Dow Jones 9447.11 -508.39 5:39 am PDT, October 8, 2008 NASDAQ 1754.88 +0.00 For info, visit access.smallcapnetwork.com S & P 500 996.23 +0.00 Change your subscription status here Russell 2000 558.95 +0.00 VOLUME 08 : ISSUE 88 The Fed decided to beef up short-term lending by buying commercial paper on Tuesday. It's not a bad strategy actually. About $100 billion in short-term lending passes hands every day here in the United States. If the Fed can do for small businesses what nobody else seems willing/able to do, it may well get credit flowing again. The Fed said about $1.3 trillion in debt could qualify for the program. The ultimate goal, however, is to get other lenders doing it again. Let me ask you a question though.... if you were a lender, would you ever do something because the government did it first? I didn't think so. I wouldn't either.  I still can't for the life of me figure out why these guys in Washington, Paulson, and Bernanke don't quite get it. It's not that lenders can't - it's that lenders won't. It's just not a risk-adjusted venture right now. If the government is willing to take on the risk, that's their problem. Besides, offering is one thing. Getting taken up on the offer is another. And, with Tuesday's 5% selloff across the board, investors seem to feel the same way.  The symptom and the hint of lending health - though not the solution - is the TED spread.   The What Spread?  I don't know if I've ever talked about the TED spread before. I haven't needed to in years, so I doubt that I have. Right now though, it's the heart of the problem.  The TED spread is just the difference in rates between inter-bank loans and short-term government debt (T-bills). Or, to be more direct, the TED spread is the difference in interest rates for 3-month T-Bills and the 3-month LIBOR rate. The LIBOR rate (London Interbank Offered Rate) is what banks charge each other for short-term loans.  More important to us, the TED spread measures the lending market's overall perceived credit risk....the difference between risk-free rates and still-relatively-low-risk inter-bank lending rates. Like any lender, when one bank is unsure about lending to another bank they charge a slightly higher rate, causing the LIBOR rate to go up.  Usually - in a normal credit environment - the TED spread is minimal, as banks don't see much more risk in lending to other banks than they do in holding government debt. The TED spread will vary from 10 basis points to 40 basis points in a healthy environment where bank lending risk is perceived to be low.  When it's risky to lend to other banks (like now), the TED spread can move much higher. Over the last month, the TED spread has been holding its ground between 300 and 400 basis points. In fact, the TED spread as of Tuesday afternoon was 340 basis points. The 3-month LIBOR rate is 4.27%, while the 3-month (13 week) T-bill is yielding 0.87%. And no, that wasn't a misprint - the rate for 13-week government paper is 0.87%.  But wait a second... wouldn't a weak return on T-bills and a strong return on inter-bank lending inspire the more profitable inter-bank lending? It should, intuitively. That's the point though - it's not! It's great for lenders, but terrible for borrowers... and the lenders aren't budging (not that I blame them). That's why the credit market is frozen.  That's also why I said above that the TED spread is a symptom, and not a cure. The TED numbers are wildly attractive to banks that lend, so the government is happy on that front. Yet, it doesn't help a bit. Why?The risk (perceived or real) is still there, and banks don't want to take any chances unless they get paid nicely (relatively). That's why the LIBOR rate is still so high... too high for most borrowers.  That's my primary beef with the economic prod of buying short-term paper. The Fed and the Treasury can do whatever they want - it won't matter. They don't control interest rates that are ultimately determined by supply and demand (LIBOR).    Problem, or Symptom?  As counter-intuitive as it might sound, the TED spread will have to shrink before banks feel confident enough to lend to each other again. They could make considerably better money by lending when the TED spread was high (and the borrowing/lending margins are wide), without really taking on any more actual risk. Despite the beneficial math of the wide spread though, their unwillingness to get involved on either side of the table is what's gumming up lending.  The irony? There won't have to actually be any less risk in inter-bank lending if the TED spread contracts; banks will just feel like there is. To be clear, the stock market can and may well recover before the TED spread shrinks. While banks are hesitant to lend money to each other, they can borrow plenty from the central bank ...if they really need to. I don't know to what extent the option is being utilized, though I suspect minimally. However, it could be what's keeping the credit market on life support while everything else is getting worked out.  Or, the stock market is fully capable of breaking down even if the TED spread shrinks and despite the government's willingness to lend.  Either way, eventually banks will have to get off of life support. In the meantime though, well, there's still some volatility we may need to work through as the spreads get worked out. That could be good or bad, but definitely trade-worthy.  The big clue to healthier times, however, I think will be a smaller TED spread. Until the credit market is unfrozen by a narrow(er) spread, the underlying technical problem will still persist. That's now why I'm on a TED spread vigil. I'll be posting semi-regular updates in the blog.      We Value Your Feedback   Got comments, questions or suggestions? Send 'em on over: Email the Editor If you wish to send a written request or inquiry, please send it to our physical address: TGR Group, LLC 4653 Carmel Mtn Rd Suite 308 #402 San Diego, CA 92130 Subscribe Information is power and timely information is profitable. Become informed and profit from Small Cap Network Profiles and Trading Alerts by becoming a Preferred Member today. There is no cost associated with your email subscription. Add your email address below and make sure to check your email inbox and confirm your opt-in request to start receiving the Small Cap Network Email Newsletter on a regular basis. To ensure newsletter delivery, you can add any additional email addresses you may have to the Small Cap Network Member List. Receiving the Small Cap Network Newsletter in multiple locations is the best way of making sure you don't miss the next investing or trading opportunity! For web based email addresses, the Small Cap Network recommends @yahoo.com or @aol.com for timely and reliable email newsletter delivery. Subscribe Here Note: Your email address will be kept strictly confidential, and will not be shared with any other entity for any purpose at any time. If you no longer wish to receive the Small Cap Network Newsletter, simply follow the instructions located at the bottom of every Small Cap Network Newsletter Edition. Refer A Friend  If you find the Small Cap Network Newsletter informative and profitable, please forward our newsletter alert service to like-minded friends and associates who share similar market interests.   Ensure Newsletter Delivery  To ensure newsletter delivery, you can add any additional email addresses you may have to the Small Cap Network Member List. Receiving the Small Cap Network Newsletter in multiple locations is the best way of making sure you don't miss the next investing or trading opportunity! For web based email addresses, the Small Cap Network recommends @yahoo.com or @aol.com for timely and reliable email newsletter delivery. D I S C L A I M E R: The Small Cap Network is an independent electronic publication committed to providing our readers with factual information on selected publicly traded companies. All companies are chosen on the basis of certain financial analysis and other pertinent criteria with a view toward maximizing the upside potential for investors while minimizing the downside risk, whenever possible. Moreover, as described below, this publication accepts compensation from certain of the companies which it features. TGR Group, LLC which owns this electronic publication, also accepts compensation in connection with the dissemination of information regarding the companies featured. This publication should not, therefore, be regarded as an independent publication.  To view our compensation on every company we have ever covered, visit the following web address: http://access.smallcapnetwork.com/profile_disclosure/ for our full Profiles and http://access.smallcapnetwork.com/alert_disclosure/ for Trading Alerts.  All statements and opinions expressed herein are those of the editors and are subject to change without notice. A profile, description, or other mention of a company in this publication is neither an offer nor solicitation of an offer to buy or sell any securities mentioned. While we believe all sources of information provided to us and contained in our publication to be accurate and reliable, we cannot and do not guarantee the accuracy of information we received from third parties.  From time to time TGR Group, LLC sells shares in the open market it receives as compensation for coverage of client companies. Since the shares are received as compensation for services and not for investment purposes, the editors do not view the sale of the shares as contradictory to any advice delivered in the content. This should be viewed as a conflict of interest by shareholders or prospective shareholders of the client companies.  The editor, members of the editor's family, and/or entities with which they are affiliated aside from TGR Group LLC itself, are prohibited pursuant to company policy from owning, buying, selling or otherwise trading stock for their own benefit in the companies who appear in the publication unless such activities are specifically disclosed in the newsletter.  THE READER SHOULD VERIFY ALL CLAIMS AND DO THEIR OWN DUE DILIGENCE BEFORE INVESTING IN ANY SECURITIES MENTIONED IN THIS PUBLICATION. INVESTING IN SECURITIES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK.  We encourage our readers to invest carefully and read the investor information available at the web sites of the Securities and Exchange Commission ("SEC") at: http://www.sec.gov and/or the National Association of Securities Dealers ("NASD") at: http://www.nasd.com. We also strongly recommend that you read the SEC advisory to investors concerning Internet Stock Fraud, which can be found at: http://www.sec.gov/consumer/cyberfr.htm. Readers can review all public filings by companies at the SEC's EDGAR page. The NASD has published information on how to invest carefully at its web site. TGR Group LLC's mailing address is 4653 Carmel Mountain Rd. Suite 308 #402 San Diego, CA 92130.  The information found in this profile is protected by the copyright laws of the United States and may not be copied, or reproduced in any way without the express, written consent of the editors of smallcapnetwork.com.