Today's Tidbits

Comments on FOMC Statement
From Lehman: “Nothing in this report suggests that the Fed is entertaining cutting
rates anytime soon and supports our view that things would have to get significantly worse for the Fed to respond via a rate cut.”
From Goldman Sachs: “…the inflation bias remains and the majority of the FOMC still sees rate hikes as more likely than rate cuts.”
From FTN: “…the liquidity crisis is a sideshow, irrelevant to the health of the economy.”
From Morgan Stanley: “Fed policymakers may be signaling that they believe we are still in the midst of a needed repricing of risk, as opposed to an outright credit crunch. Moreover, the Fed believes – as we do – that the direct economic loss associated with the subprime problem is relatively modest (on the order of $50 to $100 billion). While volatility, delveraging, and a loss of investor confidence are clearly triggering a significant degree of stress in the financial system at present, such a situation is unlikely to persist since the underlying problem is of a manageable size. The shake-out could end badly for some market players, but in the Fed’s view, it might be more dangerous to risk reinflating the credit bubble by hinting that the Bernanke put is alive and well. In our view, the Fed will certainly act at some point should the situation continue to deteriorate, but the first line of defense might well be something other than a cut in the fed funds rate.”

Moody’s Doesn’t Believe Major Investment Banks at Risk Due To Subprime
From Lehman: “…Moody's conf call affirmed ratings of the large investment banks. Moody's said sub-prime and related risk to Big 5 investment banks (Lehman, Merrill, Goldman, Morgan, and Bear) is "modest". Moody's said financial ramifications of subprime fallout will be manageable and Moody's expects to make no rating changes… Moody's said: 1) banks retain sound liquidity profiles; 2) hung bridge loans are an earnings, not funding, issue. 3) potential for a wider contagion exists, but the firms have likely stress tested and accounted for such a contingency; 4) as to comparisons with 1998, each of biggest banks' earnings are stronger and more diversified than in 1998; 5) in terms of liquidity, commercial banks are in even better shape than the investment banks.”

Jumbo Loans Becoming Relatively More Expensive Than Conforming Mortgages
From The Wall Street Journal: “Even borrowers with good credit records who can afford a large down payment are finding rates surprisingly steep if they can't qualify for a loan that can be sold to Fannie or Freddie. Rates on prime jumbo loans have risen so fast that "nobody in their right mind would pull the trigger" and accept one now, unless
they couldn't delay a home purchase…”
From Morgan Stanley: “As highlighted in a front page article in today's WSJ, banks have been jacking up rates for prime jumbo borrowers in recent days. For example, a search of web sites that we conducted yesterday indicated that so-called conforming loans (for amounts of $417,000 or less which can be purchased and securitized by Fannie and Freddie) for 30-year fixed rate mortgages were widely available at rates of 6% to 6.50%. However, while some lenders were still offering rates of 6.50% to 7% for a $1 million 30-year fixed rate loan, a number of very large originators -- such as, Bank of America and E-LOAN -- had hiked their rates to 7.50% to 8%. … well in excess of the traditional spread of 25 bps or so to conforming loans. The problem appears to stem from a breakdown in the securitization pipeline for jumbo mortgages and, if sustained, could do damage to an already quite weak housing market… jumbo mortgages account for about 17% of all mortgage debt outstanding. But, the bulk of these types of loans are not securitized and thus we expect the breakdown in this segment of the market to be relatively short-lived. It seems highly likely that some institutions will step in and start adding these loans to their own books at risk-adjusted spreads that appear very attractive. Indeed, we just rechecked the web sites that we had looked at yesterday and found that some lenders -- such as Bank of America -- had brought their rates back down to levels that appear to be more in line with historic norms.”

Unit Labor Costs Rising Over 4% YoY Indicate End of Business Cycle
From Merrill Lynch: “…unit labor costs are a lagging indicator of the business cycle. In fact, the six-month trend in manufacturing ULC is one of the components that make up the Conference Board's official index of lagging economic indicators. Go back to 4Q2000 and you will see that the y/y trend in ULC accelerated to a 4.3% year-on-year rate. The recession started the very next quarter and the Fed was in major rate-cutting mode. Then go back to 2Q1990, and ULC moved up to 4.0% y/y. Again, recession followed the very next quarter and the Fed was easing policy in a very major way…Lesson: when ULC grips a 4-handle, the historical record tells us that the business cycle is on its last legs and, contrary to popular opinion, the Fed's next move is to cut rates.”

MISC

From Merrill Lynch: “…the CRB Index is down about 11% in the last 12 months, whereas the S&P 500 is up about 12%, and Long Term Treasuries are up about 1-2% (all measured on a price return basis, not total return basis).”

End-of-Day Market Update

Treasuries sold off after the FOMC announcement. The curve flattened as the two year yield settled at 4.55% and the ten year finished at 4.76% (4:45 levels).

Equities rallied after the FOMC announcement and are closing higher on the day. The Dow is +35 and the S&P is +9.

The dollar improved steadily during the day, and the dollar index is closing up +.27 at 80.53.

Oil continued to weaken overnight, but recovered in US hours and is closing up 35 cents.