What’s Movin’ Markets – Wednesday, August 27th

  • Weber Says Higher ECB Interest Rates May Be Needed When Economy Recovers (Bloomy)
  • FDIC’s Bair Says Agency May Have to Borrow Money From U.S. Treasury (WSJ)
  • German Import-Price Inflation Accelerates to Fastest Pace in Eight Years (Bloomy) 
  • Crude Oil Rises a Third Day as Tropical Storm Gustav Nears Gulf of Mexico (Bloomy)
  • Fannie, Freddie Record Biggest Profits on New Mortgages Since Before 1998 (Bloomy
  • Pimco Seeks Up to $5 Billion to Buy Distressed Senior Mortgage-Backed Debt (Bloomy)
  • U.S. Hedge Funds Supply Short-Term Loans to Fill Property Finance Gap (WSJ)
  • Gold Advances in London on Investor Demand for Safe Haven, Falling Dollar (Bloomy)

What’s On OUR Minds:

FDIC report for Q2 was released – a bit EARLIER than expected and the news, well the p1 ‘highlights’ sorta speak for themselves:



• Industry Net Income Falls to $5 Billion

• Quarterly Loss Provisions Surpass $50 Billion

• Asset Quality Indicators Continue to Deteriorate

• Industry Assets Post First Decline in Six Years

Second-Quarter Earnings Are 87 Percent Below Year-Earlier Level”


WE couldn’t possibly make this UP … Here’s a link right to the website/.pdf report and basically what we learned is that the number of banks ‘on the list’ went from 90 to 117. Not so bad generally speaking. These ‘bad banks’ assets went from $26bil up to $78bil and THAT number was being sugar-coated by mentioning that IndyMac was responsible for the bulk of that increase. Somehow I don’t feel much better knowing that a single bank was by and large responsible for that much of an increase in ‘bad assets’ … But OK, let’s call that good that it was due to just one BIG failure. We were struck by how bad the FDIC Chairwoman actually looked during her press conference. It was as IF she’d NOT slept for several days. We can only imagine! Here’s a link to the press conference, courtesy of CNBC.com. YOU make the call.


SO, we’re stretching the limits and reach and scope of the FDIC AND Ws hotting UP the rhetoric with Russia AND there’s INCREASED concern about hurricane GUSTO or whatever it’s called AND we’ve got ga-BILLIONS in front-end supply to choke on just as we learned that back on August 5th the Fed minutes would indicate there’s a general consensus the next move is a tightening – not IF, but more of a WHEN debate, taking place. (one would THINK that context needs to be considered — Big Earl was still in process of massive correction AND now, 20% off highs, one might argue they are considerably LESS concerned about tightening than they might have been at the August 5th FOMC meeting?) THAT to us is truly one of the more disturbing developments of the day … One we’re NOT really sure WHAT to do with. We KNOW that we desire a better level to SELL 2s and 5s INTO and that this is more of a very short-term TACTICAL trade as opposed to something more cyclical or secular. Said another way we would very much prefer to use current bearish flattening MoJo AND bid for the longer end of the curve into Friday’s month-end index-extension trade as an opportunity to get better placement on longer-term steepening ideas as steeper curves must prevail as part of whatever solutions are eventually arrived at. If not, we’ll only see FURTHER PRESSURE on the banking sector which will KEEP the USofA in more of a quagmire than it is currently. That is simply NOT a good option. We have faith ‘they’ will get er done!


In as far as the 2s, 5s and month-end index extension trade goes, we offer our own version of good cop/bad cop … have attached picture of 2/10s curve … IF for example you go to our webpage and go WAY down to the bottom of the page … several days down – worth … on the left hand side there’s a little link to ‘previous entries’ … if you click it so as you can bring UP August 21st … when we had this picture up there … looking for just this … 2/10s was @ 155bps … just having a FRESH look right now given 2/10s flatter by almost 5bps AND falling right into some levels of support … 50day AND 200day moving avg both coming in between 141 and 142 bps … STILL think there’s more bear flattening to come in order to get THRU 5s BUT the attached picture MIGHT offer reasons for SOME to bid in today’s 2yr auction = BOOKING PROFITS? Possibly? Again, just thinking out loud. FURTHERMORE, watching the f/x markets and the data from ‘across the pond’, one gets the sense there’s strong desire of Europe curves to steepen AND some consider raising funds for THAT trade by getting OUT of the front end of the US curve. All adds up in the end and for now, we quite like it as it fits our very own game plan … which seems to still be sticking to the script. We can’t wait to see what the rest of the day brings!!


Items Of Interest:

Bloomy’s Econ Calender August 27th


Bloomy’s Fed-speak Calendar August 27th


GPs Key Econ Indicators (August 19th, 2008) -> Our “Economic Graph Package” is used by some of our clients to include in their monthly or quarterly reports. We have most of the major economic indicators included to give an accurate snapshot of the economy.


GPs 5yr & Under Summary (August 25th, 2008) – > This is our chart package we call the “One to Five Year Daily”. It tracks agency bullet spreads to Treasuries, date to date, to compute the real maturity spread levels (in basis points) out to five years. We track agency callables against agency bullets and Treasuries. We compare equal maturity dates when tracking these spreads because the effective durations of callables are not stable. So over time we have a consistent methodology that we use to determine “value”. Please give us a call for more in depth explanation.


GPs Index Spread Summary (August 19th, 2008) -> We use certain Merrill Lynch indices, which are described at the top of each graph, to try and determine optimal entry and exit points for each sector. Though the indices should have similar durations, they commonly don’t match precisely so we’ve included the green line (which should be read off from the right axis) to allow you to take the curve into account when looking at historical spread relationships.


GPs Daily Pivots (August 27th, 2008) The pivot point is essentially a mechanism for analyzing the short-term supply and demand factors affecting the market. It has limited applications for long- term decision making. Professional futures floor traders, also known as locals, are the biggest proponents of the pivot technique. Scalpers, brokers, market makers, and other short-term traders also use the technique, while upstairs or longer-term traders occasionally look at the pivot for ideas of what the floor traders are doing. The pivot point is basically the weighted average price of the previous trading day, calculated as the average of the previous trading day’s high, low, and closing prices. It represents the major point of inflection each day. Unless there has been significant market news between the previous trading day’s close and the current trading day’s opening, locals often try to test the near term support, resistance, and pivot point. For example, many floor traders cover their shorts and go long into the pivot level if the market opens above the pivot point and starts to sell off.


StreetStuff – Weekly, August 25th


StreetStuff – Daily, August 27th

  • DB: Capex slowdown likely to be shallower than in 2001
  • GS: Rising Unemployment Should Push Down Inflation Next Year
  • LehDRV: A Year Ago, Dislocations in Commercial Paper Markets Correctly Signaled Broader Liquidity Diminution; After an Overall 20% Decline in U.S. CP Outstanding to $1.8 Trillion, Unsecured Short-Term Borrowing Is Growing Again While ABCP Continues to Decline
  • BofAs Situation Room: The Problem List – The number of banks on the FDIC’s “problem list” increased to 117 from 90, with assets increasing to $78 billion from $26 billion, mainly due to IndyMac ($32 billion), according to the second quarter FDIC banking profile report. While Chairman Bair stated that “more banks will come on the list as credit problems worsen” at least the numbers so far show that all other banks on the list are smaller than IndyMac. Not surprisingly, the deterioration is a result of increases in the number of troubled loans and recently declining deposits even as the industry has begun to shed assets. Following a total of nine bank failures this year, the deposit insurance fund reserve ratio has declined to 1.01% of insured deposits from 1.19% the prior quarter, prompting the agency to consider a plan to replenish the fund with increased bank premiums.

Technicals – Daily, August 27th

  • JPM: Tens: Inside Day Sustains Near Term Range View
  • CSFB (daily): Holding a long. Add on weakness to 116-14/07, stop/reverse below 115-21. Square longs on strength to 118-00. Below 115-21 would turn the trend lower for 115-06, then 114-295/265.
  • CSFB (wkly):
  • T-Bonds have completed a large base.
  • 10yr yields still need to break 3.76% to confirm a large bullish reversal.
  • 2s need to stay below 2.50% to stay bullish.
  • 10yr TIPS breakeven spread breaks medium-term support.
  • 10yr US volatility looks set to rise further
  • UBS: Current Recommending Positions: Flat but I will recommend a new long position at 116.16 and/or on a settlement above 117.035. Current P&L on All Market Recommendations: +29.22%
  • ML: An absence of any significant directional progress yesterday, as traders appear to be focusing on futures roll over activity


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