Citi’s earlier and lower-priced takeover offer go forward.

The surprise announcement that Wachovia Corp. agreed to be acquired by San Francisco-based Wells Fargo & Co. in the all-stock deal — without government assistance — upended what had appeared to be a carefully examined arrangement and caught regulators off guard.

Wells’ original offer totaled about $15.1 billion, but since the value of its shares closed down 60 cents Friday, the deal is now valued at about $14.8 billion.

Only four days earlier, Citigroup Inc. agreed to pay $2.1 billion for Wachovia’s banking operations in a deal that would have the help of the Federal Deposit Insurance Corp.

The head of the FDIC said the agency is standing behind the Citigroup agreement, but that it is reviewing all proposals and will work with the banks’ regulators “to pursue a resolution that serves the public interest.”

Citigroup, which demanded that Wachovia call off its deal with Wells Fargo, said its agreement with Wachovia provides that the bank will not enter into any transaction with any party other than Citi or negotiate with anyone else.

Barring legal action, the future of Wachovia will be determined by the bank’s shareholders and regulators, which both have to approve a final deal.

It was clear which they preferred Friday, as Wachovia shares climbed as high as 80 percent.

The FDIC is talking out of both sides of its mouth, said Roger Cominsky, partner in law firm Hiscock & Barclay’s financial institutions and lending practice. The agency says it stands behind the deal with Citigroup because it hasn’t been nixed yet, he said. “But at the same time, they are saying they are reviewing all proposals.”

By law, he said the FDIC is required to find the least-costly resolution for taxpayers. The Wells Fargo deal would not rely on any assistance from the government.

Historic bailout bill passes Congress; Bush signs

Friday October 3, 6:02 pm ET
By Julie Hirschfeld Davis, Associated Press Writer

Congress enacts historic bailout legislation for financial industry; Bush quickly signs it

WASHINGTON (AP) — With the economy on the brink of meltdown and elections looming, a reluctant Congress abruptly reversed course and approved a historic $700 billion government bailout of the battered financial industry on Friday. President Bush swiftly signed it.

The 263-171 vote capped two weeks of tumult in Congress and on Wall Street, punctuated by urgent warnings from Bush that the country confronted the gravest economic disaster since the Great Depression if lawmakers failed to act.

“We have acted boldly to help prevent the crisis on Wall Street from becoming a crisis in communities across our country,” Bush said shortly after the plan cleared Congress, although he conceded, “our economy continues to face serious challenges.”

His somber warning was underscored on Wall Street, where enthusiasm over the rescue gave way to worries about obstacles still facing the economy, and the Dow Jones industrials dropped 157 points. The Labor Department said earlier in the day that employers had slashed 159,000 jobs in September, the largest cut in five years.

The historic vote was a striking turnaround from the measure’s spectacular failure earlier in the week, which had triggered a massive stock sell-off and prompted jittery lawmakers — fearing a crushing economic contagion that was spreading to their constituents — to reconsider.

“Let’s not kid ourselves: We’re in the midst of a recession. It’s going to be a rough ride, but it will be a whole lot rougher ride” without the rescue plan, said Rep. John A. Boehner, R-Ohio, the minority leader, as he prepared to cast his vote for the most sweeping federal intervention in markets in decades.

Treasury Secretary Henry Paulson pledged quick action to get the program up and operating.

The bailout, which gives the government broad authority to buy up toxic mortgage-related investments and other distressed assets from tottering financial institutions, is designed to ease a credit crunch that began on Wall Street but is engulfing businesses around the nation.

Buffett says economy needs immediate help

Thursday October 2, 12:30 pm ET
By Josh Funk, AP Business Writer

Buffett says financial crisis is an ‘economic Pearl Harbor’ that needs immediate counterattack

OMAHA, Neb. (AP) — Billionaire investor Warren Buffett said the nation has been hit with an “economic Pearl Harbor,” and the government must respond quickly.

Buffett talked about the nation’s ongoing financial woes in an appearance on the “The Charlie Rose Show” that aired Wednesday night on PBS stations.

“This really is an economic Pearl Harbor,” Buffett said. “That sounds melodramatic, but I’ve never used that phrase before. And this really is one.”

Buffett’s spokeswoman did not immediately respond to messages left Wednesday afternoon and Thursday morning.

Buffett said the nation’s economic problems are already starting to be felt by furniture and jewelry stores such as the ones owned by Buffett’s company, Berkshire Hathaway Inc (BRK.A).

The billionaire predicts that the rest of the “Main Street” economy will start to have problems if the government’s financial bailout plan doesn’t pass Congress soon.

“In my adult lifetime, I don’t think I’ve ever seen people as fearful economically as they are now,” the 78-year-old Buffett said.

The fear in the marketplace has allowed Buffett to make several sizable investments over the past month in proven companies that needed cash quickly. And Berkshire, which had $31.2 billion cash on hand at the end of June, was ready to invest because, Buffett says, he always tries to be greedy when others are fearful.

Fed officials considering further rate cuts: report

Thu Oct 2, 2008 6:51am EDT

TOKYO (Reuters) – Federal Reserve officials are weighing further interest rate cuts, even if Congress approves a $700 billion financial industry bailout, because of a worsening economic outlook, the Wall Street Journal said on Thursday. A rate cut is still far from certain, partly because of inflation worries, the WSJ said in an unsourced report on its website.

“The Fed’s willingness to consider additional rate cuts marks a turnaround from the past few months, when soaring food and energy prices turned its attention to inflation risks,” the Wall Street Journal said.

Currency traders in Tokyo said that while there was some chatter about the article among market players, the impact on the dollar seemed to be limited.

The dollar index, which measures the dollar’s value against a basket of six major currencies, rose 0.6 percent on the day to 80.162.

Even before the article, investors were bracing for the Fed to lower interest rates as early as this month.

Market players have sharply increased their bets for an aggressive Federal Reserve interest rate cut after data released on Wednesday showed that U.S. factory activity shrank in September to its lowest since the 2001 recession.

U.S. short-term interest rate futures show that investors are bracing for the Fed to cut interest rates by at least a quarter percentage point at its policy meeting in late October.

The implied chance of a bigger, half-point rate cut to 1.5 percent is now seen at 60 percent, up from around 10 percent seen on Tuesday.

Senate passes bailout

Plan to buy $700B in troubled assets wins OK. Backers hope add-ons will yield more yes-votes in House.

By Jeanne Sahadi, CNNMoney.com senior writer
Last Updated: October 1, 2008: 10:20 PM ET

NEW YORK (CNNMoney.com) — The Senate on Wednesday night passed a sweeping and controversial financial bailout similar in key ways to one rejected by the House just two days earlier.

The measure was passed by a vote of 74 to 25 after more than three hours of floor debate in the Senate. Presidential candidates Sens. Barack Obama, D-Illinois, and John McCain, R-Arizona, voted in favor.

Like the bill the House rejected, the core of the Senate bill is the Bush administration’s plan to buy up to $700 billion of troubled assets from financial institutions.

Those assets, mostly mortgage-related, have caused a crisis of confidence in the credit markets. A major aim of the plan is to free up banks to start lending again once their balance sheets are cleared of toxic holdings.

But the Senate legislation also includes a number of new provisions aimed at Main Street.

The changes are intended to attract more votes in the House, in particular from House Republicans, two-thirds of whom voted against the bailout plan.

The House is expected to take up the Senate measure for a vote on Friday, according to aides to Democratic leaders.

The legislation, if passed by the House, would usher in one of the most far-reaching interventions in the economy since the Great Depression.

Advocates say the plan is crucial to government efforts to attack a credit crisis that threatens the economy and would free up banks to lend more. Opponents say it rewards bad decisions by Wall Street, puts taxpayers at risk and fails to address the real economic problems facing Americans.

Key tax pieces of Senate bailout bill

Wed Oct 1, 2008 3:56pm EDT

(Reuters) – To improve chances of passing a $700 billion financial industry bailout package, Senate leaders have agreed to combine it with a package of tax breaks for renewable energy, businesses and middle class workers.

The roughly $150 billion cost of the tax package is partially offset by some revenue raising measures including one that would change the tax treatment of deferred compensation paid through offshore tax haven accounts.

Major tax provisions in the bill include the following:

* Extends Alternative Minimum Tax relief for some 24 million middle class taxpayers through 2008. Includes some additional AMT relief for people who exercised company incentive stock options.

* Extends provision allowing homeowners who do not itemize their taxes to take a deduction up to $1,000 for state and local property taxes.

* Extends through 2009 a provision allowing some taxpayers to take a deduction for state and local sales taxes.

SEC gives banks more leeway on mark-to-market

Wed Oct 1, 2008 3:24am EDT
By John Poirier and Emily Chasan

WASHINGTON (Reuters) – U.S. securities regulators on Tuesday gave the financial industry a reprieve from marking hard-to-value assets down to fire sale prices, throwing a lifeline to an industry beset by strained credit markets and the latest round of bank failures.

The U.S. stock market added to gains on the news, in hopes that regulators’ new interpretation of fair value, or mark-to-market, accounting rules, will slow or reverse the heavy flow of mortgage-related losses on banks’ balance sheets.

In the new guidance, first reported by Reuters, the U.S. Securities and Exchange Commission reminded financial services firms that they don’t need to use fire sale prices when evaluating their hard to price assets.

“This is a significant first step and adds stability, confidence, and liquidity within the capital markets,” said Steve Bartlett, president and chief executive of The Financial Services Roundtable. “By clarifying how to treat assets in an uncertain market, the SEC is continuing to provide transparency to investors and helping institutions to provide credit in periods of market stress.”

U.S. accounting rule maker, the Financial Accounting Standards Board said on its Web site on Tuesday that it would change the agenda for its Wednesday meeting to focus on fair value accounting. The board is contemplating issuing additional guidance through a FASB staff position as soon as Wednesday, according to a person familiar with the matter.

MARK-TO-ESTIMATE

The SEC’s guidance on Tuesday, came on the last day of the third quarter for most U.S. companies, allowing them to incorporate the changes in their next round of financial statements.