Thursday 01/24/2008

01/24/2008

Yesterday's market volatility is about all that traders could stand; hopefully today won't be so stressed. The DJIA had a 650 point range, the treasury market sold off in swift fashion when the equity markets spiked higher in the afternoon and continued to be pounded right to the end; the 10 yr note at 4:00 yesterday was down 33/32 at 3.53%----it closed at -51/32 at 3.59% right on support. It was, to say the least, one of the most volatile market days we have had in months----and in this market these days that is saying a lot.

This morning weekly jobless claims were expected to be up 18K to 320K weekly filings; as reported claims were down 1K to 301K from the revised 302K last week. The back to back levels near 300K is inconsistent with the decline in December non-government payrolls, and the 350+ levels of initial claims seen in the fourth quarter and sets up for an interesting -- and probably much improved -- employment report next Friday. The 4-week average fell to 315K -- the smallest since early October. Continued claims (more reflective of hiring than the layoffs seen in initial claims) fell -75K to 2.672 mil as the 4-week average fell off.

At 10:00, a few minutes ago, Dec existing home sales were expected to be down 1.0% to 4.95 mil units (ann); sales were reported down 2.2% to 4.89 mil units. The NAR said there was a decline in unsold inventories, from 10.6 months in Nov to 9.6 month supply in Dec. In 2007 existing home sales fell 12.6% frm 2006. Prices fell 6.0% in Dec.

Too big to fail is a well worn phrase that is once again on the table with a potential bailout of bond insurers Ambac and MBIA. In the USA it is almost a given; make a huge blunder big enough and you will be helped as the financial brethren and regulators will ride to the rescue; the list of bailouts is growing and the precedent is now well established----not good but it is what it is. NY State regulators, who met with industry executives yesterday, is trying to bolster the bond insurers' ratings with help from banks and securities firms that posted $133B of writedowns and credit losses tied to mortgage securities. NY regulators received encouragement from Federal Reserve Bank of New York President Timothy Geithner. The talk yesterday of a possible bailout was one key reason the stock market put in the rally in the afternoon. Bond insures are in this trouble for one reason----greed! Fees were large to insure mortgage sub prime bonds, and they sucked them up like starving wolves; now because the alternative to not bailing them out is worse than letting them hang, it appears they will be saved.

After the existing home sales today there is nothing on the economic calendar now until Monday. Today and tomorrow markets will continue to be influenced by talk of bailouts, rumors, a fiscal stimulus package to aid consumers, and next week's two day FOMC meeting that concludes on Wednesday with another rate cut, the amount of which is debatable---50 or 25 BPs.

Stock market in Europe rallied today on the back of the improvement in US equities yesterday afternoon. The stock market is extremely oversold when measured on a short term basis and the bond market overbought. The larger perspective however continues to be bearish for stocks and bullish to interest rates. Both markets are very fragile with emotions more a driver than intelligent thought these days. We expect market volatility to continue to be at very high levels.

Another scandal---- Societe Generale SA, France's second largest bank, said unauthorized bets on stock index futures by an unidentified employee caused a 4.9 billion-euro ($7.2B) trading loss, the largest in banking history. The trading shortfall exceeds the $6.6B Amaranth Advisors LLC lost in 2006, and is more than three times the $1.8B of losses by Nick Leeson that brought down Barings Plc in 1995.