A Market Rally Based on Garbage Paper

3/11/08 - "James Glassman, senior economist with JPMorgan Chase, said it was the first creative thing he has seen the Fed do since the advent of the credit crunch. "It provides a little more of a calming backdrop, and it takes pressure off those institutions," Glassman said. He also pointed to the deal's psychologically important global reach, given the Fed's collaboration with some of its foreign counterparts.

Brandon Thomas, chief investment officer with Portfolio Management Consultants, the investment arm of Envestnet Asset Management, noted that the market has become accustomed to rate cuts from the Fed, whereas this latest action is a far more targeted tool, allowing banks to borrow against illiquid issues such as mortgage-backed securities for longer periods of time.

"It's not going to be a panacea for all the ills in the economy, but it will get liquidity coursing through the system," he said. "Rate cuts can do that, but that's a much blunter instrument that the banks may or may not take advantage of, depending on whether they choose to lend more money."

..

"Futures are now pricing in only a 76% chance that the Fed will cut rates by 75 basis points, down from 100% odds on Monday."

From Merrill Lynch:

3/12/08 - "The Fed continues to react to events as they unfold, moving incrementally and targeting its actions towards bolstering liquidity in the financial system. This latest experiment, as with the others undertaken thus far, does not address underlying credit problems, does not materially improve the solvency of the institutions exposed to assets under stress, does nothing to put a floor under home prices, and we see no reason based on this for anyone to change their economic or earnings outlook despite the stock market’s initial reaction to this latest initiative."

"The Fed’s move will, at the margin, bolster liquidity in the financial system. In various forms, this is what the Fed has been trying to do since last summer...However, with each passing liquidity “cushion” the Fed provides, it is becoming increasingly evident that there is no quick fix to this credit crunch and asset deflation...In essence, we have an epic credit crunch going on now and events are unfolding at a much faster pace than the Fed could ever have imagined, and so it is increasingly being reactionary in its policy prescriptions instead of being preemptive."

"Just look at what has happened since the last Fed rate cut: the 225 basis points of relief, coupled with the TAF extension, and yet, since the end of January we saw BBB corporate spreads widen to 325 bps from 275 bps; high-yield spreads move out to 780 bps from 685 bps; bank bond spreads jump to 320 bps from 260 bps; and up until Monday’s close, the Dow lose 910 points...We must not lose sight of the fact that the housing downturn has only recently morphed into the first consumer recession in 17 years and quite possibly the worst in over 30 years, and that we are only past the second month of this downturn. What this, in turn, implies for corporate profits and earnings downgrades can’t be very bullish for equities."