Market

Market

Q ratio

This is a key ratio used to determine how undervalued/overvalued the stock market is, has often been a reliable indicator to determine a secular bear market bottom. Usually the q-ratio at a bear market bottom has been in the .40-.60 range.
Seems we still have a ways to go to get there.

world wide

European economic forcast

europe_map.png

European economic forcast

the yield curve 2-year note vs 10 year note

An indicator of economic health, the yield curve, is signaling that the recovery in the developed world is going to take a long time.

The benchmark curve measures the gap between the yields on two- and 10-year government securities. When the economy is weak, the gap tends to widen as interest rates are cut to aid growth. Short-dated yields, the most sensitive to policy changes, fall more than their longer-dated counterparts. As the economy recovers and rates begin to rise again, the gap narrows.

2008-11-05_111335.png
wsj.com

With short-term rates low, financial companies can borrow cheaply and lend the money to consumers at higher rates, pocketing the difference. In the longer term, this should help revitalize the banking sector, ease money and credit-market tensions and support growth. In theory, the steepening curve should help banks and other lenders repair balance sheets weighed down with bad loans and soured investments.

this time, it is different. For the steeper yield curve(a.k.a the gap ) to benefit the economy, banks have to lend. Yet this process is stalled as lenders continue to tighten loan standards and are worried about counterparty risk, according to a Federal Reserve survey published Monday.

One sign of banks' reluctance to lend comes from the interbank-lending market.

Rates there have been coming down from recent highs but remain elevated — particularly when compared with expectations for official rates — indicating that bank-funding costs around the world still are high.

The dollar measure of interbank lending risk, the three-month dollar London interbank offered rate/overnight-index swaps spread, or Libor/OIS, has come off its high Oct. 10 of 3.66 percentage points, trading at 2.09 points Tuesday(Nov/04/2008). But it remains elevated compared with an average of about 0.11 point between 2001 and July 2007 before the subprime crisis hit global markets.

all kinds of rate

prime rate

Prime Rate

The interest rate that commercial banks charge their most credit-worthy customers. Generally a bank's best customers consist of large corporations.
The lowest commercial Interest Rate charged by banks on short-term loans to their most creditworthy customers. The prime rate is not the same as the long-term mortgage rate, though it may influence long-term rates. Also, it is not the same as the consumer loan rate that is charged on personal property loans and credit cards. Mortgage rates and consumer loan rates are generally higher than the prime rate

In general, the prime rate runs approximately 300 basis points (or 3 percent) above the federal funds rate, The prime rate, as reported by the Wall Street Journal's bank survey, is among the most widely used benchmark in setting home equity lines of credit and credit card rates.

http://online.wsj.com/mdc/public/page/2_3020-moneyrate.html

two interest rates that Fed set:

borrow from Fed: The Federal funds discount rate;
borrow from other banks: the other being the overnight lending rate, or the Fed funds rate.

http://www.bankrate.com/brm/ratewatch/leading-rates.asp

Federal Discount Rate

The interest rate that an eligible depository institution is charged to borrow short-term funds directly from a Federal Reserve Bank.

The board of directors of each reserve bank sets the discount rate every 14 days. It's considered the last resort for banks, which usually borrow from each other. please refer Term Auction Facility (TAF)

The discount rate is set by each Federal Reserve Bank and approved by the Federal Reserve Board of Governors in Washington. Each Reserve Bank submits its own rate to the board, which then either approves the rate or denies it. The discount rate is not necessarily the same across all 12 Federal Reserve Banks. Occasionally, one or more of the district Fed banks has insisted on a different rate than other Fed banks. This situation could persist for several weeks
http://www.answers.com/topic/discount-rate

federal funds rate

the interest rate that banks charge to each other for overnight loans made to fulfill reserve funding requirements. (The Federal funds rate plus a much smaller increment is frequently used for lending to the most creditworthy borrowers today, as is LIBOR, the London Interbank Offered Rate.) The Federal Open Market Committee (FOMC) meets eight times per year wherein they set a target for the federal funds rate. so federal discount rate(1.25% > federal fund rate(1%). as of Nov/05/2008

Other rates, including the Prime Rate, derive from this base rate.

Raising the rate makes it more expensive to borrow from each other of banks. That lowers the supply of available money, which increases the short-term interest rates and helps keep inflation in check. Lowering the rate has the opposite effect, bringing short-term interest rates down.

http://www.answers.com/topic/prime-rate

benchmark interest rate

The benchmark interest rate is the lowest interest rate that an investor will accept for a non-Treasury investment. The benchmark interest rate is also known as the base interest rate or the threshold interest rate since the benchmark interest rate is the threshold below which investors refuse to invest funds.
The benchmark interest rate is tied to the interest rate offered on the most recently-issued (on-the-run) Treasury security. Often investors demand that the benchmark interest rate carries a premium over the most recently-issued Treasury security.

[editor] the us benchmark interest rate = target for overnight bank lending = Federal funds target rate

how Fed control money supply

http://www.answers.com/topic/open-market-operation

Following the Federal Reserve Act of 1913, the Federal Reserve (the U.S. central bank) was given the authority to formulate U.S. monetary policy.
Open market operations are the principal tools of monetary policy. (The discount rate and reserve requirements are also used.)

Within the Federal Reserve,

http://www.investopedia.com/articles/04/050504.asp?partner=answers

The buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Purchases inject money into the banking system and stimulate growth, while sales of securities do the opposite.

When the manager of the Fed's Open Market Desk at the Federal Reserve Bank of New York makes the decision to buy securities, the Fed writes a check on itself to the bank, or other institutional investor holding the securities, and deposits a check in a commercial bank. If the Fed buys $1 billion in Treasury bills, bank reserves are increased by that amount. Selling $1 billion in T-bills has the opposite effect, shrinking the reserves in the banking system, which tends to drive up the cost of credit, and interest rates. Because commercial bank reserve accounts don't earn any interest, banks try to hold their reserves at a minimum. When the Fed is worried that the inflation rate is rising, it pursues a tight money policy by selling securities. What results is higher interest rates, because the banks pass the added cost along to the borrowers.

a good site to explain this: http://www.learningmarkets.com/index.php/20081017521/Stocks/Investing-Basics/the-federal-reserves-open-market-operations.html

this guy has some explanation, but seems not very correct. just FYI. http://mwiner.wordpress.com/2008/02/01/how-the-fed-changes-the-interest-rate/

but where are the T-bills from?

Treasure Department

The United States Treasury Department regularly issues securities(Bills,Notes,Bonds) that exist for the sole purpose of financing the debt of the United States government. These securities are sold at auction to the highest bidder, maximizing their immediate value for the government; they are also actively traded on the secondary market, which means you can usually find a buyer if you need to. They are considered highly stable investments (often described as “zero risk”) because they are based on the stability of the government of the United States, simply because the likelihood of government default or overthrow is basically nonexistent.

Treasury securities are government bonds issued by the United States Department of the Treasury through the Bureau of the Public Debt. They are the debt financing instruments of the U.S. Federal government, and they are often referred to simply as Treasuries or Treasurys.

There are four types of marketable treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS).
There are several types of non-marketable treasury securities including State and Local Government Series (SLGS), Government Account Series debt issued to government-managed trust funds, and savings bonds. All of the marketable Treasury securities are very liquid and are heavily traded on the secondary market. The non-marketable securities (such as savings bonds) are issued to subscribers and cannot be transferred through market sales.

http://ca.news.yahoo.com/s/afp/us_finance_banking_treasury_bank
…The US Treasury Department said Thursday it would put 60 billion dollars in additional securities on the market to support Federal Reserve actions to stabilize roiling financial markets. The 101-day Treasury bills will be auctioned Friday and being issued as part of the Supplementary Financing Program, the department said in a statement….

Bureau of Engraving and Printing

Since October 1, 1877, all U.S. currency has been printed by the Bureau of Engraving and Printing, which started out as a six person operation using steam powered presses in the basement of the Department of Treasury. Now, 2,300 Bureau employees occupy twenty-five acres of floor space in two Washington, D.C. buildings. The Treasury also operates a satellite printing plant in Ft. Worth, Texas.

Currency and stamps are designed, engraved, and printed twenty-four hours a day on thirty high speed presses. In 1990, at a cost of 2.6 cents each, over seven billion notes worth about $82 billion were produced for circulation by the Federal Reserve System. Ninety-five percent will replace unfit notes and five percent will support economic growth. At any one time, $200 million in notes may be in production. Notes produced in 2002 were the $1 note, 41% of production time; the $5 note, 19%; $10 notes, 16%; $20 note, 15%; and $100 note, 9%. No $2 or $50 notes were printed in 2002.

Emergency Economic Stabilization Act of 2008

The Emergency Economic Stabilization Act of 2008, commonly referred to as a bailout of the U.S. financial system, is a law authorizing the United
States Secretary of the Treasury to spend up to US$700 billion to purchase distressed assets, especially mortgage-backed securities, from the
nation's banks.

The United States annual budget deficit for fiscal year 2009 may surpass $1 trillion. The original Paulson proposal would lift the United States
federal debt ceiling by $700 billion, to $11.3 trillion from the current $10.6 trillion.

The bill authorizes the Secretary of the Treasury to establish the Troubled Asset Relief Program to purchase troubled assets from financial
institutions. The Treasury Secretary is required to obtain a financial warrant guaranteeing the right to purchase non-voting stock or, if the company is
unable to issue a warrant, senior debt from any firm participating in the program.

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