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Historic Week

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Steve Liesman, the senior economics reporter for CNBC, had a great statement on Wednesday. He said it has been an historic week. On Monday the Federal Reserve doubled its Term Auction Facility (TAF), which provides cash loans to banks, to $900 billion. On Tuesday the Fed said they would step into the commercial paper market for the first time. On Wednesday we witnessed the unprecedented move of six central banks all announcing a coordinated interest rate cut to help ease concerns over a global recession. Guess what? None of it worked! The S&P 500 index just marked its sixth loss in a row - a streak not seen since 2002.

All right, I'm being overly dramatic here. This week's moves by the Fed and central banks should help but investors remain unconvinced. Wednesday morning the global markets were in meltdown. The Japanese NIKKEI was off more than 9%. The Hong Kong Hang Seng index was down more than 8%. The Indonesian markets had been halted after a 10% plunge. India's market was down more than 4%. Europe wasn't much better. London was declining more than 5% while Germany's markets were down almost 6%.

The news that six countries stepped in together to announce significant rate cuts is unheard of. One veteran market pundit said the closest event to this kind of coordination was back in 1986 when the Fed, the Bank of Japan, and the German Bundesbank all cut rates in concert. The U.S. slashed rates by 50 basis points leaving the benchmark rate at 1.5%. The news lifted stocks but traders sold the rally. A few analysts at Goldman Sachs and Morgan Stanley are already forecasting another rate cut at the FOMC's next meeting in late October.

Banking regulators are running scared. Britain just announced an $87 billion rescue plan for eight major banks. Meanwhile Span has announced a 50 billion euro deal to prop up banks by buying assets. The International Monetary Fund is forecasting a global recession in 2009 and the IMF is predicting that losses from the financial crisis will top $1.4 trillion. Desperate measures by banking regulators in the U.S. and around the globe are inflationary. At least one analyst at Merrill Lynch is pointing out that when this crisis cools the inflationary pressures will push commodities and oil prices higher again.

Short term it looks like oil prices will remain under pressure. The Wednesday morning oil inventory report by the U.S. Department of Energy revealed a surprising jump in crude oil supplies. Consensus estimates were expecting a 1-million barrel drop in oil supplies but the report listed an 8.1 million barrel gain. The market was expecting a one-million barrel gain in distillates and another gain in gasoline. It was not expecting a 7.2 million barrel jump in gas supplies. Another report, by the EIA, showed that gasoline demand was down 5.3 percent from a year ago but this reading probably reflects the shortages across the southern portion of the U.S. thanks to the recent hurricanes. The latest MasterCard Advisors report confirmed that U.S. consumers were driving less.

Americans may not be the only ones driving less. Chinese drivers are starting to feel the pinch as Beijing just hiked prices at the pump on Wednesday. The Chinese government continues to subsidize prices for its citizens but regulators just raised the cost on both gas and diesel. I wouldn't fret too much for Chinese drivers. The hikes are only about 3% to 4% but this is one more factor that could put the brakes on oil demand - at least short-term.

Another issue that could impact the recession in the U.S. is this coming winter. Homes in the northeast that depend on heating oil will see higher fuel costs. Consumers are expected to pay prices that are 20% higher than they were last year with an estimated cost nearing $2,400 for the season. Those of us that use natural gas to heat our homes could see prices jump close to 18%.

Thursday could be an interesting session. Of course lately you could say that any day the stock market is open. Crude oil prices are currently slipping about 60 cents to $88.35 a barrel. Financials will probably grab the spotlight again. Late Wednesday night it was reported that the U.S. government is loaning AIG another $37.8 billion. That's right! AIG, the largest insurance company in the world, who just got an $85 billion "loan" from the U.S. is now borrowing another $37.8 billion. AIG is actually exchanging fixed income securities for cash as they try to bolster their balance sheet. The question is how will this news affect investor sentiment, especially now that the short-sale ban has expired?

It's been an historic week and it's not over yet. Just in case you were curious, this week, one year ago, the Dow Jones Industrial Average peaked at just over 14,000. It just closed at 9,258. This week last year the S&P 500 was trading over 1,560. It just closed at 984. One year ago crude oil was trading around $80.00 a barrel.

Jim Brown


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