What’s Movin’ Markets – Tuesday, December 9th

  • German Investor Confidence Unexpectedly Rises as Economy Enters Recession (Bloomy)
  • U.K. Housing Sales Drop to Lowest Since at Least 1978 as Recession Deepens (Bloomy)
  • German, French October Exports Drop as Global Economic Slump Cools Demand (Bloomy)
  • U.S. First-Quarter 2009 Hiring Plans Held Near 5-Year Low, Manpower Says (Bloomy)
  • U.S. Needs `Highly Accommodative’ Monetary Policy, OECD Says, Noting Risks (Bloomy)
  • Sony Will Cut 16,000 Jobs in Total, Including 8,000 Employees on Contract (Bloomy)


What’s On OUR Minds:

While there is still plenty of ‘bad news’ everywhere IF you want to see it … FedEx & Texas Instruments for example, are lowering their 09 earnings f’cast and Sony is cutting jobs … we must admit that we’re as impressed as the next guy with ‘risk-markets’ ability to shake it all off and grind out some gains. Ours is not to wonder why, though, at least not about stocks. What we’re most impressed with (and concerned with, at the very same time) is the state of and future of the fixed income world.


To this end, we remain in awe of the comments by our incoming Commander-In-Chief (video yest) and the size and nature of economic stimulus coming. We are curious what YOU think about it all and IF it’s ‘enough’. WE’re looking at things in terms of Japan and the ‘Lost Decade’ and we see many key differences between us now and them, then. We can’t help but feel that’s a GOOD THING. There are plenty of ‘risks’ and we’re NOT abandoning them completely, but suffice it to say that as impressed as we may be with GoBamaNomics, we’re equally impressed with all the creativity out of the Fed. We’ve ALWAYS been fans of Bernanke and we continue to be. This in mind, we’re thinking about the curve and what the next great trade may be and came across the following comments from GS earlier today and thought it might be of interest. Our point is that IF we’re ahead of the curve, generally speaking, then the next great trade may very well be for GoBamaNomics to be righting the ship, which will lead us all to ‘greener economic pastures’. IF that were to happen, one could make a very good argument for more of a bear steepening of the yld curve. To this thought, we offer the following from GS:


US Fixed Income to Follow Japan?


2. Looking at Japan
In the past couple of weeks, the fixed income market has been trading the theme of non-conventional monetary policy measures. This has helped flatten the US yield curve as the Fed has openly talked about the prospect of targeting interest rates further along the yield curve. Looking at the Japanese experience may offer some useful insights.


In Japan, when year-over-year growth first fell into negative territory in 1993, BoJ policy was still in a ‘conventional’ easing mode. The discount rate had by then declined from 6.0% to 2.25%, and it wasn’t until the end of 1995 when it reached 50bp. Through this period, the Japanese yield curve continued to steepen on trend, reaching a high of 230bp at end 1995.


At that point, headline consumer price year-on-year changes became negative and expected 1-year ahead inflation fell to just above zero, according to Consensus Economics. With front-end rates close to their zero nominal bound, the yield curve began flattening from the long-end. By end-1998, following an abysmal four consecutive quarters of negative activity growth, 2s10s had fallen back to 70bp, with the 10-yr yield trading around 75bp. Consumer price deflation lasted until 2004.


In the subsequent period, and up to the BoJ’s first rate hike, the Japanese yield curve bull-flattened and bear-steepened, driven by the long end and opposite to the typical behavior where short rates mostly dictate the slope of the term structure.


3. …with the US in mind
Turning back to the US, Fed policy is already close to the zero nominal bound, and annual real GDP growth is likely to be negative in the present quarter. CPI inflation has been negative on the month-on-month readings, but still firmly positive on an annual comparison. According to the November issue of Consensus Economics, forecasters expect negative growth, but positive CPI inflation in one year’s time.


Driven by a rally at the long-end, particularly following the negative core month-on-month CPI print in November, the 2s10s slope in Treasuries has fallen from a high of around 250bp to 180bp currently. This raises the question if the flattening can continue and if this is the beginning of a Japan-style trading pattern in US bonds, where the long-end becomes the ‘barometer’ of economic activity and monetary policy, taking us to a regime of curve flattening rallies and steepening sell-offs.


Obviously no past experience can provide a definitive answer, but we believe the Japanese case is nonetheless suggestive. One take away from that experience is that a prolonged long-end flattening of the government yield curve to, say, 100bp in 2s10s requires a combination of at least two factors: A period of negative year-over-year real GDP growth and the expectation of a long period of deflation ahead of us.


Our current US economic forecasts do envisage a long enough period of negative year-over-year growth numbers, like in the Japanese experience. However, on our baseline projections, we do not expect anything close to a prolonged deflationary episode which could shift long-term inflationary expectations sharply downward. Currently, only the second and third quarters of 2009 are predicted to show negative year-over-year CPI changes on our numbers. Similarly, according to the latest Consensus Economics survey results, US headline CPI inflation is expected to be at 1.6% year-over-year in one year’s time from now, and at 2.1% level in the long run (6-10 years’ time).


Unless long-term inflation expectations start shifting downwards, it is hard to imagine markets to price a Japanese-style term structure. Granted, market measures of inflation are already pricing notable deflation in the next several years, but as we argued in the past, this has more to do with “overshooting” of inflation expectations before the summer, ahead of the sharp turn in spot oil prices.


Of course, the yield curve can react not only to economic developments, but may in principle be used as a policy tool too. As said at the outset this is an idea that bond market participants have been contemplating lately, particularly after Chairman Bernanke’s comments in this respect. Interestingly, however, the Fed appears to be more inclined to target mortgage rates (agency debentures, and agency-backed MBS), which arguably command a higher ‘multiplier effect’. The government curve is also clearly benefiting from these policy initiatives, if only via convexity hedging activity. But if such actions allow monetary policy to regain traction, and fiscal policy also switches to a more stimulative posture, then fears of deflation may be replaced by those of higher inflation. This will remove scope for the curve to flatten persistently.”


Again, we ask … what do YOU think …


OTHERWISE, we came across the following ad pertaining to The Big 3 and thought we’d pass it along:


Items Of Interest: 

Bloomy’s Economic Calendar December 9th


Bloomy’s Fed-speak Calendar December 9th


GPs Key Econ Indicators December 8th, 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 December 8th, 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 December 3rd, 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 December 9th, 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 December 8th




StreetStuff – December 9th

  • DB: November retail sales are the key data point this week
  • DB: Global Economic Perspectives – Searching for a new source of global demand growth
  • GS: Deficit Headed Above $1 Trillion, No Matter How TARP is Treated
  • BofAs Situation Room: Bridge Loan for the Autos – The Auto Industry Financing and Restructuring Act made its way through Congress representing a compromise solution to bridge the autos into the new year and into a new Congress. Tapping funding from loan guarantees to fund “green” auto development, the loans would effectively forestall the systemic risk effects of an immediate liquidating Chapter 7 bankruptcy warned by GM requiring the companies accessing the loans till March 31, 2009 to come up with long-term plan of reorganization. By extending a limited amount of financing to maintain operations and requiring all parties to engage in a reorganization plan towards long-term viability, the plan reduces systemic risk in the near term and if successfully resulting in sufficient concessions could help the industry avoid insolvency altogether. However, whether stakeholders will be able to commit to the required concessions for that long term viability outside of bankruptcy court remains highly uncertain and potentially unlikely. Under such circumstances, today’s action postpones that future day of reckoning, leaving credit markets with the continued prospects of auto uncertainty, but alleviates the systemic risk from a liquidating bankruptcy of one of the auto manufacturers.
  • MLs Rosy: US Economics: 2009 – The year ahead – The housing recession that began three years ago finally seeped into a capital spending recession and only by the third quarter of 2008 did it finally morph into a consumer recession.
  • Stephen Jen/MS: My Thoughts On Currencies – Bottom line: In the final trading days of the year, market positions could be at risk of being unwound. Since the bulk of the currency market positions are likely to be ‘bearish-on-the-world’ trades, it is possible that we see some give-back on the long-USD, long-JPY and long-gold trades. Notwithstanding these tactical considerations in the near term, I continue to believe that more material bad news for the global economy is still ahead of us and 1H09 will likely be marked by a definitive resumption of many of the trends and themes we have highlighted in the past six months.



Technicals – December 9th

  • Mizuho: Buy at 123.00, adding to 121.00; stop well below 120.00. Add to longs on a sustained break above 124.28 for 127.20/128.20 further out.
  • JPM: Tens: Expect More Consolidation behind 2.56-2.46% Resistance Barrier; Cash Tens- Hold core 1/3 long, from 3.35%. Look to exit in 1Q, toward deeper rally targets. Twos: Hold 50% long from 1.25%. Look to exit into 1Q, toward deeper rally targets.
  • CSFB: Short took profit at 122-16/08, but the subsequent long was stopped below 121-30. Resell strength to 123-00/12, stop/reverse above 123-20. Cover shorts on weakness to 121-16/13. Above 123-20 can retarget 124-14/16.
  • BarCap: daily f/I tech report as well as Global Technical Trends – A moment of optimism – Enjoy – Following months of darkness, it would appear there is light at the end of the tunnel after the price action last week generated a slew of trend ending signals. While we suspect the light will ultimately prove to be an approaching train, for the time being we can enjoy a change in circumstances. At the forefront of a relief rally for risky assets, we would like to see the Shanghai Composite and the S&P500 showing leadership. In turn, this should take the steam out of the recent FI rally, where profit taking alone could trigger a deep correction. FX markets are poised to bounce within range, though here we believe trading could prove quite erratic into the New Year. The exception to this rosy scenario is likely to be commodity markets because the evidence for a sustainable, albeit temporary, recovery is largely absent.
  • UBS: Cautious But Attempting to Develop Recovery While Trading Above 122.185, Breaks of 123.11 the Trigger to 124.205. Current Recommending Positions: Flat. Current YTD All Market Trade Recommendations P&L: +41.78% … ALSO, have included report on ‘bubbles’, worth printing up and reading a couple of times … it’s ONLY couple/three pages!!!


In Press NOW:

Up And Down Wall Street Daily – Tuesday, December 09, 2008 The Trillion-Dollar Rally By RANDALL W. FORSYTH As money gushes from Washington, it’s helping to fuel a nice rally — in a bear market.



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