What’s Movin’ Markets – Tuesday, November 25th

  • Paulson, Bernanke Said to Unveil New Plan to Shore Up Consumer Financing (Bloomy)
  • King Says U.K. Banks May Still Need More Capital, Credit Biggest Challenge (Bloomy)
  • Swap Traders Push Derivatives on GM Default Recovery as Bankruptcies Soar (Bloomy)
  • Nowotny Says ECB Should Keep `Firepower’ on Interest Rates, Be Cautious (Bloomy)
  • Stimulus `Jolt’ Triple the Size of Initial Plans Takes Shape Under Obama (Bloomy)
  • OECD Urges Further Interest-Rate Reductions, Tax Cuts to Help Economies (Bloomy)
  • Permanent Tax Cuts Are Ideal Stimulus, Writes Stanford’s John Taylor (WSJ)
  • London, Midtown Manhattan, Tokyo Office Rents Post First Drop Since 2002 (Bloomy)
  • Citigroup Bailout Charts New U.S. Course for Rescues, Adding Taxpayer Risk (Bloomy)
  • Obama Bonds May Be Answer as Dollar Plunges: Commentary by William Pesek


What’s On OUR Minds:

We’re having a tough time this morning grappling with the curve. We had for a very long time been the steepeners biggest fans and lately we find ourselves waxing poetic about just the opposite. The conditions in place that created demand for steepening yld curve now has pushed things to the edge and we’re frightened about what’s on the other side, to be quite honest. We knew that this month would produce an outsized month-end index extension and we were and are as curious as the next guy as to how managers are going to deal with it. Will there be a general fade as folks think ahead to the onslaught of supply and desire to stay underweight OR will there be some sort of recognition as to just how short (or NOT LONG) managers are at this point in the cycle? Today for example, one of The Client Survey’s out there from a big bank suggests that longs dip AGAIN (23 vs 31) and shorts are unch at a fraction of longs (@ 6) while it seems that everyone jumped once again firmly onto the fence. Neutrals are up to 71 vs 63. CLICK HERE FOR DETAILS but you get the point.


Moving our thought process beyond the end of this week, the bid for duration is also becoming something about the Fed and one’s thoughts and perceptions about what’s next. We’ve seen the Fed embark upon its quantitative easing process and there are some ‘out there’ who may use the argument that the Fed’s running out of bullets. For the record, we’ve NEVER been in that camp and in many instances have suggested that the Fed will always be able to cut Reserve Requirements, allowing banks to keep less of their capital on hand, theoretically using it to lend to US so as we can finance our lifestyle (translation = kids schooling and buying of homes?). This remains to be seen, though and we figure they’d do this BEFORE cutting the FedFunds rate again at this point.


We ALSO are beginning to see the market deal with the possibility that the Fed will somehow throw its hat in the ring with regards to the longer end of the yld curve and somehow suggest where ylds should be. How? Well for one they could make outright purchases for example. We think this sort of competition for duration might help but also might have some of its very own unintended consequences and THIS is what we mentioned earlier – the other side of ‘the edge’ that we’re frightened about.


For now, though, the market is all about de or DIS – inflation and we’re not about to stand in the way. We simply can understand WHERE the curve flattening comes from and would suggest it’s more than just a month-end phenomenon. There’s plenty of room for duration grab-A-thon as folks attempt to cope!


Here are a couple of pictures to put things into perspective … 2/10s now and also a look back to the LAST time we went thru this sort of similar thought process – mid June 2003:


Finally, from today’s WSJ, we thought the following picture of T-Bill market was appropriate:

[Pepper ... and Salt]

Items Of Interest:

Bloomy’s Economic Calendar November 25th

Bloomy’s Fed-speak Calendar November 25th

GPs Key Econ Indicators November 17th, 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 November 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 November 17th, 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 November 25th, 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 November 24th

StreetStuff – November 25th

  • DB: Relying on claims for an early read on GDP – We expect today’s GDP report to show a modest downward revision to Q3 growth from -0.3% to -0.6%.
  • GS: How Big a Fiscal Stimulus Package? We still await hard numbers on the size of President-elect Obama’s fiscal stimulus proposal.  The $500-$700 billion package projected by Senator Schumer on Sunday probably translates into annualized stimulus of around $300 billion.  In contrast, Obama’s stated goal of 2-1/2 million incremental jobs by early 2011 could be consistent with a larger $400-$500 billion annualized figure.
  • GSs Abby Joseph Cohen: Global Themes and Risks [Presentation]
  • BofAs Situation Room: Theory of Relativity – Dramatic widening in CMBS since the end of October shifts cross sector relative value. The consequence of abandoning the TARP asset purchase program hit the assets most expected to have benefited: residential and commercial mortgages and securities. The default of two key commercial properties at the same time exacerbated losses in CMBS, driving spreads on AAA cash securities to over 1500 to LIBOR, rendering the rest of the high quality space rich relatively. Friday and today, spreads recovered to +1160, and we highlight the potential liquidity programs contemplated by Treasury and the Fed as a future source of additional support to consumer assets that may end up also including CMBS. Capitalizing on the cross market investment opportunity in CMBS, we highlight our CMBS strategy team’s primer on the asset class as a key tool for new investors into the space.
  • MS: Aggressive Policy Actions Will Avert Both Depression and Deflation


Technicals – November 25th

  • JPM: Cash Tens: Break 2008 Range, but Enter 3.35-3.50% Buy Zone Support; Dec Tens- Range after the 121.255 peak tests 119.115 Sept high. Floor at 118.12-118.00; Tens- We are scale buyers in the 3.35-3.50% zone for a 1Q rally to 2.875-2.85% initially. Met 3.35%; Cash Tens- Accumulate Longs in the 3.35-3.50% zone, for a move to interim new highs through 2.99%. Partial reached at 3.35%; Twos: Buy near 1.25% (done in WI), and then near 1.40%, for medium term new highs through 0.96%.
  • BarCap: Recently, the authorities have done much to try and halt the slide and arrest the global slowdown, unfortunately the markets are suggesting they are not yet winning the battle. Our modest hopes for a short-term period of stability in financial markets were crushed last week by the resumption of the steamroller trends, which have consistently flattened the markets this year. A further wave of deleveraging triggered another twist in the deflationary spiral with commodities and equity markets falling sharply. While we would allow for a near-term corrective bounce in both, we are extremely reluctant to assume that the greater trends are over. US equities have broken important support and European markets threaten to follow suit as commodities continue trade heavy. The volatility in fixed income markets is becoming hard to live with, but the general story is still bullish one s the markets build for one more rally and top into next month. FX markets generally did trade sideways last week, though increasingly it appears the CHF is likely to weaken.
  • Mizuho: Buy at 120.06 but only if prepared to add to 119.00; stop below 117.00. Cover longs again ahead of 121.25 and only re-buy on a weekly close above here (better its equivalent 119.16 in the March 2009 contract for 124.00/125.00 medium term).
  • CSFB: Holding a long from 119-20/10, stop below 119-00. Square longs on strength to 122-05/10. Below 119-00 and re-try a long at 118-20/10, stop below 118-05. Highlights from weekly – 30yr yields and bonds complete medium-term continuation patterns; 10yr yields and Notes break the 2003 lows/highs, but need to remove 2.96% to offer 2.60%; 2yr yields remain bullish for .70%; 5yr yields should stay bullish below 2.34/36%; The 2s10s curve faces a key test of support at 206bps.
  • ML: Exhaustion declines, but support intact; Very short term equity bottoms, Q4 risk remains to support; US 10yr overbought correction leaves support undamaged

In Press NOW:

  • Where Was Geithner in Turmoil? By ANDREW ROSS SORKIN The experience that Timothy F. Geithner, former head of the N.Y. Fed and current nominee for Treasury secretary, brings to the table can be looked at as an asset or a liability.
  • Saving Citi May Create More Fear By ERIC DASH The government’s bailout of Citigroup could lead other banks to take bigger risks. 
  • Another Crisis, Another Guarantee By FLOYD NORRIS Will the latest rescue by the U.S. government finally restore confidence in the American financial system? 
  • G.M.’s Pension Fund Stays Afloat, Against the Odds By MARY WILLIAMS WALSHG.M. appears to have enough money in the fund to pay its more than 400,000 retirees their benefits for many years — a result of its conservative pension management. 
  • Bank Industry Analysts Fall Prey to the Shrinkage By LOUISE STORY Analysts, once prominent within the industry, are joining a growing pool of bankers and traders losing their jobs before bonus times, with few job prospects on the horizon
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