Ambac Stock Tumbles
When New Capital Plan is Smaller Than Expected
From Bloomberg: “Ambac Financial Group Inc. tumbled as much
as 20 percent in New York Stock Exchange trading after the bond insurer's plan
to raise $1.5 billion fell short of investors' expectations and failed to allay
concern it may lose its AAA credit rating.
Investors had anticipated banks would be part of a bailout that would
raise as much as $3 billion, enough to overcome record losses on
subprime-mortgage debt. Instead, the New York-based company will seek buyers
for $1 billion of common shares and $500 million of equity units, according to
a statement today. ``This wasn't what
the market was hoping for,'' said Robert
Haines, an analyst at CreditSights Inc., a bond research firm in New York.
``There's no bailout. It's just a capital raise, and there's no guarantee
they'll get it done.'' Ambac shares
dropped and credit-default swaps rose, indicating worsening perceptions of
credit quality, even though Standard & Poor's and Moody's Investors Service
said today they would probably confirm the company's AAA rating after the offering. With such a limited capital raising, Ambac may not
be able to keep its AAA rating for long…``Ambac's capital raising might save
the company's AAA ratings in the short term, but the outlook for continued
writedowns and impairments to capital clearly indicates that this is not a AAA
industry,…''
Non-Manufacturing ISM
Rebounded in February
From Lehman: “The non-manufacturing
ISM index bounced higher. The new composite index (begun in
January) jumped to 49.3 from a 44.6 last month while the business activity
index, the headline index reported each month since mid-1997 jumped back above
50 to a 50.8 after plunging to 41.9 last month. New orders jumped by 6.1 points
but still remained just a touch below 50 while the employment series moved up
by three points. Overall the sharp
improvement in this series suggests that, although the economy is slowing, the
outright collapse in activity suggested by last month's report was more likely
driven by confidence factors rather than changes in the real pace of activity.”
Factory Orders Slip
From RBSGC: “Factory orders fell in January by 2.5%, in
line with expectations. The 5.3% drop in durable goods orders reported last
week was trimmed to 5.1%, with the core durable goods measure revised up from
-1.8% to -1.5%. Meanwhile, after slipping by 0.4% in December (due entirely to
a fall in the petroleum component), nondurable goods orders advanced by 0.3% in
January. Despite firmer prices, petroleum bookings softened for a second
consecutive month, so that excluding that category, nondurable goods bookings
in January were up by 0.6%. Meanwhile,
factory inventories surged in January by 1.3%, the largest monthly rise since
January 2005. Durable goods stockpiles expanded by 0.6% (excluding aircraft,
durable goods inventories increased by just 0.1%). Nondurable goods stocks
surged by 2.3%. However, here too the gain was narrowly based, with all of the advance
concentrated in petroleum (+7.7%) and chemicals (+3.6). Excluding these
price-inflated increases, nondurable goods inventories fell by 0.2%. By stage
of processing, the increase in stockpiles was seen mostly in raw materials
(+1.6%) and work-in-progress (+2.3%), while the rises in finished goods stocks
decelerated further, from 0.8% in November and 0.5% in December to just 0.1% in
January. In addition, given a 1.1% jump in factory shipments, the I/S ratio
held steady at 1.24. Thus, the outsized gain in factory inventories is not
quite as worrisome as it might appear.”
From JP Morgan: “Newly available details in the factory goods
report show that the
underlying
conditions for core capital goods shipments in January were stronger than the
headline number would suggest…Rising energy and chemical prices did
dramatically affect inventories, however. Nondurable inventories rose 2.3%, the
largest increase in 25 years as both petroleum product and chemical inventories
posted their second largest rise on record. Petroleum products and chemicals
together account for almost half of nondurable inventories. Chemical prices are
probably being boosted by an unprecedented increase in chemical import prices
in January.”
Beige Book Reaffirms
Economic Weakness
From Deutsche Bank: “The latest Beige Book was prepared by the
Boston Fed and spanned the period from mid-January to late February. There were no major surprises in the text of
the report, rather it reaffirmed other indicators pointing to a weak
economy. The majority of districts
described consumer spending negatively, and several districts noted declining
sales of big-ticket and home related items.
Similarly, auto sales were tepid, in part due to tighter lending
conditions…The residential real estate market was broadly described as weak,
with the exception of a few local markets, specifically condos and co-ops in
Manhattan . The most interesting news,
in our view, was the description of deteriorating conditions in the non-residential
real estate market. Several districts
cited rising office vacancies, falling leasing volumes, falling or stagnant
demand for retail space, and "mixed" office rents. Tight credit conditions were cited as a major
factor. The inflation commentary was
mixed; while survey contacts generally reported higher prices from vendors,
they also reported "mixed" success in passing those price pressures
along to customers. Finally, the Beige
Book again noted limited wage pressures, although several districts noted a
slower pace of hiring, increased prevalence of layoffs, fewer hours worked, and
hiring freezes.”
MISC
From The Wall Street Journal: “Home prices have been declining nationwide
for the last year. At the end of 2006, 7% of mortgage borrowers had negative
equity, according to First American CoreLogic, a research firm. A report by
economists from Goldman Sachs Group Inc. and Morgan Stanley and two academics
estimates that proportion will rise to 21%, or 10.5 million households, if home
prices fall 15%, as they expect. Assuming
an average mortgage balance of $250,000, that would put $2.6 trillion of
mortgage debt "under water," the report said.”
From Deutsche Bank: “The ADP national employment survey posted a
23k decline after January was revised down 11k to 119k. It was the first drop
in the survey since June 2003. The downward revision to January suggests that
we are unlikely to see an upward revision to January payrolls, and importantly,
the trend in the ADP survey is clearly pointing downward-the 3-month moving
average is +85k, down from +133k in January. The slowdown in the ADP survey
corroborates both the rise in jobless claims-the 4-week moving average is up to
361k-and, most significantly, the sharp and unexpected deceleration in employee
tax withholding receipts-down from 6% in January to 2% in February, the largest
month to month slowdown since the last recession. The weakness in the ADP
survey was evident in both major categories: goods-producing employment (-70k
in February vs. -13k in January) and service- providing employment (+47k vs.
+132k). We are maintaining our forecast of a 10k decline in February nonfarm
payrolls compared to consensus expectations of a 25k gain.”
From Newsweek: “Low-income families aren’t the only victims
of the mortgage crisis: there’s also a surge in homeless pets. Animal shelters are flooding with the furry
friends of people who can no longer afford their property – or their pets. The Society for the Prevention of Cruelty to
Animals in Sacramento, Calif., for instance, accepted 178 dogs and cats in
December, a jump of almost 80 percent over the previous year. Less fortunate Fidos are dumped on the
streets or released into nature…abandoned in a yard.”
End-of-Day Market
Update
From UBS: “Other than a brief rally that began around
1pm, Treasuries spent most of the day selling off with the 2s30s curve
steepening nearly 6.5bps by 3:15pm…. Bills and Discount Notes continue to see
huge inflows--in lockstep with money fund inflows. With energy prices up
substantially across the board and crude hitting yet a new record high, TIPS
vastly outperformed nominals. With inflation fears weighing on the market, long
end breakevens widened 9-10bps and
January 2009 breakevens were out 13bps…. Spreads widened out substantially,
particularly in the 10-year sector. Agencies saw heavy buying in the 9-18 month
area from central bank and money market accounts, richening to Libor by 6bps in
1-year space and 3.5bps in 2-years. Agencies also outperformed swaps by 2bps in
the back end. Mortgages opened up 8 ticks tighter to Treasuries, and went as
much as 11 ticks tighter after fast money buying. As the market sold off, we
saw origination pick up and fast money profit taking, bring mortgages 9 ticks
wider to Treasuries and 2 wider to swaps. Liquidity in MBS is now fleeting, at
best, as pass-throughs trade in 2-4 tick increments. To wit: between 4pm and
4:20pm, FN 5 1/2's went from T+10 wider to T+25 wider to T+16 wider. Yikes.”
From Lehman: “[Swap] spreads are officially offerless. There is no liquidity at ANY level. Flows continue to be all one way. All paying. All in chunky size…The street has
no more capacity to sell spreads. Unless
flows become a little more balanced, the market will remain broken.”
From RBSGC: “The market came under steepening pressure
with prices rather mixed -- 2s-5s were up on the day; 10s-30s were lower. This
activity is schizophrenic and very difficult for us to explain away, let alone
derive a direction bias from. The data
was largely on the soft side…The action in Treasuries, however, bore little
connection to the data. Rather, inspiration came from initially rousing stocks
and improving MBS --leading to some bear flattening -- and then the reversal in
stocks that followed on the heels of the AMBAC bailout. The latter was taken with disappointment and
went along with a widening in MBS spreads (off the earlier narrowing) and
widening in swaps (out 4.75 bp!). The glib and superficial take is that the
AMBAC capitalization plan was not greeted as the ultimate solution by rating
agencies (who plan to keep the monoline on the negative watch list) and the
banks behind the intended offering didn't want to put their own money up
except, we presume, at a distant backstop. That leaves it to shareholders to
double down… The curve has stabbed over 200 bp -- this was our target for
ENTIRE YEAR! and to get there so soon, so fast, gives us pause.”
From Suntrust: “Many cross currents are at play in the bond
market, creating high volatility and treacherous trading. Treasuries were punched
hard by the February Non-Manufacturing ISM. The index rose more than expected…The
surprise sent yields across
the coupon curve higher by 10 bp. The so-called correction lower in commodities
was short-lived. Crude oil, heating oil, natural gas and copper have rebounded
4-5%. Some attribute this to Bernanke's suggestion yesterday that banks accept
"short payoffs" on loans. The WSJ described Bernanke as sounding like
a man "two aspirins away" from a federal bail-out. The dollar is still
feeling the misery. Then the Beige Book reported a less than cheery outlook…The
end result of all the above has been once again a steeper yield
curve. 2/10's are spread by +204 bp, a new cycle wide. Equities rallied, swooned,
then came back to even. Today was just another day in bond land.”
From Bear Stearns: “MBS invent another way to completely
shatter. FN 5s 20/32 wider for the third day in a row. Once again real $ turned
its back on our product. Albeit flows were lopsided. But todays 2x1 Sellers vs
Buyers felt more like 20x1. Some nasty thresholds
were breached as 5yr swaps broke 100, Current Coupon reached 270bps and the
curve is now steeper… GN/FN 5goes thru 2pts. For those of you keeping score at
home that up 46/32 in one month. GN rolls are even more of a problem. They now
trade 3/32 higher than FN rolls.”
From Lehman: “The long end got pounded on Wednesday as
mortgage accounts sold the ten year sector in big size, and bond futures were
sold aggressively in early trading. The
yield curve managed to holds its steepening bias after strong than expected data
(non manufacturing ISM) and the 5 year sector barely budged as the market crumbled,
with so much of the selling seemingly coming in 10s and 15s. The long end was probably not helped by
continuing bad news on the inflation front, where unit labor costs rose by much
more than had been anticipated, energy rallied by almost 5%, and the dollar
continued to suck wind. Bonds continued
to follow equities, and today's price
action was extraordinarily whippy. There
was good news which was maybe not so good news which was maybe good news again about
the monoline insurers (zzzzzzzzzz) and those tidbits, however sketchy, drove
stocks up and down a few times, taking fixed income along for the ride. In the
end, though, the heavy selling in longer maturities won out, and 10 year yields
got back to pre month-end levels. Two
year notes had a 15 bp range on the day, and eventually sold off into the
middle of the day's trading range after having spiked back to unchanged on the
day in the early afternoon. Flows were
active, but still not on the pace of what we saw last week, at least in treasury
space.”
From Bloomberg: “Crude oil rose above $104 a barrel for the
first time in New York after OPEC gave no indication it will increase production,
U.S. fuel inventories declined and Venezuela sent tanks to its border with
Colombia…Crude oil for April delivery rose $5, or 5 percent, to settle at
$104.52 a barrel on the New York Mercantile Exchange, a record
close. It was the biggest one-day increase since Jan. 30, 2007.”
Three
month T-Bill yield fell 15bp to 1.49%.
Two
year T-Note yield fell 2 bp to 1.63%
Ten
year T-Note yield rose 7 bp to 3.69%
Dow
rose 41 to 12,255
S&P
500 rose 7 to 1334
Dollar
index fell .21 to 73.46
Yen
at 104 per dollar
Euro
at 1.526
Gold
rose $25 to $989
Oil rose $5.09 to $104.60
*All prices as of 4:57 PM
