From JP Morgan: “The Fed delivered 50bp as we expected, but the statement looks more dovish than we anticipated. Even after 125bp in easing in just over one week the FOMC notes: "Financial markets remain under considerable stress, and credit has tightened further for some businesses and households," and "downside risks to growth remain." Finally, as we expected, Fisher dissented on this action and voted for no ease. Overall, even though the Fed notes that this ease combined with the cumulative easing prior to this should balance growth risks, they are still worried about the downside risks to growth.”
From UBS: “Overall, the tone suggests a willingness to continue easing if growth data continue to weaken—particularly if a recession has now begun, as we believe. We still forecast 25 bp rate cuts at each of the next three FOMC meetings (March 18, April 29/30, and June 24/25), with the funds rate down to 2.25% by mid-year. After that, we expect policy to go on hold as the economy starts to pull out of recession in the second half of the year.”
From Market Watch: “Five months ago, U.S. rates were the fourth-highest in the developed world and now they are the third-lowest… meaning the dollar is "yielding only 25 basis points more than Switzerland which means that once the Fed lowers rates again in March, and we expect them to, the U.S. dollar will be tied with the [Swiss] franc as second-lowest yielding currency in the developed world," above only Japan's rock-bottom 0.5%.”
From Bloomberg: “Banks may have to post additional writedowns of as much as $70 billion if credit ratings for bond insurers are downgraded, according to Oppenheimer & Co.'s Meredith Whitney. Citigroup Inc., Merrill Lynch & Co. and UBS AG hold 45 percent of the ``entire market risk,'' Whitney wrote in a note to clients dated yesterday. ``The fate of the monoline insurers is of paramount importance to financial stocks,'' Whitney wrote. ``When it becomes clear, as we expect it will, that more charges are on the horizon, we believe the market will take another turn for the worse.'' MBIA Inc., the largest bond insurer, and Ambac Financial Group Inc., the second-biggest so-called monoline insurer, are on review for possible downgrades by Moody's Investors Service and Standard & Poor's.”
From Reuters: “Recession fears are weighing heavily on U.S. corporate finance chiefs, pushing optimism down to a fresh three-year low, according to a survey on Wednesday. The quarterly survey from Financial Executives International (FEI) and Baruch College showed its optimism index sank 6.6 points, as nearly every chief financial officer polled said they were as concerned or more concerned about recession than they were in the previous quarter… Of the 361 CFOs polled, 73 percent said they were more concerned about a recession in the United States in the next 12 months. Economic growth ranked as their companies' top economic worry, followed by concerns about consumer spending, inflation and oil costs. Weakness in the dollar was also a worry, with nearly 46 percent of CFOs saying the decline would have a negative impact on their business.”
From Goldman Sachs: “Following this morning's ADP report, we are changing our estimate for January's payrolls to +125,000 and the unemployment rate to 4.9%. An outcome along these lines, while firmer than we first thought, would not alter our view that the labor market is in a longer-term trend of deterioration symptomatic of recession.”
From Deutsche Bank: “Housing affordability has improved fairly dramatically given the drop in conventional mortgage rates and declines in home prices relative to income.”
From Reuters: “Applications for home mortgages jumped to their highest level in nearly four years as low interest rates led more homeowners to seek refinancing… The MBA seasonally adjusted index of refinancing applications soared 22.1 percent to … the highest since July 2003. But the index measuring applications for home purchases declined 17.7 percent …Refinancing activity rose to 73 percent of all applications, up from 66 percent in the previous week…Fixed 30-year mortgage rates rose 0.11 percentage point last week to 5.6 percent, the MBA said. The previous week's rate was the lowest since late June 2005.”
From Realtytrac: “…more than 1 percent of all U.S. households were in some stage of foreclosure during the year, up from 0.58 percent in 2006.”
From Bloomberg: “UBS AG posted the biggest loss ever by a bank after raising fourth-quarter writedowns on securities infected by U.S. subprime mortgages to $14 billion.”
From The Financial Times: “The risk of bankruptcies among the big US homebuilders has risen sharply as the economy has weakened and an end to the housing slump remains distant. Credit default swaps on homebuilders, which act as insurance on corporate debt, suggest some of the biggest are at risk of failing to keep up debt payments… the most exposed are Standard Pacific, Hovnanian, Beazer and Meritage. All are among the top 15 publicly listed US homebuilders…. Homebuilders have been frantically trying to sell off properties and raise cash to remain liquid, offering heavy discounts and making large losses.”
From Bloomberg: “Merrill Lynch & Co., the world's largest brokerage, will cut back on packaging home loans and consumer debts into securities after the collapse of the subprime mortgage market eroded demand for the products. ``Opportunities in many areas'' of structured finance and so-called collateralized debt obligations ``will be minimal for the foreseeable future and our activities will be reduced accordingly,'' New York-based Merrill said in an e-mailed statement. The firm will continue packaging corporate loans and derivatives into securities… ``We are not going to be in the CDO and structured-credit types of businesses,'' which generated 15 percent of the firm's fixed-income revenue…”
From The Street.com: “The FBI has launched a criminal probe of 14 companies as part of a larger investigation in the wake of the subprime mortgage and resultant credit crisis, according to The Wall Street Journal. Citing the head of the FBI's economic crimes bureau in Washington, D.C., the Journal said the probe would look at possible accounting fraud, loan securitization and insider trading. The investigation will look at all stages of the securitization process, from companies that bundled loans to those that ultimately held them, the paper said. The FBI declined to identify any of the 14 companies, the Journal said.
From Bloomberg: “Goldman Sachs Group and Morgan Stanley, the two biggest securities firms, said they were responding to requests from regulators for information on subprime-mortgage securities.”
From Morgan Stanley: “Junk bond issuance is evaporating: through yesterday $850mm in high-yield debt had been issued for the month compared with $8.5bn for all of January last year.”
From The Financial Times: “An influential US official on Tuesday hit out at his country’s “addiction to debt”, warning that the federal budget was on an “imprudent and unsustainable path” due to ballooning healthcare costs… Moody’s Investor Services, the credit rating agency, last month warned that a lack of reform to Medicare – the government-administered healthcare plan – and the social security system threatened the US’s long-term fiscal outlook, and, thus, its AAA bond rating. Mr Walker said the root of the problem was the government’s continuing pledge to fund the gap between promised and funded social security and Medicare benefits and other commitments. In a report released to coincide with the hearing, the Government Accountability Office – which Mr Walker heads – put the total US public debt at $9,000bn …including the debt held by social security funds. That was almost double the $5,000bn headline figure for public debt, which excludes such funds’ debt. Including the gap between future promised and funded social security and Medicare benefits, the GAO put the total debt burden in present dollar value at $53,000bn – about four times the size of the US economy.”
From Market News: “Chinese consumer confidence inched down in January for the fourth month in a row, as a deterioration in the long-term outlook for business conditions more than offset a modest improvement in current conditions…Growth in consumption accounted for the largest share of GDP growth in 2007, the first time consumption has been in this position since 2001…”
From Bloomberg: “The Baltic Dry Index, a measure of shipping costs for commodities, surged 5.1 percent in London, its biggest gain in almost two years.”
From The Financial Times: “Andrew Liveris, chairman of Dow Chemical told the Davos meeting that: “Water is ... the oil of the 21st century.””
End-of-Day Market Update
From UBS: “Treasury yields meandered upwards again prior to the Fed decision. After the rate cut announcement, front end yields plunged while long end rates spiked upwards, and the 2s30s curve steepened roughly 10bps by 3pm… Agencies were very weak, trading 1-1.5bps cheaper to Libor most of the day before tightening marginally by the 3pm close… Mortgages traded tighter to swaps throughout the day…”
From Bloomberg: “U.S. stocks fell for the first time this week after concern that bond insurers guaranteeing $2.4 trillion in securities will lose their AAA credit ratings erased
a rally spurred by the Federal Reserve's interest-rate cut. Ambac Financial Group Inc. and MBIA Inc., the largest U.S. bond guarantors, led declines after Fitch Ratings revoked its top ranking on Financial Guaranty Insurance Co. The Standard & Poor's 500 Index had climbed as much as 1.7 percent after the Fed lowered its benchmark lending rate to 3 percent from 3.5 percent to help the economy avert a recession. `The Fed's trying to do what it can, and it looked like it excited people for a little while,'' … ``But things keep coming back in to show things are definitely weakening.'' The S&P 500 retreated 6.49, or 0.5 percent, to 1,355.81 and is down 7.7 percent this year. The Dow Jones Industrial Average lost 37.47, or 0.3 percent, to 12,442.83. The Nasdaq Composite Index decreased 9.06, or 0.4 percent, to 2,349. About two stocks fell for every one that rose on the New York Stock Exchange.”
From Market Watch: “The dollar weakened against its major counterparts Wednesday, after the U.S. Federal Reserve decided to cut interest rates by a half-point and signaled that more cuts could lie ahead.”
From AP: “Gold jumped in aftermarket trading Wednesday after the Federal Reserve slashed its key interest rate—an inflationary move that boosted the metal's appeal as a stable investment.”
From Market Watch: “Crude-oil futures rose for a fifth day… However, crude's rise was limited by a government report that showed U.S. oil inventories have risen more than expected.”
Three month T-Bill yield fell 13 bp to 2.15%.
Two year T-Note yield fell 9 bp to 2.20%
Ten year T-Note yield unchanged at 3.68%
Dow fell 37.5 to 12,443
S&P 500 fell 6.5 to 1356
Dollar index fell .47 to 75.08
Yen at 106.45 per dollar
Euro at 1.487
Gold rose $5.50 to $929
Oil rose .32 to $91.96
*All prices as of 4:40pm
From UBS: “Overall, the tone suggests a willingness to continue easing if growth data continue to weaken—particularly if a recession has now begun, as we believe. We still forecast 25 bp rate cuts at each of the next three FOMC meetings (March 18, April 29/30, and June 24/25), with the funds rate down to 2.25% by mid-year. After that, we expect policy to go on hold as the economy starts to pull out of recession in the second half of the year.”
From Market Watch: “Five months ago, U.S. rates were the fourth-highest in the developed world and now they are the third-lowest… meaning the dollar is "yielding only 25 basis points more than Switzerland which means that once the Fed lowers rates again in March, and we expect them to, the U.S. dollar will be tied with the [Swiss] franc as second-lowest yielding currency in the developed world," above only Japan's rock-bottom 0.5%.”
From Bloomberg: “Banks may have to post additional writedowns of as much as $70 billion if credit ratings for bond insurers are downgraded, according to Oppenheimer & Co.'s Meredith Whitney. Citigroup Inc., Merrill Lynch & Co. and UBS AG hold 45 percent of the ``entire market risk,'' Whitney wrote in a note to clients dated yesterday. ``The fate of the monoline insurers is of paramount importance to financial stocks,'' Whitney wrote. ``When it becomes clear, as we expect it will, that more charges are on the horizon, we believe the market will take another turn for the worse.'' MBIA Inc., the largest bond insurer, and Ambac Financial Group Inc., the second-biggest so-called monoline insurer, are on review for possible downgrades by Moody's Investors Service and Standard & Poor's.”
From Reuters: “Recession fears are weighing heavily on U.S. corporate finance chiefs, pushing optimism down to a fresh three-year low, according to a survey on Wednesday. The quarterly survey from Financial Executives International (FEI) and Baruch College showed its optimism index sank 6.6 points, as nearly every chief financial officer polled said they were as concerned or more concerned about recession than they were in the previous quarter… Of the 361 CFOs polled, 73 percent said they were more concerned about a recession in the United States in the next 12 months. Economic growth ranked as their companies' top economic worry, followed by concerns about consumer spending, inflation and oil costs. Weakness in the dollar was also a worry, with nearly 46 percent of CFOs saying the decline would have a negative impact on their business.”
From Goldman Sachs: “Following this morning's ADP report, we are changing our estimate for January's payrolls to +125,000 and the unemployment rate to 4.9%. An outcome along these lines, while firmer than we first thought, would not alter our view that the labor market is in a longer-term trend of deterioration symptomatic of recession.”
From Deutsche Bank: “Housing affordability has improved fairly dramatically given the drop in conventional mortgage rates and declines in home prices relative to income.”
From Reuters: “Applications for home mortgages jumped to their highest level in nearly four years as low interest rates led more homeowners to seek refinancing… The MBA seasonally adjusted index of refinancing applications soared 22.1 percent to … the highest since July 2003. But the index measuring applications for home purchases declined 17.7 percent …Refinancing activity rose to 73 percent of all applications, up from 66 percent in the previous week…Fixed 30-year mortgage rates rose 0.11 percentage point last week to 5.6 percent, the MBA said. The previous week's rate was the lowest since late June 2005.”
From Realtytrac: “…more than 1 percent of all U.S. households were in some stage of foreclosure during the year, up from 0.58 percent in 2006.”
From Bloomberg: “UBS AG posted the biggest loss ever by a bank after raising fourth-quarter writedowns on securities infected by U.S. subprime mortgages to $14 billion.”
From The Financial Times: “The risk of bankruptcies among the big US homebuilders has risen sharply as the economy has weakened and an end to the housing slump remains distant. Credit default swaps on homebuilders, which act as insurance on corporate debt, suggest some of the biggest are at risk of failing to keep up debt payments… the most exposed are Standard Pacific, Hovnanian, Beazer and Meritage. All are among the top 15 publicly listed US homebuilders…. Homebuilders have been frantically trying to sell off properties and raise cash to remain liquid, offering heavy discounts and making large losses.”
From Bloomberg: “Merrill Lynch & Co., the world's largest brokerage, will cut back on packaging home loans and consumer debts into securities after the collapse of the subprime mortgage market eroded demand for the products. ``Opportunities in many areas'' of structured finance and so-called collateralized debt obligations ``will be minimal for the foreseeable future and our activities will be reduced accordingly,'' New York-based Merrill said in an e-mailed statement. The firm will continue packaging corporate loans and derivatives into securities… ``We are not going to be in the CDO and structured-credit types of businesses,'' which generated 15 percent of the firm's fixed-income revenue…”
From The Street.com: “The FBI has launched a criminal probe of 14 companies as part of a larger investigation in the wake of the subprime mortgage and resultant credit crisis, according to The Wall Street Journal. Citing the head of the FBI's economic crimes bureau in Washington, D.C., the Journal said the probe would look at possible accounting fraud, loan securitization and insider trading. The investigation will look at all stages of the securitization process, from companies that bundled loans to those that ultimately held them, the paper said. The FBI declined to identify any of the 14 companies, the Journal said.
From Bloomberg: “Goldman Sachs Group and Morgan Stanley, the two biggest securities firms, said they were responding to requests from regulators for information on subprime-mortgage securities.”
From Morgan Stanley: “Junk bond issuance is evaporating: through yesterday $850mm in high-yield debt had been issued for the month compared with $8.5bn for all of January last year.”
From The Financial Times: “An influential US official on Tuesday hit out at his country’s “addiction to debt”, warning that the federal budget was on an “imprudent and unsustainable path” due to ballooning healthcare costs… Moody’s Investor Services, the credit rating agency, last month warned that a lack of reform to Medicare – the government-administered healthcare plan – and the social security system threatened the US’s long-term fiscal outlook, and, thus, its AAA bond rating. Mr Walker said the root of the problem was the government’s continuing pledge to fund the gap between promised and funded social security and Medicare benefits and other commitments. In a report released to coincide with the hearing, the Government Accountability Office – which Mr Walker heads – put the total US public debt at $9,000bn …including the debt held by social security funds. That was almost double the $5,000bn headline figure for public debt, which excludes such funds’ debt. Including the gap between future promised and funded social security and Medicare benefits, the GAO put the total debt burden in present dollar value at $53,000bn – about four times the size of the US economy.”
From Market News: “Chinese consumer confidence inched down in January for the fourth month in a row, as a deterioration in the long-term outlook for business conditions more than offset a modest improvement in current conditions…Growth in consumption accounted for the largest share of GDP growth in 2007, the first time consumption has been in this position since 2001…”
From Bloomberg: “The Baltic Dry Index, a measure of shipping costs for commodities, surged 5.1 percent in London, its biggest gain in almost two years.”
From The Financial Times: “Andrew Liveris, chairman of Dow Chemical told the Davos meeting that: “Water is ... the oil of the 21st century.””
End-of-Day Market Update
From UBS: “Treasury yields meandered upwards again prior to the Fed decision. After the rate cut announcement, front end yields plunged while long end rates spiked upwards, and the 2s30s curve steepened roughly 10bps by 3pm… Agencies were very weak, trading 1-1.5bps cheaper to Libor most of the day before tightening marginally by the 3pm close… Mortgages traded tighter to swaps throughout the day…”
From Bloomberg: “U.S. stocks fell for the first time this week after concern that bond insurers guaranteeing $2.4 trillion in securities will lose their AAA credit ratings erased
a rally spurred by the Federal Reserve's interest-rate cut. Ambac Financial Group Inc. and MBIA Inc., the largest U.S. bond guarantors, led declines after Fitch Ratings revoked its top ranking on Financial Guaranty Insurance Co. The Standard & Poor's 500 Index had climbed as much as 1.7 percent after the Fed lowered its benchmark lending rate to 3 percent from 3.5 percent to help the economy avert a recession. `The Fed's trying to do what it can, and it looked like it excited people for a little while,'' … ``But things keep coming back in to show things are definitely weakening.'' The S&P 500 retreated 6.49, or 0.5 percent, to 1,355.81 and is down 7.7 percent this year. The Dow Jones Industrial Average lost 37.47, or 0.3 percent, to 12,442.83. The Nasdaq Composite Index decreased 9.06, or 0.4 percent, to 2,349. About two stocks fell for every one that rose on the New York Stock Exchange.”
From Market Watch: “The dollar weakened against its major counterparts Wednesday, after the U.S. Federal Reserve decided to cut interest rates by a half-point and signaled that more cuts could lie ahead.”
From AP: “Gold jumped in aftermarket trading Wednesday after the Federal Reserve slashed its key interest rate—an inflationary move that boosted the metal's appeal as a stable investment.”
From Market Watch: “Crude-oil futures rose for a fifth day… However, crude's rise was limited by a government report that showed U.S. oil inventories have risen more than expected.”
Three month T-Bill yield fell 13 bp to 2.15%.
Two year T-Note yield fell 9 bp to 2.20%
Ten year T-Note yield unchanged at 3.68%
Dow fell 37.5 to 12,443
S&P 500 fell 6.5 to 1356
Dollar index fell .47 to 75.08
Yen at 106.45 per dollar
Euro at 1.487
Gold rose $5.50 to $929
Oil rose .32 to $91.96
*All prices as of 4:40pm
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