What’s Movin’ Markets – Tuesday, September 30th

  • U.S. Treasuries Decline as Lawmakers Vow to Revive Paulson’s Rescue Plan (Bloomy)
  • U.S. Heading for Deeper Economic Slump, With or Without Treasury Bailout (Bloomy)
  • Fed May Need to Dip Further Into Toolbox as Congress Tries to Revive Bill (Bloomy)
  • Banks Borrow Most Since 2002 at ECB’s Emergency Rate, Deposit $64 Billion (Bloomy)
  • German Unemployment Drops as Companies Hire to Work Off Backlog of Orders (Bloomy)
  • U.K. Second-Quarter Economic Growth Is at Weakest Annual Pace Since 1992 (Bloomy)
  • Europe Inflation Slows for Second Month; Rate Falls to 3.6% on Oil Decline (Bloomy)
  • Dow Theory Holds U.S. Stocks May Fall More on Transportation Average Drop (Bloomy)
  • U.S. Bank Mergers With Government Help Mean Higher Fees, Less Choice (WSJ)
  • Wachovia CEO Steel Ran Out of Time as Credit Crunch Tightened Around Bank (Bloomy)
  • Fed’s Hoenig Says U.S. Economy Is Resilient, Will Emerge Stronger (Reuters)
  • Reserve Primary Fund to Liquidate, Begin Distributing Cash to Shareholders (Bloomy)

What’s On OUR Minds:

Given the holiday here today and the historic nature of the markets that once again leave us in complete awe, we’ll keep OUR thoughts extremely brief today. For the record, we’ll be at the machines on and off, checking in on emails (bloomy and otherwise) so holler IF you need.


While WE continue to think about things from more of a ‘view from 40,000 feet above’ at the moment (things that KEEP us thinking about steeper curves and the next move by the Fed to be an ease – one of our LONG HELD VIEWS), we thought we’d bring forward some comments from some of the better strategerists out there. Some of who WE think are the ‘brightest bulbs in the room’, the fellas over at GCM (David Ader who appears to be off today, and his ‘protégé’, Ian Lyngen):


“The market traded off overnight, giving back some of the very sharp gains from Monday’s session. That said, we still have 2-year yields near 1.75% and 10s at 3.68% — not levels suggesting it is safe to return to water. In fact, we see the curve remaining biased steeper, over 190 bp this morning, not the extremes of the low 200s but holding the recent push higher. The recent volatility has made near-term interest-rate calls challenging at best, down right painful in practice. From a broader perspective, we continue to see the market biased to price-in additional economic downside – regardless of how the near-term data actually materializes.


The LIBOR markets continue to reflect the broad unwillingness to lend within the banking sector — especially in the dollar market as this morning saw overnight LIBOR rates surge 430 bp to 6.875% and 1-month up 20+ bp to 3.926%. Clearly quarter-end at play, but financial sector stress is the real story.


Near-term Fed policy action is a key debate — The market has priced-in nearly 50 bp of easing before year-end – we see no reason to fade this because even if the Fed is able to forego easing, the front-end richness will likely be retested as the market remains unconvinced of the FOMC’s resolve. In this context, we look to play the range between now and the end of the year — selling a push below 1.50% in 2s and buying back above 2.15-2.25%.


We’ve favored steepening as a macro-theme throughout much of this move, and while we are unwilling to shift our overarching bias, opportunistically selling vs. the extremes is the way to play this market. We look to sell vs. 200+ bp and add to the steepener on any dip to the 168-175 bp range. As we were near 195 bp yesterday, a pre-NFP steepening as Congress struggles to enact the bailout should keep upward pressure on the curve – after the bill passes and we see the NFP print – look for normalization back to the 175-185 bp range – barring any paradigm-shifting downside Employment surprise.


TACTICAL BIAS: The market is not here because of what we know about 1)the economy (weakening with most data surprises to the downside), 2) inflation (with oil down, dollar up, consumer spending weaker friendly inflation figures are surely on the way), 3) the rest of the world (Europe and Asia weakening, and the ECB & MPC likely to be in full easing mode before long), 4) the Fed (where Q1 Fed Fund futures give high odds of 1.5% Funds rate).


No, the market is here because of what we don’t know — i.e. the financial system. Assuming we can get a bill through, from a bond market perspective there is room for a back up. But that back up will be limited. The bailout has been, to us, a temporary relief trade and so an opportunity for placement and not more than that. We adhere to that belief and sense that the balance of the year will prove one of worsening economics and a strong underlying bid to the bond market.


And so we continue to look for a back up to buy. Problem is we won’t be alone; positions remain short to flat, although there is evidence of those starting to extend. Attached is a chart of Dealer Positions in Treasuries, which too reveals a short-covering bent.


We are not great fans of 2s in the type of panic moves we’ve seen; the bid doesn’t last long and the way this trades suggests that they could underperform under credible scenarios like a bailout. Further, up against expectations for a 1.50% Funds rate we don’t really see value vs., say, the 1.50s in 2s.


This may be misguided, but the weakness in stocks should bode well for the belly in both a directional sense and if our read on duration needs pans out. This is not today’s trade, probably not this week’s.”


Items Of Interest:


TARP – AKA The EESA – which stands for The Emergency Economic Stabilization Act. Here is what we’ve thrown together over the last few hours – some of the better in the biz have some initial thoughts on The Bill making it’s way into law over the course of the next few hours and days, which will ultimately be the beginning of the end of this long, drawn out situation. Are we nervous when the politicos in DC are aiming to FIX WALL STREET? You bet. Do we have any alternative, other than to LOVE IT? Not sure … Whatever the case may be – fan or NOT, we’ve UPDATED it as of September 30th:

  • GCM: TARP – Where To Now?
  • CSFB: Troubled Asset Relief Program -Helpful, but Not the End of the Maelstrom
  • ML: Tarp, we hardly knew ya – No political solution to the financial crisis — for now


Bloomy’s Econ Calendar September 30th


Bloomy’s Fed-speak Calendar September 30th


GPs Key Econ Indicators September 16th -> 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 September 24th, 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 September 15th, 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 September 30th, 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 – September 29th (weekly)


StreetStuff – September 30th

  • DB: Economic outlook grows grim
  • DB: Global Economic Perspectives A matter of trust – Until trust is restored, central banks will have to keep the financial sys-tem on life-support. In the meantime the tightening of credit and other hits to the financial sector augur for a further reduction in the outlook for growth in the US and Europe, where we now see mild recessions as likely, as well as elsewhere. We shall publish our full and detailed outlook for the world economy in coming days.
  • CitiFX: GLOBAL STRATEGY MONTHLY The Greatest Bailout of All Times and What It All Means … Recent market volatility has stopped us out of many of our positions
  • GS: Abby Joseph Cohen’s latest – Global Themes and Risks [Presentation]
  • BofAs Situation Room: The Bailout That Works – In the wake of the failure to pass the TARP legislation, alternatives to bailouts take center stage. In the midst of the past week’s TARP negotiations, both Washington Mutual and Wachovia found solutions within the current regulatory framework, securing depositors and eliminating financial uncertainty. As in the Lehman case before it, these solutions illustrate that once losses are crystallized for existing holders, new private capital stands more than ready and willing to invest. In the case of Wachovia today, the ability of strong banks-with some government assistance in the form of FDIC loss sharing-to merge with weaker banks illustrates an alternative to bailouts readily exists to deal with the credit crisis.
  • Lehman’s DRV: Perspective on yet Another “Black Day” for Risky Assets Having been on capital market station for six of the top 20 worse days for risky assets since 1920, the following perspectives might be useful to investors.
  1. Never Blame a Single Catalyst
  2. Hardly the Worst Daily Equity Correction of All Time
  3. Diversification Works
  4. Risky Asset Class Valuation Bottoms Usually Not Far Behind Cathartic Market Venting


Technicals – September 30th

  • JPM: Tens- Stage a Flight to Quality Rally as Equity Markets Collapse
  • Mizuho: Buy at 116.00, adding to 115.00; stop below 114.00. Add to longs on a daily close above 117.04 for 118.00 where some hesitation is likely, then 119.12 and on to 121.00/121.26.
  • CSFB: Go long on a setback to 115-27/17, stop below 115-01. Also add to longs above 116-265, for a move back to 118-00. Below 115-01 would warn of a decline to 114-09/07. Retry a long here, stop/reverse below 114-00.
  • CSFB (wkly): 10yr US/Germany may be trying to form a base. 10yr US yields continue to hold key support at 3.90%. 30yr yields also hold their 4.50% support, and 2yr yields remain capped by their falling 40-day average. We continue to look for the 2s10s curve to steepen. 10s30s on the other hand is weighing on key support
  • UBS: Current Recommending Positions: Flat. Current YTD All Market Trade Recommendations P&L: +14.58%


In The Press NOW:


FT Home

The big unwind

George Magnus on the risks of deleveraging


Monday, Bloody Monday

House rejection of $700 billion rescue plan wipes out $1 trillion in stock-market value.





U.S. Heading for Deeper Economic Slump, With or Without Bailout By Rich Miller

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