But the big picture did not change. Speculation over further capitalization needs brought major banks’ equities down. I try to keep things in perspective and can only think that all these movements in relative prices (among different asset markets) are possible because investors rely on a STEADY rate of new money supply. But tension, nervousness around this assumption is necessarily going to increase
The markets continued suffering from the pig flu contagion yesterday. But the big picture did not change. Speculation over further capitalization needs brought major banks’ equities down: Bank of America -9%, Citi -5.9% and Wells Fargo -3.8%, among others. As well, Chrysler’s banks were in negotiation to reach an agreement with the US government to exchange $6.9BN in secured debt for $2BN in cash. There were however positive economic data, as the S&P Case Schiller Home Price Index was minimally better than expected, at 143.17 and the Consumer Confidence index was at 39.2 vs. expected 29.7. Did stocks trade on fundamentals and did not fall further because of these news? The S&P500 ended at 855.16pts (-0.27%). The CDX IG12 index closed flat at 177bps.
The Federal Open Market Committee started its 2-day meeting yesterday. But the Fed did not buy Treasuries and at the 30-yr level, the yield is already at 3.95%. The market continued to buy into Agency debt, with spreads over Treasuries tightening to lower levels. It seems that the Fed’s intervention in this market is creating a huge distortion. One can only wonder what will happen once this bid disappears. The distortion has long legs, as any other monetary distortion. Not only prices between mortgages and Treasuries have converged but with it, a new wave of mortgage refinancing is taking place. Simultaneously, REITS (Real Estate Investment Trusts) issuances have recently outperformed the High Grade corporate index: Boston Properties completed a $215MM construction financing, Camden Property launched a tendered offer on $258MM, and Vornado announced a common share offering and Kimco Realty Corp. closed a $220MM unsecured Term Loan.
Sure, these transactions were expensive for the issuers, but they still carried on with them…Is there something wrong with it?
April 29th 2009, Intraday: 30-yr Treasury (white) vs. S&P500 (orange) Source: Bloomberg
I try to keep things in perspective and can only think that all these movements in relative prices (among different asset markets) are possible because investors rely on a STEADY rate of new money supply. But tension, nervousness around this assumption is necessarily going to increase. If I am looking correctly at the chart below (intraday graph for yesterday), the relationship that we had been relying on (Thesis No. 1) between Treasuries and stocks seems to be weaker and weaker.
Given all the rumors on stress tests results, pig flu, automotive sector bankruptcy and the FOMC meeting, I guess I would have to expect certain noise reflected in the chart. But I don’t think this is just noise. And I believe that volatility in exchange rates and equities (VIX Index) as well as spread compression in Agency debt is somehow indicating a certain discomfort. Personally, I don’t want to call this a correction, because I think we are not seeing a fundamental trend. The so called rally has not been a trend, but a mere reallocation of assets fueled by a Fed that buys approximately 1/3 of the US Govt. debt. This brings me back to the thesis No. 3, proposed on the April 27th letter: “Knowledge of an exit plan is a condition for the stocks AND credit markets NOT to fall”. Since April 27th, we have had no news on the subject, and the S&P500 is -1.3%. The thesis, for now, cannot been refuted.