Today we had a first grade panic in credit default swaps ABX-HE-AAA 07-2, ABX-HE-AAA 07-1 and second grade panic in CMBX-NA-AAA 3.
In the past two occasions that kind of panic was a very reliable indicator that the chain reaction will happen. The next thing to happen before the stock market starts moving down is the decline of junk bonds. For the next 2-3 weeks I see only 3 possible outcomes:
- Major market crash
- Feds will cut 50bps
- All of the above
As I don’t see any hint so far that Feds may cut 50bp I would put the probability of the outcome #1 at over 50%
Update: I don’t know how important it is but back Thursday someone charged someone else 15% for overnight Fed Funds loan. The comments from “Calculated Risk” discussion:
The 15% for the Fed funds rate as the “high” shows that some member institution has to pay 15% due to the poor quality of assets that they are using for the FED Repo (TOMO operations).
O yeah, while I’m at it, I don’t think the 15% was in a Fed Repo operation ( http://www.newyorkfed.org/market…?SHOWMORE=TRUE)
The FFR is “the federal funds rate, which is the interest rate at which depository institutions lend balances to each other overnight”. The TOMO is done to influence these operations in the aggregate. So the 15% we saw was some institution charging some OTHER institution for overnight lending against its crappy assets. Wouldn’t I love to know who it was.
October 26, 2007 at 8:29 pm
… I don’t see any hint so far that Feds may cut 50bp ….
There will not be any hints. The Friends of the Fed make more money when it comes as a “surprise.”
October 26, 2007 at 8:34 pm
50 bps is in the bag ! the ABX indices and the performance of MBIA , ABK , MTG point the way for another double dose of fed magic. The crack addicts on Wall Street need their fix so plan accordingly. Clearly the goal of Paulson and Bernanke is do whatever they can to prop up equities….25 bps would come as a cruel shock and while the dollar would benefit , equities would be sorely disappointed and so would the big boys on Wall Street. And I don’t expect Hank to disappoint his buddies….
October 26, 2007 at 10:34 pm
So this could be a sucker rally we’re seeing?
I mean, Countrywide announces a disastrous quarter and the Bloomberg cheerleaders started singing “I can see clearly now, the pain is gone.”
Ah, no it’s not.
October 26, 2007 at 11:51 pm
So far I have no opinion whatsoever if 50bp cut will or not happen. 25bp is pretty much guaranteed.
>>> So this could be a sucker rally we’re seeing?
I think the definition of “sucker rally” is blurry. I think the rally was genuine, i.e. people had real bullish mood, probably tired of decline.
To prove I will post this chart:
http://stockcharts.com/h-sc/ui?s=$CPC&p=D&b=3&g=0&id=p69435388650
It is put/call ratio. Today reading is close to exceptionally low, meaning people are so bullish they don’t even have money to buy stocks, they have to buy calls
As you can see from the chart that kind of reading is usually close to market heights, so after the ABX action I expect a crash, unless Feds cut 50bp.
October 26, 2007 at 11:54 pm
Most traders are too emotional. C’mon guys, this is just money! Not something you should really care about!
October 27, 2007 at 7:31 am
Theroxylander , do you believe the Fed and Treasury would allow a crash in equities at this point in time ? Real estate values in the US are declining notably in places such as California , Fla , Phoenix and Vegas ( note Europe -UK , Spain , Ireland are in the early stages of what we’re experiencing now , think early 2006 ) and foreclosures are off the charts on a year over year basis. I agree the ABX indices including the so called AAA tranches are screaming that something is breaking or has broken but is out of sight presently. Commercial real estate is rolling over as well. Commodities are screaming as a clear tell of not only inflation but lack of confidence in US fiscal policies. Under the present circumstances and in light of the manipulations which have occurred since the August financial seizures globally , do you think the Fed would risk upsetting the applecart by cutting by merely 25 bps next week ? I think the Fed and Treasury have chosen to sacrifice the dollar and will risk capital flight out of dollar denominated debt to save Wall Street and US equity markets. The looming MLEC Super SIV shows the lengths Treasury will go to avoid the true financial disaster, which marking toxic waste to any where near market prices , would hasten. MLEC extends the game for a period of time but it doesn’t make toxic waste disappear… but for the MLEC scheme to have a chance and to entice Banks to participate , the Fed has to buy time. For all of the above reasons ,that’s why we will see 50 bps next week. Just my thoughts .
October 27, 2007 at 1:12 pm
[...] but when he does, it’s worth paying attention to. Like yesterday’s post titled “Red Alert.” Today we had a first grade panic in [two] credit default swaps and second grade panic in [...]
October 28, 2007 at 11:08 pm
Opinion here:
http://www.jsmineset.com/ARhome.asp?VAfg=1&RQ=EDL,1&AR_T=1&GID=&linkid=5353&T_ARID=5410
is that merrill is broke. I don’t know if the CEO story is sufficient to make that conclusion but sufficient enough to post the link.
October 28, 2007 at 11:37 pm
http://business.timesonline.co.uk/tol/business/economics/article2741522.ece
October 29, 2007 at 12:22 am
Another good one:
http://blogs.telegraph.co.uk/business/ambrosevanspritchard/oct07/skyhasfallen.htm
November 5, 2007 at 5:39 pm
[...] Investing I’ve posted a “red alert” warning on possible market decline back at October 26. Since then S&P lost only 1.7%, but I believe that the real decline is to come this [...]