Bank stocks are down today around the world—and the blame goes to that old devil LIBOR.
Dollar LIBOR, the London Interbank Offered Rate that banks pay for short-term loans in dollars, climbed to 0.536% from 0.510% yesterday. That’s the 11th day in a row that LIBOR has climbed higher. Today’s level is the highest since July 7, 2009.
As you remember from my post on LIBOR yesterday (https://jubakpicks.com/2010/05/24/worry-over-shaky-euro-banks-pushes-up-interest-rates-threatening-the-global-economic-recovery/ ), LIBOR is a daily average based on a survey of 16 banks. Besides heading upward in general that average shows in increasingly large spread between the most and least stressed banks over the last two weeks.
A rising LIBOR reflects fears that some banks aren’t good risks even over a period as short as overnight. To compensate for any added risk, the market charges more for its short-term money.
But right now a rising LIBOR also testifies to two other fears.
First, that the proposed financial reform package now wending its way through the U.S. Congress will add to the cost of money for U.S. banks.
Second, that the central banks that have kept the hose open and flooded the market with short-term dollar liquidity are starting to reduce that flow of cash.
I think the first fear is mostly groundless. Congress isn’t going to do anything especially radical while the global economy threatens to stumble again. I expect that the bill that finally emerges from the House/Senate conference committee—after Wall Street’s lobbyists have reminded members of Congress of who contributed to their last election war chest—will be much more moderate than Wall Street fears and that many of the rest of us hope.
The second fear is, if not groundless, at least overblown. The European Central Bank and the Federal Reserve aren’t going to let a few hundred billion in liquidity threaten all the progress that’s been made so far to put the global financial and economic crisis to rest. I suspect that even as I write this comforting phone calls are going out to key bankers signaling the central banks’ intention to supply dollar liquidity as needed. The European Central Bank has been somewhat slow off the mark in making dollars available from its lending window in the last couple of weeks. But I suspect that “error” is even now getting corrected.
Nothing like a crisis to focus a central banker’s attention.
And we’ll worry about how to sop up all this extra cash another day.
yx – these “worrying” times are the best buying times! Once things settle, it will be too late as usual for retail investors.
And, the selling frenzy of the last few weeks has less to do with the spill and more to do with margin calls, rush to cash, get-out-of-euro mania. Hedge funds that have been up 8-10% for the year (and most were) are simply dumping energy positions (specially crude oil) by the boat loads to step aside. Sudden change in strategy from long to short does this – and this time these guys are going to get burnt when they have to cover their positions.
IF (big IF) I had spare cash saved up, I would be deploying it in almost any of the oil companies (except maybe BP – already own the silly jinxed company). If ones time horizon is 2-3 years, this is the ideal time to pick up some of these on sale of the decade. Obviously, if we go into another recession, all bets are off; else, this is an overreaction to the spill. Even with tougher regulations, these companies will simply pass on the cost to Joe the final consumer on the highway. Infact, RIG (look at Jim’s sensible re-analusis) and WFT are awfully tempting at this time; and will definitely get a bounce.
My worry about XOM or any oil stock is as long as the spill continues………
MON hit 52W low too few weeks ago, but it further went down from there.
what do you guys think about xom at its 52 week low?