What’s Movin’ Markets – Friday, October 31st

  • Bank of Japan Cuts Interest Rates to 0.3%; Shirakawa Casts Deciding Vote (Bloomy)
  • Japan BOJ’s Shirakawa Says Three Dissenters Wanted Larger Rate Cut (Bloomy)                
  • Asian Stocks Fall, Snapping Record Rally, on Earnings, Metals (Bloomy)             
  • U.K. Consumer Confidence Drops Close to Lowest Level Since at Least 1974 (Bloomy)
  • German Retail Sales Decline More Than Expected as Turmoil Unsettles Consumers (Bloomy)
  • Homeowners Have Mortgage Higher Than House Is Worth as Prices Plunge (Bloomy)    
  • Treasuries Rise as Economic Contraction Spurs Bets for Further Rate Cut (Bloomy)       
  • U.K. Companies May Need $73 Billion a Year to Boost Pension Funds (UK Times) 

What’s On OUR Minds:

TGIF and a happy Halloween to one and all … We often talk about being bond-geeks watching stocks and everyone knows we HATE doing that as it’s just NOT our wheel-house. Allow us to take a moment and put this in some sort of context. Yesterday’s 5yr auction process, while NOT nearly as good as the 2yr note was (IF you look at similar metrics like tails, cover and IN-direct bidder %ages), might have been more valuable in that it might just have told us something. We’re forever and always looking for big flashing neon signposts as to which direction the market’s gonna go. We don’t pass em by that often and when we do, well, yer probably supposed to pull the car over and take a picture with yer cell phone just in case you forgot what it said. This in mind, here’s one we THINK we might have all passed yesterday and we are curious what YOU make of it:


Mkt News on giNORMOUS direct bid 13:05 10/30 US TSYS/AUCTION RESULTS: Directs took a huge 14.3% of 5y, about 10x their normal amount. Directs bid for $4.6b and had a 73% Hit rate, so they were clearly interested. The surge in interest is in line with PIMCO’s talk about moving “little distance back out” the curve.


Auction      Total       Total    Primary      % of     Direct      % of     Indirect    % of

Date         Public      Comp.    Dealers      Comp.  Bidders    Comp.  Bidders    Comp.

            Accepted    Accepted Accepted    Total    Accepted  Total    Accepted  Total


10/30/08    $24.000  $23.793  $13.658    57.4%    $3.40   14.3%   $6.73   28.3%

09/25/08    $24.000  $23.870  $17.365    72.7%    $0.11    0.5%   $6.39   26.8%

08/28/08    $22.000  $21.851  $15.185    69.5%    $0.15    0.7%   $6.52   29.8%


In OUR opinion this stuff matters. The last time we saw such a huge ‘direct’ bid was back in October 2005 when the auction size was ONLY $13bil. Somebody thought 2.825% was ‘cheap’ and we suppose IF that someone could fund the purchase somehow nearer the FedFunds levels of 1%, well that right there’s an arb we too would do all day long IF it were available. As always, we’re big BIG fans of sleeping at night and it strikes US that’s one way to have some fixed-income exposure and do so.


NOW, the part about us being bond guys watching stocks? What, you may be asking, does the 5yr auction have to do with anything? We’re glad you’ve asked – and sticking with us on this one – and the following picture is the payoff. While we’re NOT mathematicians, the correlation looks better than decent:





Why now do we care? Well we just think it’s funny how we’ve all become Libor/OIS experts and we here at GP have become so after Ben Bernanke told us to do so, earlier on in the year. We’ve had many a look at that spread and have put it up in this space before. We thought this next story from Bloomberg (chart of the day yesterday) pulls it all together quite nicely and looks at stocks, debt load and the Libor/OIS spread. For the record, it’s OUR opinion that this is only ONE thing ‘out there’ that might very well be an off-set to the recent equity market ‘euphoria’ surrounding the balanced funds BID for stocks. We’d offer that only paying attention to that, would miss the point. Most companies ‘out there’ carry some sort of debt load. They will face refinancing costs and as long as the Treasury markets front end remains ‘broke’, this poses a risk. This risk is NOT something we all were worried about back in 2007 when the Bear Stearns mbs fund imploded. This continues to be the gift that keeps on giving, in the sense that every time we think that we’ve got it all handled, something ELSE comes up. We digress. Here’s recent Bloomberg Chart Of The Day:


Looming Debt Costs Prove `Worst Enemy’ for Stocks: Chart of Day


By Michael Patterson and Sarah Thompson

    Oct. 30 (Bloomberg) — Stock investors are punishing U.S. companies with looming principal payments on their debt more than they are the broader market.




…shows the performance of 100 Standard & Poor’s 500 Index companies with the highest principal payments due through 2009 as a percentage of net assets. The measure, which includes Harley-Davidson Inc., Caterpillar Inc. and American Express Co., has trailed the entire S&P 500 by 19 percentage points since mid-August 2007, when credit markets first began to show signs of stress, as shown in the chart with the Libor-OIS spread.

    “Debt payments are a company and its shares’ worst enemy and will, in certain cases, send investors running for the hills,” said Peter Jarvis, a London-based money manager at F&C Asset Management, which oversees about $200 billion. Investors may keep punishing the companies as the credit crisis and economic slump increase refinancing costs, he added.

    The principal-payment ranking excludes 20 companies in the S&P 500 for which data on net assets wasn’t available. Principal- payment calculations are based on syndicated bank loans and bonds tracked by Bloomberg as of yesterday. To see all the companies

included in the index, click on {.MATURE <Index> CIXU <Go>}.


–With reporting by Bryan Keogh and Eric Martin in New York.

Editors: Nick Baker, Dan Hauck


To contact the reporters on this story:

Michael Patterson in London at +44-20-7073-3102 or


Sarah Thompson in London at +44-20-7673-2067 or



Finally, IF you see the following two dudes ‘out there’ tonight – remember that both their dad and their poppy LOVE the dark chocolate !!!  


Happy Halloween! From The Big Picture Blog thingy, comes the following:

Items Of Interest:

Bloomy’s Econ Calendar October 31st

Bloomy’s Fed-speak Calendar October 31st

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 31st, 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 31st

  • DB: Income tug-of-war: Gas prices add & layoffs take away
  • BofAs Situation Room: Credit the CPFF – Credit the CPFF and other government liquidity programs for bringing about the thaw in credit markets. The Fed’s weekly data on CP issuance showed its first gain of $92.6bn, stemming six consecutive weekly declines. Directly contributing to that gain was $144.8bn of usage reported today under the CPFF, the Fed’s Commercial Paper Funding Facility providing 3-month CP for Tier 1 rated issuers. LIBOR continued to reflect the easing conditions in credit markets as it set lower again today to 3.19%. We expect those rates to continue to decline as further normalization in funding markets proceeds.
  • BofAs Rate Strategery: Supply and the Curve – The curve is likely to steepen on additional supply but for different reasons than the market consensus expects.
  • Rosy of ML: $2Trillion and rising (think Fed balance sheet) and ALSO have included a note he put out late yesterday after Janet Yellen comments that stopped US dead in our tracks. His comments are titled, “Yellen’s yellin’ like us”
  • Stephen Jen/MSs (fx guru): Weekly FX Pulse – Bearing The Cold – USD: An Even Bigger and Broader Dollar Smile. We believe that the world is still short the dollar, and further ‘deleveraging’ or ‘liquidation’ of cross-border positions will ultimately be dollar-positive. We now see even more upside for the dollar in the coming 3-6 months, against most of the majors and almost all of the EM currencies. USD: Now Some Food for the Bulls. In July we recommended using EUR/CHF puts as a relatively cheap proxy for being short US equities. With stock prices at multi-year lows and the VIX at a sky-high 65, we now look at going the other way.
  • Citi: A Review of the US Government Guarantee GSE Debt and MBS
  • GS: Refunding Estimated at $50bn; Large Borrowing Estimates for Q4 and Q1

Technicals – October 31st

  • CSFB: Holding a long from 113-11/01. Add on further weakness to here, stop/reverse below 112-27. Reverse longs on strength to 116-16/20, stop/reverse above 116-25. Below 112-27 would warn of a slide back to 111-19/14. Retry a long here, stop/reverse below 111-00.
  • CSFB: The strong move higher in US/Germany has seen the 10yr, 5yr and 2yr spreads all achieve our initial upside targets. However, while a pullback should be allowed for, we would view weakness as corrective, with further significant German outperformance looked for. Indeed, the 30yr spread may now also be on the cusp of completing a medium-term base.
  • JPM: Cash Tens: Heavy Action Breaks 3.90% Support, and Seeks 4.00%
  • UBS: Current Recommending Positions: Short at 113.125 targeting 111.16 with stops for now at 114.31. Current YTD All Market Trade Recommendations P&L: +20.06%

In Press NOW:

  • Mortgage Plan May Aid Many and Irk Others By DAVID STREITFELD Experts say it is difficult to devise programs to aid distressed homeowners without giving everyone else a reason to mail the keys back to their lenders. 
  • Fed Adds $21 Billion to Loans for A.I.G. By MARY WILLIAMS WALSH The American International Group has access to $144 billion in credit from the Federal Reserve under three programs, but its cash needs could grow even further.


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