TALF, the latest government-sponsored financial relief program, aims to free up the ABS market. Here's a roundup of reactions from Wall Street
Add another acronym to the U.S. government's alphabet soup of financial relief programs: TALF. Under the Term Asset-Backed Securities Loan Facility, announced Nov. 25, the Federal Reserve will extend up to $200 billion in nonrecourse loans to holders of asset-backed securities (ABS) backed by consumer and small business loans in a bid to free up the ABS market. The Treasury Dept. said it will extend $20 billion in funds under the Troubled Asset Relief Program (TARP) to support the initiative.
Also on Nov. 25 the Fed announced it will initiate a program to purchase up to $100 billion in the direct obligations of housing-related government-sponsored enterprises (GSEs)—Fannie Mae, Freddie Mac, and the Federal Home Loan Banks—and up to $500 billion in mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae to ease the strains in the mortgage market. On top of those mind-bending numbers, reports released Nov. 25 provided a better-than-expected read on U.S. consumer confidence in November and an about-as-expected report on U.S. third-quarter gross domestic product.
BusinessWeek and Standard & Poor's MarketScope staff compiled the statements of Wall street economists and strategists on these topics—and the recent action in the stock market—on Nov. 25:
Edward Yardeni, Yardeni Research
I figured [Federal Reserve Chairman Ben Bernanke] would move to lower mortgage rates by targeting a lower 10-year Treasury yield. This morning he came up with a simpler and more direct solution: The Fed will buy mortgage-backed securities directly to lower the mortgage rate and increase the supply of mortgage credit. This is a major development. It should lower rates on such securities significantly. This should help to stimulate housing activity and economic growth.
Ted Wieseman, Morgan Stanley (MS)
Overall GDP growth was revised down a bit less than expected, to -0.5% from -0.3%, but underlying details were weaker, with final sales adjusted down to -1.4% from -1.1% on an even bigger plunge in consumption. This was partly offset, however, by a surprising upward adjustment to inventories, which now are shown adding nearly a full point to third-quarter growth. This presents downside risks to our Q4 GDP estimate. We will update our Q4 forecast after the full details of this revision are released with the personal income report, but it appears that we are on track for a decline in excess of 4%.
David Greenlaw, Morgan Stanley
As expected, the Conference Board's gauge of consumer confidence (44.9 vs. 38.8) rebounded modestly in November but remained at a badly distressed level after plummeting to a record low last month. The closely watched question on views of the current labor market continued to worsen, however, ahead of what we expect will be by far the worst drop in nonfarm payrolls of this downturn so far in November. In other data, following very weak results from the Empire State and Philly Fed, the composite gauge in the Richmond Fed manufacturing survey was also terrible, falling to -38 from -26, a second straight all-time low in the survey's 15-year history. All three components—orders (-48 vs. -35), shipments (-31 vs. -24), and employment (-32 vs. -15)—showed severe weakness. [All comparisons are from October to November.].
Philip Roth, Miller Tabak
Whatever the case, the equity market's action Monday reflected an increase in confidence in the future of the economy and the markets. For now. The blue-chip DJIA (+6.5% on Friday; +5.9% yesterday) put together the best two days in 20 years…The market had a powerful reversal day on Friday and a follow-through day on Monday, so the odds of a short-term upturn in progress are pretty good. Without even a minor resistance level being surpassed yet, we look for no more than partial retracements, consolidations, to keep the pattern improving. The market is leaving a seasonally weak period and moving into a seasonally strong period, so probabilities seem decent for a rally (with longer advances and longer consolidations as volatility diminishes) into early 2009. We'll be looking at the development of the longer-term indicators in the next couple of months to see if they give a clearer picture of the outlook for 2009 as a whole.
Alexander Young, Standard & Poor's
While the S&P 500's recent rally off its Nov. 20 closing low of 752.44 represents a welcome reprieve after months of relentless selling, we believe a retest of the lows is likely. Although recent volatility has discounted significant EPS erosion as well as a looming global recession, the consensus also expects the economic and profit picture to improve in the second half of 2009. Should the current worldwide downturn be longer and deeper than expected, we think equities will be vulnerable to further selling as markets discount a bleaker-than-previously-expected outlook. Given the unprecedented scope of global deleveraging, hedging against a "longer and deeper" scenario appears prudent. In addition, while the S&P 500's recent valuation of only 11.6 [times] 2008 estimated EPS may appear cheap by historical standards, the possibility of continued negative profit revisions means current valuations are likely higher than they appear.