An Overview
From Handelsbanken: “Reports of an Australian hedge fund limiting redemptions, disappointing earnings news from two more home builders, and rumours of liquidity problems at a couple of broker dealers extended the flight to quality rally in Treasury bonds and sparked large downward adjustments in equities and a slid in the dollar against the yen. The principal result of this increase in the risk premium discounted in the markets was bullish steepening of the Treasury yield curve and a dip in equities below key resistance at 13500 and 1500 on the Dow and the S&P… Continued deterioration in the sub-prime market and the derivative securities bases on these assets has prompted a sharp widening in credit spreads, especially for high yield debt. The long over due rise in the risk premium discounted in the domestic bond markets has also spilled over into equities and into the foreign exchange markets developing a self supporting loop of bad news. The deleveraging of the financial markets carries important implications not only for investors but also for the broader economy. Specifically, the economies ability to weather the consolidation in residential investment experienced over the past two years with only a marginal cut back in the pace of employment reflects the fact that excess liquidity in the economy was simply channelled into unaffected areas of the economy by efficient markets. On the other hand, a narrowing of the credit channel associated with more cautions bank lending decisions and the recent financial market rationing of credit to the most risky borrowers will keep the economy from living up to the relatively upbeat consensus forecast… The dynamics of a new more academic leaning FOMC and a desire on the part of policy makers to distance themselves from the “Greenspan put” implies that an orderly widening of credit spreads is not likely force a rate cut. Only a bank funding cries is likely to force the Fed’s hands before inflation is back well within the Committee’s comfort zone. The ongoing normalization of risk premium will be allowed to run as long as a flow of liquidity though the economy is not unexpected chocked off. Three things that market participant should monitor to determine if financial conditions are spiralling out of control: 1) swap and CDS spreads, 2) the strength of the yen, and 3) the on-the-run/off-the-run spread in the Treasury market. The interest rate swap market and CDS markets are good measures of the perceived risk in the economy and, in particular, the financial sector. A rising yen will reduce the liquidity coming into the economy from overseas and is likely to accelerate the deleveraging of the markets. The on-the-run/off-the-run spread provides a window into the perceived risk among major financial market participants.”
From Deutsche: “…one day does not make a trend and while emotions ran high, feels as though none of the topical concerns are going away soon.”
From JP Morgan: “Agencies have been absolutely hammered w/ 10s 9bp wider on the
day and trading at ~L-9.75bp. Lost in all of the credit meltdown, EM has taken it on the chin, w/ the EMBI index 28bp wider. Interestingly, mtge pass-thrus have cheapened significantly on sprd to USTs and swaps over the past week and a half, but when adjusted for the move in vol they haven't cheapened nearly as much...at this point it looks like mtge sprd positions are largely a vol trade.”
Implied Volatility Rising as Concerned Investors Buy Insurance
From Lehman: “Treasury Vols SCREAMING HIGHER - have gapped/repriced higher multiple times throughout the day.”
From Bloomberg: “The benchmark for U.S. stock volatility surged to the highest in 13 months on concern that bond market turmoil triggered by the subprime loan crisis will lead to bigger price swings. The Chicago Board Options Exchange Volatility Index jumped as much as 29 percent to 23.36, the highest since June 2006. Higher readings in the so-called VIX, derived from prices paid for options on the Standard & Poor's 500 Index, indicate traders expect bigger stock-market swings in the next 30 days. ``When it shoots up that means there's a great deal of uncertainty,'' …The S&P 500's slide today of as much as 3.5 percent, which would be the biggest closing decline since 2003, is a ``pretty good jab to the ribs.'' Spikes in the VIX have coincided with stock-market declines. The index rose the most ever on Feb. 27, climbing 64 percent to 18.31, as the U.S. equity market suffered the worst rout in almost four years[ when the Chinese stock market sold-off]. The VIX has come within 2 points of 50 on only three occasions in the past decade. The first, on Oct. 8, 1998, came as losses mounted from Russia defaulting on its debt. It reached another peak 10 days after the terrorist attacks in September 2001, and again surged in July 2002 as fallout from Enron Corp.'s collapse drove down shares of its main lenders and former rivals. …``People are panicking,…Volatility usually rises when you have big moves in the market and moves down tend to be more violent than moves up.'' When the S&P 500 reached a record high on July 19, the VIX finished the day at 15.23. While the S&P 500 has gained four straight years, the VIX has fallen every year since 2002. In November, the index fell below 10 for the first time since 1994 and in December fell to a 13-year low of 9.39. The number of shares changing hands also increased, another sign of volatility. Some 2.28 billion shares traded on the New York Stock Exchange as of 3:27 p.m., 88 percent more than the same time a week ago. In the U.K., the London Stock Exchange said 798,800 trades were made today, the most ever at the bourse.”
From RBSGC: “…in this environment of credit panic and illiquidity, you have the few actually trying (or succeeding) to get out or buy protection having an exaggerated influence and confusing already opaque price discovery. Where are we on all this? After such a massive move we are more interested in where yields stall than if they can continue and therein lies the rub. It's largely about credit spreads and we see no recovery, let alone relief, in sight and we deem this an ongoing event and, most certainly, credit risk premium is a structural, not a temporary, restoration. Besides, as we look at market positions and harp on neutral exposure vis a vis duration, we know that the overweight is in credit. What makes this liquidity/credit crunch different from others is that the risk is embedded into so many different funds, investments, and not so concentrated as to reveal quickly if traumatically an Orange County or LTCM. The revelation will take longer, we suspect, and so support Treasuries for that period and then some.”
Increasing Worries About the Economy, But Fed Not Likely to Rush Bailout
From Merrill Lynch: “Today's durable goods orders data only looked good next to the home sales report. While we are going to very likely see a 3%+ GDP growth for 2Q tomorrow, the number seems inconsequential for a forward-looking financial market. Stocks and bonds had priced in the second quarter inventory-led bounce a while ago. Not only do we enter the third quarter with no momentum on the consumer spending side, but after today's durables report, we have no growth being built into capex either. At the same time, housing remains in a full-blown recession and the spike in the durable goods I/S ratio in June to 1.48x from 1.46x in May, should cloud the 3Q production outlook. We have taken our 3Q real GDP growth forecast down to 1.7% (from 1.9%) and believe risks are squarely to the downside…The economy is clearly softening and the weakness from housing is clearly spreading out. The Fed is probably going to have to at least shift to a de facto neutral posture at the coming FOMC meeting on August 7th, especially with the sharp widening in credit spreads, the downturn in the equity market and the general pullback in risk appetite and lending further clouding what's already been a subdued economic outlook.”
From Lehman: “Fears of subprime mortgage contagion and a deeper housing recession continue to rattle financial markets. Housing data were decidedly weak, with larger-than-expected declines in existing and new home sales. We see downside risks to our downbeat forecast:”
From Dow Jones: “Home builders set off new alarm bells on the distressed U.S. housing market, with D.R. Horton Inc. and Beazer Homes USA Inc. posting losses, while WCI Communities Inc. admitted it can’t find a buyer for the ailing company. Those weren’t the only signs of stress: Beazer got a new line of credit that’s half the size of its previous one, signaling a greater tightening of money available to the industry. All of this indicates the worst housing slump in years – one that has scared buyers and lenders as inventories and foreclosures mount - won’t end any time soon. And it’s at the root of
the concerns slamming the stock market.”
From Morgan Stanley: “The Fed will not cut rates until this repricing of risk becomes a systemic problem that impacts the market's access to liquidity and leverage. In other
words, a good old fashioned liquidity crunch. Furthermore, Bernanke is not going
to cut rates and reward investors who bought products with very little risk
premium. There is no Bernanke put, at least not yet.”
Chinese Economists Recommend China Discontinue Purchasing US Mortgages
From The Asia Times: “While China is eager to invest a portion of its US$1.33 trillion foreign-exchange reserve overseas, it is unlikely to take a chance on buying additional US mortgage-backed securities (MBS) as they are now considered too risky, Chinese economists said… Yi Xianrong, a senior economist and finance professor with the Chinese Academy of Social Sciences, a central government think-tank, attributed the previous surge of mortgage-backed securities bought by Chinese companies to inexperience in conducting risk assessments and their miscalculation of the US property market. "After seeing how the property prices in China kept soaring, these Chinese companies never thought of the US property market as having problems and they bought a lot of mortgage-backed securities, particularly in the past two years," Yi told Asia Times Online. "Apart from underestimating the level of risk, the better returns offered by MBS over US Treasury bonds also made the Chinese investors unable to judge the high risk of the US mortgage market."… Yi said some bond ratings agencies that advise investors, including Chinese, also purposely played down the MBS risk. "Some ratings agencies slapped investment-grade ratings on mortgage-backed bonds that they knew they were risky," he charged. Bond-rating agencies this month finally downgraded about $12 billion worth of subprime US mortgage securities, Yi said. Economist Shi Weigan echoed Yi's comments. "With a possible burst in the housing bubble in the US, it's not the right choice for Beijing to spend foreign-exchange reserve funds on the US mortgage-backed securities," Shi said.”
Federal Government Expected to Go On a Hiring Spree as Baby-Boomers Retire
From CNN: “193,000 jobs will open up between now and 2009, according to the report, which is based on a detailed survey of 34 agencies representing about 99% of the federal workforce. Most of the hiring is due to two big factors - the aging of the workforce and the war on terror. Nearly one-third of the government's 1.6 million full-time employees are expected to retire over the next few years, and they all need to be replaced. At the same time, more than 83,000 jobs are being added at agencies charged with protecting the United States, including 47,897 jobs at the Department of Homeland Security and 35,505 at the Department of Defense…About 86% of federal jobs are located outside the D.C. area, and more than 50,000 are overseas. Cities with the greatest concentration of federal employees include Norfolk-Virginia Beach, Baltimore, Philadelphia, Atlanta, San Diego, New York City, Chicago, Salt Lake City, Oklahoma City, and Los Angeles. Uncle Sam is willing to be generous to the right candidates, offering "recruitment bonuses, retention incentives, [and] relocation incentives," the report says. Some positions will pay new hires' graduate-school tuition, and many offer student-loan repayments - up to $10,000 per year for a total of $60,000 - in exchange for at least three years of government service.”
MISC
From Bloomberg: “The risk of owning bonds of Wall Street firms soared as concerns escalated that investment banks will be hurt by losses from subprime mortgages and corporate debt… confidence has been sapped after hedge funds run by at least seven firms reported or forecast losses after the rout in securities backed by subprime mortgages, some of which have lost at least half their value as defaults among the riskiest borrowers rise. Slumping demand for high-yield, high-risk debt forced almost 40 companies to rework or abandon bond offerings in the past three weeks.”
From Dow Jones: “Risk-averse investors have been increasingly balking at junk bond offerings meant to replace bridge loans, which are temporary leveraged buyout financing extended by the banks. This has fueled worries that Wall Street banks will find themselves on the hook for risky, longer-term financing.”
From Dow Jones: “The dollar’s month-long declines against the yen took a decisive turn for the worse Thursday as volatility in global markets had investors scrambling to unwind the popular yen centered carry trade strategy, sending the Japanese currency soaring against its major rivals. More rough weather in U.S. stocks and declines in U.S.
Treasury yields amid higher oil prices and weaker-than-expected economic reports pushed the dollar to as low as Y118.86 during the New York session. That’s its lowest level since April…”
From Citi: “Consensus forecasters have habitually overestimed advance US GDP readings in recent years. Actual outcomes have come in beneath consensus 10 of the last 12 times.”
From Dow Jones: “Wells Fargo & Co.’s, the nation’s second-largest home lender, said it will stop making subprime mortgages through brokers amid escalating late payments and defaults that have been plaguing the entire mortgage industry. The closing of the subprime “wholesale lending” business, which accounted for 1.6% of Wells Fargo’s total home mortgages of $397.6 billion last year, reflects “the turmoil” in the market for risky mortgages, said Michael Lepore, executive vice president for institutional lending at the San Francisco bank. The business’s returns, he added, “have been consistently
diminishing since the first quarter.” Wells Fargo will continue to offer subprime loans - or those to less-than-creditworthy borrowers - “in channels where the company has direct relationships with consumers,” the bank said.”
From USA Today: “States are taking the lead in trying to combat what the Federal Trade Commission reports is the biggest concern to American consumers — identity theft — by limiting the ways thieves can collect Social Security numbers and other personal data. Since January, at least 35 states have considered bills that would further restrict the use of Social Security numbers to identify individuals, some even calling to remove the number from documents such as paychecks and police reports, according to the National Conference of State Legislatures.”
From Dow Jones: “Ford Motor Co. surprised Wall Street in announcing its first
profit in two years…:
From Dow Jones: “The Chicago Fed Midwest Manufacturing Index - a measure of manufacturing output in Illinois, Indiana, Iowa, Michigan and Wisconsin - remained unchanged in June…”
From RBSGC: “…yesterday saw the mortgage servicer remittance reports come out and show further payment slowdowns on subprime -- no surprise, perhaps, but no relief either. And today has rating agencies downgrading more debt (S&P doing this to some more ABS).”
End-of-Day Market Update
Treasury prices soared on panic flight to quality buying initiated by speculative buying in the morning and joined by real money buying in the afternoon. The 2y Treasury yield has fallen 15.5bp to 4.56%, while the 10y yield has fallen 12bp to 4.78%, causing the curve to steepen.
Equities hit the skids on high volume selling. The Dow is closing down 312 at 13,474. The S&P 500 dropped 36 to 1489, and Nasdaq fell 49 to 2599.
The dollar gave back some of yesterday’s gains, which some are attributing to central bank buying yesterday. The dollar index slid .20 to 80.45. Gold fell a substantial $12, as investors sought liquid investments to sell for cash gains to cover margin calls.
NY Oil futures fell 93 cents after hitting new highs for the year earlier in the trading session. The high oil price is being used to explain some of the weakness in equities today.
From Handelsbanken: “Reports of an Australian hedge fund limiting redemptions, disappointing earnings news from two more home builders, and rumours of liquidity problems at a couple of broker dealers extended the flight to quality rally in Treasury bonds and sparked large downward adjustments in equities and a slid in the dollar against the yen. The principal result of this increase in the risk premium discounted in the markets was bullish steepening of the Treasury yield curve and a dip in equities below key resistance at 13500 and 1500 on the Dow and the S&P… Continued deterioration in the sub-prime market and the derivative securities bases on these assets has prompted a sharp widening in credit spreads, especially for high yield debt. The long over due rise in the risk premium discounted in the domestic bond markets has also spilled over into equities and into the foreign exchange markets developing a self supporting loop of bad news. The deleveraging of the financial markets carries important implications not only for investors but also for the broader economy. Specifically, the economies ability to weather the consolidation in residential investment experienced over the past two years with only a marginal cut back in the pace of employment reflects the fact that excess liquidity in the economy was simply channelled into unaffected areas of the economy by efficient markets. On the other hand, a narrowing of the credit channel associated with more cautions bank lending decisions and the recent financial market rationing of credit to the most risky borrowers will keep the economy from living up to the relatively upbeat consensus forecast… The dynamics of a new more academic leaning FOMC and a desire on the part of policy makers to distance themselves from the “Greenspan put” implies that an orderly widening of credit spreads is not likely force a rate cut. Only a bank funding cries is likely to force the Fed’s hands before inflation is back well within the Committee’s comfort zone. The ongoing normalization of risk premium will be allowed to run as long as a flow of liquidity though the economy is not unexpected chocked off. Three things that market participant should monitor to determine if financial conditions are spiralling out of control: 1) swap and CDS spreads, 2) the strength of the yen, and 3) the on-the-run/off-the-run spread in the Treasury market. The interest rate swap market and CDS markets are good measures of the perceived risk in the economy and, in particular, the financial sector. A rising yen will reduce the liquidity coming into the economy from overseas and is likely to accelerate the deleveraging of the markets. The on-the-run/off-the-run spread provides a window into the perceived risk among major financial market participants.”
From Deutsche: “…one day does not make a trend and while emotions ran high, feels as though none of the topical concerns are going away soon.”
From JP Morgan: “Agencies have been absolutely hammered w/ 10s 9bp wider on the
day and trading at ~L-9.75bp. Lost in all of the credit meltdown, EM has taken it on the chin, w/ the EMBI index 28bp wider. Interestingly, mtge pass-thrus have cheapened significantly on sprd to USTs and swaps over the past week and a half, but when adjusted for the move in vol they haven't cheapened nearly as much...at this point it looks like mtge sprd positions are largely a vol trade.”
Implied Volatility Rising as Concerned Investors Buy Insurance
From Lehman: “Treasury Vols SCREAMING HIGHER - have gapped/repriced higher multiple times throughout the day.”
From Bloomberg: “The benchmark for U.S. stock volatility surged to the highest in 13 months on concern that bond market turmoil triggered by the subprime loan crisis will lead to bigger price swings. The Chicago Board Options Exchange Volatility Index jumped as much as 29 percent to 23.36, the highest since June 2006. Higher readings in the so-called VIX, derived from prices paid for options on the Standard & Poor's 500 Index, indicate traders expect bigger stock-market swings in the next 30 days. ``When it shoots up that means there's a great deal of uncertainty,'' …The S&P 500's slide today of as much as 3.5 percent, which would be the biggest closing decline since 2003, is a ``pretty good jab to the ribs.'' Spikes in the VIX have coincided with stock-market declines. The index rose the most ever on Feb. 27, climbing 64 percent to 18.31, as the U.S. equity market suffered the worst rout in almost four years[ when the Chinese stock market sold-off]. The VIX has come within 2 points of 50 on only three occasions in the past decade. The first, on Oct. 8, 1998, came as losses mounted from Russia defaulting on its debt. It reached another peak 10 days after the terrorist attacks in September 2001, and again surged in July 2002 as fallout from Enron Corp.'s collapse drove down shares of its main lenders and former rivals. …``People are panicking,…Volatility usually rises when you have big moves in the market and moves down tend to be more violent than moves up.'' When the S&P 500 reached a record high on July 19, the VIX finished the day at 15.23. While the S&P 500 has gained four straight years, the VIX has fallen every year since 2002. In November, the index fell below 10 for the first time since 1994 and in December fell to a 13-year low of 9.39. The number of shares changing hands also increased, another sign of volatility. Some 2.28 billion shares traded on the New York Stock Exchange as of 3:27 p.m., 88 percent more than the same time a week ago. In the U.K., the London Stock Exchange said 798,800 trades were made today, the most ever at the bourse.”
From RBSGC: “…in this environment of credit panic and illiquidity, you have the few actually trying (or succeeding) to get out or buy protection having an exaggerated influence and confusing already opaque price discovery. Where are we on all this? After such a massive move we are more interested in where yields stall than if they can continue and therein lies the rub. It's largely about credit spreads and we see no recovery, let alone relief, in sight and we deem this an ongoing event and, most certainly, credit risk premium is a structural, not a temporary, restoration. Besides, as we look at market positions and harp on neutral exposure vis a vis duration, we know that the overweight is in credit. What makes this liquidity/credit crunch different from others is that the risk is embedded into so many different funds, investments, and not so concentrated as to reveal quickly if traumatically an Orange County or LTCM. The revelation will take longer, we suspect, and so support Treasuries for that period and then some.”
Increasing Worries About the Economy, But Fed Not Likely to Rush Bailout
From Merrill Lynch: “Today's durable goods orders data only looked good next to the home sales report. While we are going to very likely see a 3%+ GDP growth for 2Q tomorrow, the number seems inconsequential for a forward-looking financial market. Stocks and bonds had priced in the second quarter inventory-led bounce a while ago. Not only do we enter the third quarter with no momentum on the consumer spending side, but after today's durables report, we have no growth being built into capex either. At the same time, housing remains in a full-blown recession and the spike in the durable goods I/S ratio in June to 1.48x from 1.46x in May, should cloud the 3Q production outlook. We have taken our 3Q real GDP growth forecast down to 1.7% (from 1.9%) and believe risks are squarely to the downside…The economy is clearly softening and the weakness from housing is clearly spreading out. The Fed is probably going to have to at least shift to a de facto neutral posture at the coming FOMC meeting on August 7th, especially with the sharp widening in credit spreads, the downturn in the equity market and the general pullback in risk appetite and lending further clouding what's already been a subdued economic outlook.”
From Lehman: “Fears of subprime mortgage contagion and a deeper housing recession continue to rattle financial markets. Housing data were decidedly weak, with larger-than-expected declines in existing and new home sales. We see downside risks to our downbeat forecast:”
From Dow Jones: “Home builders set off new alarm bells on the distressed U.S. housing market, with D.R. Horton Inc. and Beazer Homes USA Inc. posting losses, while WCI Communities Inc. admitted it can’t find a buyer for the ailing company. Those weren’t the only signs of stress: Beazer got a new line of credit that’s half the size of its previous one, signaling a greater tightening of money available to the industry. All of this indicates the worst housing slump in years – one that has scared buyers and lenders as inventories and foreclosures mount - won’t end any time soon. And it’s at the root of
the concerns slamming the stock market.”
From Morgan Stanley: “The Fed will not cut rates until this repricing of risk becomes a systemic problem that impacts the market's access to liquidity and leverage. In other
words, a good old fashioned liquidity crunch. Furthermore, Bernanke is not going
to cut rates and reward investors who bought products with very little risk
premium. There is no Bernanke put, at least not yet.”
Chinese Economists Recommend China Discontinue Purchasing US Mortgages
From The Asia Times: “While China is eager to invest a portion of its US$1.33 trillion foreign-exchange reserve overseas, it is unlikely to take a chance on buying additional US mortgage-backed securities (MBS) as they are now considered too risky, Chinese economists said… Yi Xianrong, a senior economist and finance professor with the Chinese Academy of Social Sciences, a central government think-tank, attributed the previous surge of mortgage-backed securities bought by Chinese companies to inexperience in conducting risk assessments and their miscalculation of the US property market. "After seeing how the property prices in China kept soaring, these Chinese companies never thought of the US property market as having problems and they bought a lot of mortgage-backed securities, particularly in the past two years," Yi told Asia Times Online. "Apart from underestimating the level of risk, the better returns offered by MBS over US Treasury bonds also made the Chinese investors unable to judge the high risk of the US mortgage market."… Yi said some bond ratings agencies that advise investors, including Chinese, also purposely played down the MBS risk. "Some ratings agencies slapped investment-grade ratings on mortgage-backed bonds that they knew they were risky," he charged. Bond-rating agencies this month finally downgraded about $12 billion worth of subprime US mortgage securities, Yi said. Economist Shi Weigan echoed Yi's comments. "With a possible burst in the housing bubble in the US, it's not the right choice for Beijing to spend foreign-exchange reserve funds on the US mortgage-backed securities," Shi said.”
Federal Government Expected to Go On a Hiring Spree as Baby-Boomers Retire
From CNN: “193,000 jobs will open up between now and 2009, according to the report, which is based on a detailed survey of 34 agencies representing about 99% of the federal workforce. Most of the hiring is due to two big factors - the aging of the workforce and the war on terror. Nearly one-third of the government's 1.6 million full-time employees are expected to retire over the next few years, and they all need to be replaced. At the same time, more than 83,000 jobs are being added at agencies charged with protecting the United States, including 47,897 jobs at the Department of Homeland Security and 35,505 at the Department of Defense…About 86% of federal jobs are located outside the D.C. area, and more than 50,000 are overseas. Cities with the greatest concentration of federal employees include Norfolk-Virginia Beach, Baltimore, Philadelphia, Atlanta, San Diego, New York City, Chicago, Salt Lake City, Oklahoma City, and Los Angeles. Uncle Sam is willing to be generous to the right candidates, offering "recruitment bonuses, retention incentives, [and] relocation incentives," the report says. Some positions will pay new hires' graduate-school tuition, and many offer student-loan repayments - up to $10,000 per year for a total of $60,000 - in exchange for at least three years of government service.”
MISC
From Bloomberg: “The risk of owning bonds of Wall Street firms soared as concerns escalated that investment banks will be hurt by losses from subprime mortgages and corporate debt… confidence has been sapped after hedge funds run by at least seven firms reported or forecast losses after the rout in securities backed by subprime mortgages, some of which have lost at least half their value as defaults among the riskiest borrowers rise. Slumping demand for high-yield, high-risk debt forced almost 40 companies to rework or abandon bond offerings in the past three weeks.”
From Dow Jones: “Risk-averse investors have been increasingly balking at junk bond offerings meant to replace bridge loans, which are temporary leveraged buyout financing extended by the banks. This has fueled worries that Wall Street banks will find themselves on the hook for risky, longer-term financing.”
From Dow Jones: “The dollar’s month-long declines against the yen took a decisive turn for the worse Thursday as volatility in global markets had investors scrambling to unwind the popular yen centered carry trade strategy, sending the Japanese currency soaring against its major rivals. More rough weather in U.S. stocks and declines in U.S.
Treasury yields amid higher oil prices and weaker-than-expected economic reports pushed the dollar to as low as Y118.86 during the New York session. That’s its lowest level since April…”
From Citi: “Consensus forecasters have habitually overestimed advance US GDP readings in recent years. Actual outcomes have come in beneath consensus 10 of the last 12 times.”
From Dow Jones: “Wells Fargo & Co.’s, the nation’s second-largest home lender, said it will stop making subprime mortgages through brokers amid escalating late payments and defaults that have been plaguing the entire mortgage industry. The closing of the subprime “wholesale lending” business, which accounted for 1.6% of Wells Fargo’s total home mortgages of $397.6 billion last year, reflects “the turmoil” in the market for risky mortgages, said Michael Lepore, executive vice president for institutional lending at the San Francisco bank. The business’s returns, he added, “have been consistently
diminishing since the first quarter.” Wells Fargo will continue to offer subprime loans - or those to less-than-creditworthy borrowers - “in channels where the company has direct relationships with consumers,” the bank said.”
From USA Today: “States are taking the lead in trying to combat what the Federal Trade Commission reports is the biggest concern to American consumers — identity theft — by limiting the ways thieves can collect Social Security numbers and other personal data. Since January, at least 35 states have considered bills that would further restrict the use of Social Security numbers to identify individuals, some even calling to remove the number from documents such as paychecks and police reports, according to the National Conference of State Legislatures.”
From Dow Jones: “Ford Motor Co. surprised Wall Street in announcing its first
profit in two years…:
From Dow Jones: “The Chicago Fed Midwest Manufacturing Index - a measure of manufacturing output in Illinois, Indiana, Iowa, Michigan and Wisconsin - remained unchanged in June…”
From RBSGC: “…yesterday saw the mortgage servicer remittance reports come out and show further payment slowdowns on subprime -- no surprise, perhaps, but no relief either. And today has rating agencies downgrading more debt (S&P doing this to some more ABS).”
End-of-Day Market Update
Treasury prices soared on panic flight to quality buying initiated by speculative buying in the morning and joined by real money buying in the afternoon. The 2y Treasury yield has fallen 15.5bp to 4.56%, while the 10y yield has fallen 12bp to 4.78%, causing the curve to steepen.
Equities hit the skids on high volume selling. The Dow is closing down 312 at 13,474. The S&P 500 dropped 36 to 1489, and Nasdaq fell 49 to 2599.
The dollar gave back some of yesterday’s gains, which some are attributing to central bank buying yesterday. The dollar index slid .20 to 80.45. Gold fell a substantial $12, as investors sought liquid investments to sell for cash gains to cover margin calls.
NY Oil futures fell 93 cents after hitting new highs for the year earlier in the trading session. The high oil price is being used to explain some of the weakness in equities today.
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