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Saturday, October 04, 2008


rays of sun?

two points via john jansen -- this could set the stage for something constructive. first, the money market:

My money market source has actually spoken some optimistic thoughts today. He said that he does not wish to overstate the case or suggest that investors are about to have a sudden change of heart.But he did state that the tenor of the conversation with big money clients shifted today and rather than the clouds they are seeing the gentle rays of the sun.

Specifically, he cites two money manager trades in which the investor extended to the two month sector. Those trades have been virtually non existent lately.

... Once again there is a small change in motion but my former colleague reiterates that the steps taken today are the smallest baby steps in a lengthy marathon.

then agencies:

The short end of the agency market was “en fuego” today. ...

Why the rally in short paper. Some of it is a testament to the success of the central banks and their massive injection of liquidity. Repo on agency collateral was 50 basis points today. That is a nice chunk of positive carry for the owner of the collateral.

Similarly, short rates are so low that it is forcing some investors out the curve as they find the pain of holding cash too much to bear.

There is also some talk in the market that Home Loan issuance has abated somewhat and that relieves some of the pressure on funding.

This story is interesting in conjunction with my earlier posting regarding some barely perceptible changes in the money markets. It is another outward sign that the logjam in the frozen money markets might just be at the early stages of resolution.

this last week has produced the blackest news flow i can recall. that is not sufficient but it is a necessary condition for a bottom.

the question really is as simple as this: is this episode different? the historical precedent of the last 60 years makes pretty clear that, from this point, risk is in almost all cases quite low. as was pointed out to me today, look at teh aftermath of s&p moves of (-5%) and greater -- in almost all cases, such moves are near the low. the problem is that "almost all cases" is not "all cases" -- and if this unwind is well and truly out of control, there is a looming systemic risk that could overwash any few hours of constructive movement in credit and any positive precedent.

risk is still high, in my view. but positive signs are not to be dismissed here. i would wager that being short is as dangerous as being long.

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You imply the possibility that the s&p could be near "the low". Did you really mean that, or did you mean "a low"? Given what you've written in the past (and what I read elsewhere) I'd be surprised (but hopeful!) if you consider it possible that enough deleveraging has occurred yet for it to be feasible for stocks to have bottomed completely...

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nowhere near, hbl, i fear. it's only now that we are beginning to see sincere deleveraging, in my opinion, and it is a process that could continue for several quarters in the real economy -- and in financial markets, a significant fraction of market value over any time period.

"a low", i suspect -- it pays to remember that, in the aftermath of the 1929 crash, the dow rallied 80% over several months.

trouble is that such a crash would be immediately in front of us if it is to come.

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