Welcome to Desolation Row

Earlier: Lehman Files for Bankruptcy

There is a great song by Bob Dylan entitled “Desolation Row.”  It contains a line which is quite apropos this morning. Dylan in the song says “after the ambulances go, the only sound left is Cinderella sweeping up on Desolation Row.”

Wall Street is Desolation Row this morning. The ambulances (Fed and Treasury) have left the scene, and solitary Cinderella is sweeping up the pieces.

Prices of Treasury coupon securities have skyrocketed in response to the sad and historic events which have swept across the financial landscape this weekend. The yield on the benchmark 2 year note has plummeted an eye popping 37 basis points to 1.84 percent. The yield on the 5 year note has tumbled 33 basis points to 2.61 percent. The yield on the 10 year note has crashed 23 basis points to 3.49 percent. The Long Bond has dropped 15 basis points in yield to 4.17 percent.

The 2year/10 year spread has widened dramatically to 164 basis points from about 150 basis points on Friday.

The 2year/ 5 year/30 year butterfly spread, which I follow as an indicator of the relative movement of the belly of the curve versus the wings, has exploded to 79 basis points from 65 basis points.

Equity markets are in free fall, with European markets down, on balance, about 3.5 percent. Trading in futures markets indicates that US equities will drop about 3 percent when trading begins in New York in several hours.

At this early hour, oil is off about $4 and is trading in the middle 90s. It is off more than $50 from its peak in July. I wonder if any speculators have shorted the liquid on the way down. That would be horrible and they should return their profits to the government.

Today will be a very volatile trading session in every market. Watch the spread markets for clues. (I do not have any clues yet because the folks I speak to are not at their desks yet.) I will watch swap spreads, the IG 10, and the CDS on some of the troubled names still afloat.

I think the real economy is in serious trouble. Risk aversion is ascendant. Risk taking is shunned. Capital is a resource to be husbanded and conserved. Banks which have just funded a special purpose vehicle to provide liquidity to themselves will not be racing to  make risky loans to Main Street or Wall Street. Leverage will be disdained and shunned.

Every revolution from the French Revolution to the sexual revolution has ended in excess. So, too, will this revolution in the financial industry as banks and traders painfully and reluctantly reeducate themselves in the art of prudent risk taking.

Comments

[phdinsuntan...:]

"I wonder if any speculators have shorted the liquid on the way down. That would be horrible and they should return their profits to the government." Just look DUG volumes

2008 Sep 15 07:56 AM

[Chuck:]

All I know is that my 401K LOVES Bill Clinton.
(it's now on Life Support, thanks to the actions from Washington over the last 7.5 years.)

2008 Sep 15 08:40 AM

[fool's gold:]

but lehman has an 18% dividend yield?

2008 Sep 15 09:02 AM

[Abdullah al...:]

"All I know is that my 401K LOVES Bill Clinton."

Most of this mess is due to his appointment of Andrew Cuomo to run HUD. He put pressure on the banking industry to make bad mortgage loans to people who had absolutely no business accepting the money - all in the name of the "Community Reinvestment Act." Hey, the banks didn't care - they just passed the risk on to the bond market through collateralized debt.

The Soviet Union thought it could create a society where nobody could make a profit and it failed. Andrew Cuomo thought he could make a society where nobody had to take a loss, and now we're dealing with it. Perhaps the AG of NY should indict himself.

2008 Sep 15 09:04 AM

[CloroxCowboy:]

GOOD!! This is punishment for the earlier stupidity of these firms, and it is 100% justified. Yes I know it will send ripple effects through the economy. GOOD!! That is punishment for the stupidity of Americans living beyond their means, and it is 100% justified. The absolute beauty of the financial markets is their ability to dole out rewards and punishments based on greed. As the (in)famous Michael Douglas quote goes, "...Greed works. Greed clarifies and cuts through and captures the essence of evolutionary spirit..." Successful operators in the financial markets will always be those with a healthy ruthlessness based on greed. (I'm not talking about illegal activity here, just smart investing) Sympathy and charity have no place in a market economy and only end up costing me, the responsible investor, more money in taxes. A responsible investor was 90% out of equities by Oct 07. I say that because it was easy enough at that time to see the writing on the wall, and with the correct motivation *greed* the responsible investor was interested in preserving his capital to later take advantage of the poor schmucks who were about to be crushed underfoot. If you can't relate to greed then you should step out of the game before you yourself are crushed. If you think what I'm saying is evil, you are not cut out to trade objects of value. Put your money in a mutual fund until retirement and stop whining.

"I wonder if any speculators have shorted the liquid on the way down. That would be horrible and they should return their profits to the government." This statement is asinine. Look up greed and learn how it is essential to price correction (and every action in the market). Of course oil is being shorted, as it should be. That's how overblown prices are brought back to sane levels. No sane person is out there trading for the good of the government or the American people. End rant.

2008 Sep 15 09:23 AM

[John Pseudonym:]

Bill Clinton also signed the repeal of the Glass Act which is at the root of of this.

Bush and the Republicans deserve most of the blame as they had the power to stop this long ago, but Clinton was the one that started this mess.

2008 Sep 15 09:52 AM

[Dividends4Life:]

Turmoil, confusion and fear all provide buying opportunities for the long-term investor that is willing to go against the popular thinking.

D4L

2008 Sep 15 09:56 AM

[sancerre:]

MORE DYLAN FOR THE OCCASION.... THE TIMES THEY ARE A CHANGING , MA I'M ONLY BLEEDING,TOMBSTONE BLUES, BABY LET ME FOLLOW YOU DOWN, ITS ALL OVER NOW BABY BLUE.......

2008 Sep 15 10:05 AM

[John Pseudonym:]

Bring back the good old Clinton years...yeah right!

Read this Chuck; and if you really want the truth do some investigating on your own and you will find it:

www.marketoracle.co.uk...

2008 Sep 15 10:09 AM

[icandoitdon:]

the roots of this crisis go far back...probably a consequence of the fear that the great depression would be repeated unless the government created backstops, which it did with its creation and expansion of social programs through the years. but domestic spending wasn't the sole culprit. we have military bases in well over 100 countries around the world and have fought long, expensive and dubious (at best) wars on borrowed money for which we got absolutely nothing in return, wasting money, lives and our reputation as the "leader" of the free world. some leader we've proven to be...relying on china, japan, russia and mideast oil sheiks to finance both our lifestyle and our military. ain't we grand?

but it was the federal reserve and the regulatory agencies responsible for the stability of our financial system who pushed us over the edge. from the early days of his tenure, after paul volker broke the back of inflation of the late 1970s and 80s greenspan saw cheap and plentiful credit as a panacea for every problem that crossed the financial landscape and thereby laid the ground work for its financial collapse. he utterly ignored the build up of leverage within the financial system. when the danger became apparent even to laymen, bernake tried to mitigate the fallout with the same snake oil used by greenspan, and he's now gone him one better by creating taxpayer liability for the mistakes of private enterprise. in the name of "saving the financial system" of course. his band aid approach has saved nothing because the system he and others helped construct was build on a foundation of cheap money and excess leverage that is in the process of crumbling. thats how it should be.

2008 Sep 15 10:43 AM

[TinyTim:]

How about:

The pumps don't work cause the vandals took the handles.

2008 Sep 16 05:43 PM

[Old Wizard:]

The Clinton years were wonderful. Let's see who was the fed chairman under Clinton. Wasn't the tech bubble something like the housing bubble where people were irrationally investing in companies that had little or no real assets and weren't the same financial organizations making carloads of money in new issues? What makes this crises even worse is that the same financial wizards figured an even better way to leverage little or no assets called derivatives. The irony of the drama is that now those institutions are looking for the government rescue lifeline because it's hurting them. the tragedy of this drama is that the working public is left at the end of the ponsi deal and they are probably owners of money markets, accounts in failed investment and other banks, mutal funds and houses whose value is impacted dramatically downward. All this while the people who received big bonuses and sanctioned the Ponsi schemes received high pay and bonuses and are relatively unscathed.

2008 Sep 20 08:18 PM