What’s Movin’ Markets – Thursday, October 30th

  • Asian Stocks (WEI), Currencies Advance on Interest-Rate Cuts; Commodities Rally (Bloomy)
  • Treasury Notes Decline as Stocks Advance, U.S. Prepares Five-Year Auction (Bloomy)
  • Treasury, FDIC Consider $500 Billion to Back Mortgages, Slow Foreclosures (Bloomy)
  • ECB Loans to Banks Top $1 Trillion for First Time, Excludes Dollar Lending (Bloomy)  
  • German Unadjusted Jobless Total Drops Below 3 Million Again After 16 Years (Bloomy)
  • European Economic Confidence Plunges by Record as Financial Crisis Deepens (Bloomy)
  • U.K. House Prices Fell 14.6% in October, Most Since 1991, Nationwide Says (Bloomy)
  • Japan’s Government Plans to Spend Almost $51 Billion to Stimulate Economy (Bloomy)
  • Bank of England Should Reduce Rate Soon, Significantly, Blanchflower Says   (Bloomy)   
  • Deutsche Bank Reports Unexpected Profit as New Rules Limit Debt Writedowns (Bloomy)    
  • Wall Street Firms Won’t Surrender Bonuses Amid Outcry, Veteran Bankers Say (Bloomy)    
  • Hamptons Home Prices Plunge as Wall Street Upheaval Cools Beachside Sizzle (Bloomy)

What’s On OUR Minds:

Yesterday here in this space we talked about steepening yield curves and TIPs. It would seem as though we are working for PIMCO given the recent press (WSJ.com article on their shift into TIPs) and by Bill Gross’s recent missive (here’s link to November comments). Flip to the last page and you’ll find three things he’s focused on. Agency MBS debt, bank capital (pfd’s and shorter term debt that falls under the FDICs ‘umbrella’) and here’s No. 3: “A focus on the front end of the yield curve. The Fed will stay low for an extended period of time while the inevitable inflationary pressures of government bailouts lay further out on the yield curve.” There are times when we’ve got ‘issues’ with him and times like these, where we couldn’t agree more. Hopefully the flavor of our webpage and our rantings over the course of the recent past make this abundantly clear. For the record, we really do NOT care who gets credit for the idea or who agrees WITH the idea. What WE care about is if YOU’ve got any of it on, that it treats you (our clients and friends) well. THAT’S IT!


Nuff said. Moving on, then, back to what’s next. On THAT note, we are anxiously awaiting GDP data as well as the 5yr note auction. IF recent history (stellar 2yr note auction process)  is any indication, the 5yr auction should go OK, especially as there’s some sort of concessions being offered at the moment. We’re trading at the cheaper end of the outright range since being announced (currently near 2.85) and it’s cheapened up a bit on the curve. In as far as a curve concession, well, it’s more muted evidence, but lets not sell it short. 5s are cheaper today relative to the 2yr as well as 10s and Bonds. For example, 2s/5s is @ +118 which is a couple bps steeper while 5s/30s is @ +147 which is approx 3bps flatter … While this stuff is not the focus at the moment for most of the free world as we know it, we’ve every reason to believe there might just be a decent bid IF the auction were to occur right now. Unfortunately we’ve gotta wait another 6hrs and as we ALL know, that’s an eternity in this environment. Have a great start and get yer 5yr bids in early and often!!


In that it’s Thursday and that means it’s Initial Jobless Claims, we thought we’d bring you an idea of just WHY the numbers have skyrocketed recently and it’s reflective of just how companies are dealing with the current economic environment:

Items Of Interest:

Bloomy’s Econ Calendar October 30th


Bloomy’s Fed-speak Calendar October 30th


FOMC (as of October 30th) –  Given the enormity of Fed policy these days, we thought it might be helpful to include an attachment here with everything ‘out there’ we could find and thought relevant re the FOMCs recent decision. As is always the case, the 1st page is a side-by-side of the last 2 statements for you to read and make yer very own decisions. There are links along the top to what some of the brightest bulbs out there are saying/thinking … Let us know IF it helps.


GPs Key Econ Indicators October 28th, 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 October 30th, 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 October 28th, 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 October 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 – WEEKLY – October 27th


StreetStuff – October 30th

  • DB: Ceteris paribus, what is energy worth in terms of jobs? – One of the reasons why we see the economy improving next year is lower energy prices; this will not prevent recession, rather the decline is occurring in direct response to recession.  Over time, however, falling energy costs will provide important support to beleaguered US households. Indeed, the improvement in household cash flow from lower energy prices could be quite dramatic, equivalent in income generation to several million jobs.  We have observed that for every $1 change in retail gasoline prices, household energy spending changes by approximately $100 billion.  Therefore, a $1 decline in retail gasoline prices is equivalent a $100 billion tax cut, all else being equal.  According to our analysis, this is worth nearly 3 million jobs.
  • GS: The Treasury’s Financing Need: Pressing on All the Buttons – The US Treasury faces an unprecedented financing need in fiscal year (FY) 2009.  Excluding the Supplemental Financing Program (SFP), which facilitates the Fed’s liquidity operations, we put the Treasury’s borrowing requirement at $2 trillion. Given the ramp up in outstanding bills that has already occurred, and the fact that the SFP may require still more in special cash management bills, we think the Treasury will only finance about $300bn of this in an expansion of the regular weekly bills.  Even this amount of financing would require keeping such issuance at the highest weekly rates seen over the past year. If this is right, then the remaining $1.7 trillion must be financed by virtually doubling the current $900bn “run rate” in gross coupon issues, which likewise has ramped up considerably over the past year as issuance of 2- and 5-year notes has already doubled.  This virtually assures that the Treasury will implement all of the measures it has already indicated are under consideration: reintroducing the 3-year note into the quarterly refunding and converting the 10-year notes and the 30-year bonds into full monthly and quarterly cycles, respectively. Beyond this, we think the Treasury should consider reopening 2-year notes on a monthly basis, as demand in that sector remains heavy, and conducting regular reopening auctions of off-the-run securities.  Given the potentially short-term (1- to 2-year?) bulge in the financing requirement, we think this is preferable to introducing securities at other maturity points.  That said, additional significant increases in 5-year notes look inevitable, and the Treasury may have to augment its TIPS program as well.
  • BofAs Situation Room: Falling Before the Finish Line – Recent trends of tremendous volatility toward the end of the day continued as the S&P 500 declined from 965 to 925 in the last ten minutes of trading while credit (CDX.IG) widened 4bps, though ending 2 bps tighter on the day at 208 bps. That eliminated any delayed positive effect of the FOMC decision to cut 50 bps and highlights the reality of significant realized volatility with the VIX at 70.
  • Lehman DRV: Global Central Bank Policy Update: Seldom More Contradictions:
    50 bp Ease by Fed, ECB Likely Easing Next Week, Yet Troubled Iceland Hiking by Astounding 6.00%; Even After a Month of Coordinated Rate Cuts, 2008 Still a Year of More Frequent Hikes (66 YTD) Than Eases (43); Dichotomy of Monetary Accommodation in G10 Compared With EM Policy Stasis/Hiking Argues for Global Bond Portfolios Staying Overweight Core Treasury Markets – As policymakers continue to pursue cooperative measures to restore market confidence, a straightforward metric of central bank coordination demonstrates the need for even more collaboration, especially across the emerging world, in lowering target interest rates. A global monetary dichotomy of G10 easing and EM policy stasis (even some hiking) will likely persist until financial markets stabilize. In turn, the likelihood of more aggressive rate cuts in the G10 suggests that bond portfolios should be overweight the core treasury markets versus the peripherals.
  • Rosy/ML: The Bernanke Put … for bonds though, not stocks 


Technicals – October 30th

  • JPM: Cash Tens- Went 25% Long at 3.845%, and exited near 3.75% target. Await next idea, likely via Email.
  • BarCap: Equity roadmap; US Treasuries – 10s and 5s: A three-stage process for equities; Eurodollars and Cash 2s: Breakevens paint an ominous picture
  • CSFB: Retry a long at 113-11/01, stop/reverse below 112-27. Also add to longs above 115-16 for a move to 116-16/20. Reverse longs here, stop/reverse above 116-25, as a break can target 118-00. Below 112-27 would warn of a slide back to 111-19/14. Retry a long here, stop/reverse below 111-00.
  • CSFB: S&P 500 Historical discount/premium to its 200-day moving average
  • UBS: Current Recommending Positions: Flat but I will recommend a new short on a settlement below 113.30. We will also suggest a short in US 30Yrs on a close under 115.045.  Current YTD All Market Trade Recommendations P&L: +20.24%

In Press NOW:


FT Home

  • Pension fund gap hits $100bn US companies scramble to cover market losses 
  • US hospitals may have to buy back $8bn in debt Credit market turmoil may leave hospitals in bind 
  • Goldman partners’ reduced rewards Bank names 94 new senior employees
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