Tuesday Market Conditions

05/06/2008

The bond and mortgage markets started better this morning on momentary safe haven moves as Europe's stock markets were soft and the US stock market opened lower. UBS reported a loss of $17.3B in the first-quarter at its investment-banking unit, and plans to cut 5,500 jobs and said clients withdrew a net $12.2B from its asset- and wealth-management divisions. As losses continue to hit it adds trade into treasuries but we seriously argue that it is only hot money; leaving the potential of unstable moves that can be quickly reversed in the rate markets if equities firm through the day.

The 10 yr note and mortgage rates are stuck in a narrow 18 basis point range for three weeks now, building a platform for another quick move when the range finally cracks. There is key technical support for the 10 yr note at 3.92% as we have been mentioning for three weeks; however the closest the note has gotten is 3.89%. With no economic data today and no Fed speakers to think about, the remainder of the day will be based on the equity markets perform. The market is set up for traders as volume is thin and most investors are standing down from playing the trade game. There is a hurdle out there; tomorrow Treasury will sell $15B of new 10 yr notes at its quarterly refunding, not likely that the 10 yr can rally much today with supply pressures; and that will keep a lid on how much mortgage prices can improve.

More bad news for the mortgage and housing industry; just what we don't need. Fannie Mae reported a wider loss than analysts estimated, cut its dividend and said it will raise $6B in capital as the worst housing slump since the Great Depression deepens. Its stock tumbled as much as 12% in early trading; and said its credit-market losses will be worse next year. The first-quarter net loss was $2.19B, or $2.57 a share, compared with a loss of 64 cents a share anticipated by analysts. The company, which sold $7B of preferred stock in December, may need as much as $15B to cope with the delinquencies and foreclosures.

Crude oil is up again, now over $121.00; Goldman Sachs is saying today crude could see a mega spike to $150.00 to $200.00/barrel within six to twenty four months. If that is correct the US economy is headed for a recession that will pale any past recession. $200.00 oil is $6.00+/gallon for gas. While we believe oil is going higher, to expect that kind of increase is hard to fathom, let alone anticipate the consequences. No wonder the stock market is trading lower this morning. There is no way the US economy, consumers or businesses can stand that kind of increase.

The dollar isn't adding to its gains last week as the bearish outlook remains firm in the forex trading world. Gold is also back on the climb after falling $150.00 from its highs, it is up today and has been increasing for the past three sessions.