Sunday, August 19, 2007

Commercial paper market doesn't have access to new liquidity

The Fed cut the discount rate in order to bolster confidence and kick-start trading in the stock market, but it has no meaningful action on the commercial paper market, said Michael Englund, principal director and chief economist with Action Economics LLC.

"A liquidity crisis is what's underlying the commercial paper crunch," Englund said, "and [commercial paper] doesn't have access to the discount loans."

Many large industrial companies, such as Dow Jones Industrial members Caterpillar Inc. and General Electric Co, often use commercial paper to help fund customers purchasing their equipment, as well as for day-to-day operations such as payroll.

Earth-moving equipment maker Caterpillar had about $4.58 billion in commercial loan paper debt as of its most recent Securities and Exchange filing, while General Electric which makes everything from turbines to power plants, has about $69.5 billion in U.S. commercial paper debt, and another $28.5 billion in non-U.S. debt, as of June 30.

Other companies with large commercial mortgage paper debt include Deere Co. The volatility of the credit market, particularly within commercial paper, will entice lenders to raise prices on their loans, and those costs will likely be passed on to companies borrowing to make large equipment purchases.

"The problem is the debt market and how it will have a broad affect on growth, in the long-term view, and industrial equipment [prices] will naturally rise in that kind of environment until the Fed lowers the fund rate," said Rob Goodman, director of investments for Fairpoint Asset Management in Cleveland, Ohio. Meanwhile, margins can expect to be squeezed, he said.
Earlier Friday the Fed lowered the discount rate to 5.75% from 6.25% in what analysts are calling a "symbolic gesture." The discount rate is primarily used by troubled banks, and allows the federal government to control the money supply and offer stability to financial markets

Florida Commercial Loan, Florida Hard Money Comercial Loans, and bridge financing are still being offered at reasonable rates via consultant Five Stars Mortgage in Florida.

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