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Credit markets are taking a battering today. The flight to riskier assets which began with the Federal Reserve announcement that the Federal Funds rate would remain at zero for the rest of our natural lives has paused and possibly reversed itself.
There are several factors leading to the change of heart. The Home Loan System has its own set of problems and they are increasing in prominence. They are no greater than any of the other episodes of the last 18 months but highlight the reality that the problems which bedevil the system will not disappear quickly.
Deutsche Bank (DB) was an ugly reminder of the problems as it announced a chunky Q4 loss and the piece-by-piece disemboweling of Citibank are also stark reminders that the financial problems are still here and that the world is perilous.
There is also a feeling or belief extant that something is afoot and about to break and that the request by the incoming Obama Administration for TARP funds has some participants wondering who is in trouble.
Swap Spreads are wider by 8 basis points in the 2 year sector at 60 ½. Three year spreads are 7 basis points wider at 59 ½. Five year spreads are 5 wider at 58. Ten year spreads are 4 wider at 18. Thirty year spreads defy reason and gravity and are 2 basis points tighter at NEGATIVE 21 ½.
Mortgages are three ticks wider to swaps.
Agency spreads are 10 basis points wider in the 2 year and 5 year sectors and a dozen wider in 10 years.
Corporate bond spreads are trading in a bifurcated world. Industrial names out to 10 years are largely unchanged and a tad weaker as you venture beyond the 10 year sector.
Financial sector paper is weaker, and quite a bit weaker if you are trafficking in the wrong name. JPMorgan (JPM) and Wells Fargo (WFC) paper is 5 basis points to 10 basis points wider. Bank of America (BAC) paper is 15 to 20 wider. Citibank (C) is the wrong name and its paper has widened 40 basis points.
The IG 11 is about 5 wider at 220/223.
I have mentioned several times that I am long LQD. We can make that past tense now. Against this background I decided that it was prudent to take my profits. I remain long Wells Fargo and GE 4 year bonds and anticipate that I will not trade out of those positions. The size is small and the bid/offer is rapacious.
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This article has 17 comments:
If I am wrong and it's more a Goldman or Fannie Mae Freddie Mac blowup then things will get very very nasty very very fast. At least Citibank is a very know problem.
These days there is so many balls to watch. And I don't mean the type that Cinderella goes to.
For equity markets, the pattern is break down before nasty news, consolidate and sucker rally on soothing stimulus, and off to the next round.
Sine you started your career at the Federal Reserve, perhaps you should contact Ben S. Bernanke and tell him that he should really get out into the real world a little bit.
The AP had a great photo essay on Bernanke's visit to London -- being waited on hand and foot... But Ben, you see, this isn't the way the world really lives. You can't support your country club friends at the expense of the American people and expect to get away with it in the end.
Ask Ben, since he has all of these "tools" to stop this crisis, then why hasn't he stopped it? If the bazooka was enough, why didn't it work? If TARP was enough, why didn't that work? My last question for Ben: If things don't work, why do you keep doing the same thing, but more of it?
The problem is not credit and giving everyone never-ending credit lines will not work. How do you think we got into this mess in the first place? Credit creates demand, inflates prices and ruins healthy choice making in the markets (opportunity costs, etc). I have a lot of credit and tens of thousands in personal credit lines. Am I using it? NO! Are my friends using their credit lines? NO!
Bernanke has stated his number one goal is freeing up credit to get back to a healthy economy. You can tell Bernanke he's got it wrong... The last 15-20 we were in a sick economy - abuse of credit, loans made on thin air, asset classes that were pie in the sky. It's coming back to Earth, and Ben S. Bernanke may not like it and his friends may not like it, but it's coming down to realistic levels.
You can tell Ben S. Bernanke that if he thinks recovery will start in Q3 of 2009, I'd sure like to know, absent more abuse of credit, how he sees that playing out.
John... You are long WFC? As I recall they were the bank that made statements in October that they were rock solid, then turned around and took the taxpayers money. Is that the same bank? Isn't that considered lying to investors? If they were so strong, why didn't they turn down TARP funds?
On Jan 14 02:57 PM Jacflash wrote:
> John Carney at Clusterstock points out that C and JPM have moved
> their earnings announcements up a week, to this Friday. A clue?
Well, if the banking system became insolvent in October 2008 that would answer these questions, wouldn't it? I got a flyer from Wells saying they's give me $50.00 if I'd open an account for $100.00. Think that one over for a minute... Pathetic!
Banks/financials... Buyer beware!
On Jan 14 01:01 PM constructe wrote:
> This is my guess regarding the urgent need for TARP. I think they
> will try to purge some bad debt and derivatives contracts with Citibank.
> It's becoming evident that it can't live on its own and maybe there
> is some TARP funding expectation/assumption... clause in its dealings
> to sell the brokerage unit. Any AIG issue will not be a big deal
> I think. It is a constant periodic billion dollar debt hole.
>
> If I am wrong and it's more a Goldman or Fannie Mae Freddie Mac blowup
> then things will get very very nasty very very fast. At least Citibank
> is a very know problem.
>
> These days there is so many balls to watch. And I don't mean the
> type that Cinderella goes to.
On Jan 14 03:17 PM Chuch wrote:
> Wow, market is tanking today, our next problem to deal with is deflation,
> see crashmarketstocks.com/
Well, if I sold, I could always buy it back. I do have losses that will cover my gains in LQD.
Bernanke seems to think he can fix a problem that may be as big as $30 trillion or more with $2trillion.
Maybe he and the next pres will turn water into wine too.
On Jan 14 03:47 PM Rokjok777 wrote:
> The whisper in the UK is that the major accounting firms can't sign
> off on their year-end audits of the banks there. Because they are
> insolvent.
It took the rest of the CEOs in attendance, especially Ken Lewis, to convince him to “go along” with the plan “for the good of others”. He was told that if he decided to “op-out” he would look like he was “un American”. He and the others were told by Bernanke that “they had little to say about it”, if they didn’t take the money and sign the agreement THAT DAY, they would suffer the consequences (in so many words). Treasury Secretary Henry Paulson basically told the bank CEOs that they had to accept the government stock purchases for the good of the U.S. economy.
Yes, Wells Fargo & Co stock is down and yes, they will have more loan losses in the future, but far less as a percentage than 99% of the others. Wells is a conservative lender and did NO option ARMs on their own. They certainly obtained some heavy baggage with their Wachovia purchase, but they also got hundreds of millions in tax write-offs that they can use for years to come. They are now the nation’s biggest bank as far as bank branches. They are second in total assets and first in market cap. Short term, 12 to 18 months, their stock is going to be in the toilet, long term, they are the “bank” to own.
**********************...
On Jan 14 03:16 PM curbs-in wrote:
> John... You are long WFC? As I recall they were the bank that made statements in October that they were rock solid, then turned around and took the taxpayers money. Is that the same bank? Isn't that considered lying to investors? If they were so strong, why didn't they turn down TARP funds?