Interpolated Yield curve forecast

Each month Bloomberg surveys 60 to 70 economists to get their estimates of where Fed Funds, the 2-year Treasury, and the 10-year Treasury will be over the next several quarters. I take this data and interpolate for the points in between the survey data to create the attached report. This allows us to get a broad view of where various economists see interest rates going over the coming quarters.

You’ll notice from the report below that the average forecasts are down for every time period in this month’s survey. If you have any questions or if there is anything I can be doing for you just let me know.

Steve Scaramastro, SVP

800-311-0707

Market Update 6 15 10 _ Florida, the oil spill, sharks and other stuff

 

The sacrifices I make for you people

 

I know that you all have a lot of concerns and questions regarding the oil spill in the Gulf of Mexico.  Rather than leave your concerns unaddressed I went to get answers for you.  I spent the last week travelling the Florida panhandle.  I was up and down the Florida coast from Destin down to Carrabelle, through pines and palmettos, past the bays, the emerald waters, white sandy beaches, and palm trees, and all along the Gulf, and I did it all for you.  Very selfless…I know. 

 

The plan was to work during the day and be back at the house in the afternoon to hang out with the family…a combined work/family trip.  The timing of my trip was accelerated due to the BP Oil spill.  I’ve wanted to fish Apalachicola Bay for as long as I can remember and I thought that if I didn’t do it NOW then it might be a decade or more before it was fishable again.

 

Along the way I interacted with bankers, local folks, fishing guides, tourism employees, and workers at the local grocery store.  I briefly flirted with the idea of attending a meeting at city hall to listen in on the latest thoughts and plans for the oil spill but the wife drew the line there.  No municipal meetings for me while on “vacation”.  She stopped just short of actually calling me a nerd but I could see from the look on her face that it’s what she wanted to do. 

 

After a week of travelling, meetings, and conversations (all done for your benefit) I grabbed a 60 lb sack of oysters, two lbs of shrimp and a 6 pack of beer one evening and I sat down on the third floor deck that overlooks the Gulf of Mexico.  From this lofty perch I watched the sun set and listened to the waves crash on the shore.  The Gulf breezes blew, the dolphins played in the surf in front of me, and I sat back and thought about everything I’d seen and heard over the preceding days.

 

Lessons

 

The first thing I’m always reminded of is just how good of a barometer a community banker is.  They always have their finger on the pulse of the local economy and are very good at providing you with the vital signs of their community.  One of my banker friends that I met with had just done a tour of the public beach parking lot.  At first I thought “wow…this Florida banker gig is a really cool job…he’s cruising the beach during the middle of the day.”  As it turns out a parking lot is a very good source of real-time economic intel.  On that particular day there were only two parking spots open…a sign of pretty healthy activity in the beach area.  This is the type of thing a local banker would know to do.  As a tourist I’d never pick up on it…I’d be too busy griping that there are no good parking spots.  So at the moment activity is pretty good…but the cloud on the horizon is that there are a lot of people cancelling their vacation plans…even though there is no oil on their beaches.  It’s guilt by association at this point. 

 

The second thing is that I met nobody looking for a bailout of any sort.  The Americans that I met wanted to WORK.  That’s all they wanted…they wanted for people to come to the beach so that they could make a living.  They weren’t asking for government funds, no handouts, no government dole.  They just want the opportunity to work.  That is a very refreshing change of pace from a lot of the news you see now-a-days.  It’s nice to get away from the headlines and go meet real people that just want to work for a living, no complaints, no asking for handouts, they just want to keep doing their jobs and live the American dream…its America the way you remember it…before bailout fever broke out.

 

The third thing I realized is that there were no signs of oil anywhere I went.  The beaches in Destin are still the picture perfect turquoise-water and white-sand gems that they have always been.  Apalachicola Bay is still pristine and full of seafood waiting to be caught and eaten (that’s my view…if you take the Disney view of the world then it’s full of sea creatures living in harmony and talking with each other).  If you’re looking for great beaches and a great vacation then I would urge you to ditch work next week and head to Florida.

 

Central Banks are like Sand Crabs

 

The other night we were walking on the beach…the whole family.  My 10 year old son and 7 year old daughter were chasing sand crabs as we went.  At one point they had chased a crab so far from his hole that his back was against the surf and they stood directly between him and the safety of his hole in the sand.  The crab had run from his problems for so long that when he finally turned to face them head on he literally had nowhere to run and nowhere to hide.

 

These are no ordinary problems…from a sand crab’s point of view they are almost insurmountable.  The crab is two inches tall weighs maybe an ounce…and he’s up against a combined weight of 100 lbs of my kids (these are your standard kids…their destructive force is approximately 200 times their combined weight…the crab has no chance). 

 

To my astonishment, as the kids slowly moved in on him…he got all bowed up like he was going to fight.  The look on its crustacean face seemed to say “don’t make me!”  I couldn’t believe my eyes…who did this crab think he was fooling?  He was posturing to make himself look as big as possible in an attempt to fool the world into thinking that he had some hope of controlling the issues in front of him.  Moments later he was buried alive by a torrent of sand.  

 

I laughed when I realized that this little sand crab trying to bluff my kids into backing down is a bit like a central bank trying to bluff the world into thinking that they can solve all of our problems with a bit of monetary policy and some market manipulation.  With a balance sheet that has swelled to over a trillion dollars, economic problems raging on a global scale, and interest rates at zero I can only hope we don’t get buried alive as well. 

 

 

Sub-prime Mortgages, shark fishing, and risk management

 

As I strolled on the beach with the family one evening I happened upon on a guy with a fishing pole.  It was a picture that could have been taken right out of a salt-water fishing magazine…the sun had just set and he was out there with his family and he was surf-fishing…it was awesome.  As I got closer I could hear the drag on his reel just singing as something stripped line from it.  Despite the apparent action he looked fairly calm.  I asked him “I hear your drag screaming…what do you think it is?”  He pointed out into the Gulf and he said “it’s my dad”.  I looked out in the direction he was pointing and about 300 yards out there was a guy in a small kayak…waaaaaay out there. 

 

I then asked the next logical question “what’s he doing?”

 

The answer was that they were shark fishing and his dad was taking the bait out (they wanted the bait further out than they could cast…so they used a kayak).  I told him good luck and began to walk off.  Before I got a few steps away it hit me, and I turned around and congratulated him for being smart enough to send someone else out into shark infested waters at dusk in a small boat full of dead fish to get the bait right where they wanted it.  He laughed and said that he himself had made the first six trips and this was his dads first.

 

Now…I love fishing…and catching sharks is pretty manly…but even I have to question the judgment involved with paddling out into previously chummed water at dusk in a small kayak full of shark attractant.  I began to wonder if these guys get the Discovery channel.  Surely they’ve seen sharks hammer things about the size of that kayak…its dramatic footage.  I saw no beer anywhere near them…these looked like sober decisions. 

 

It’s the kind of event you think about for a while.  The first thought I had was that I need to buy a kayak ‘cause I’M DOING THAT next time I come down…but with beer so I have an excuse for the paramedics on my flight to the hospital. 

 

So as I reflected on this shark-fishing technique from the tranquility of my beer and oyster infested balcony I realized that their method of catching sharks isn’t a whole lot different than the risk management analysis employed by sub-prime borrowers and investors. 

 

Like the sub-prime borrower/investor the shark guys are completely ignoring the “tail risk” in the distribution of potential outcomes.  The tails of a distribution are where the low probability events live. It’s the stuff nobody thinks about because “oh the chances of that happening are so low…blah blah blah”.  If the severity of the low probability outcome is low…then it’s no big deal…you don’t get hurt too bad if the unlikely event comes to fruition.  On the other hand…if the low probability event is accompanied by a high severity outcome then you could be in real trouble if you ignore it.

 

These guys are hoping that there is a big shark in the area.  In a wonderfully ironic twist, if they are correct, and there is indeed a big shark in the area, then the severity of the low probability outcome increases dramatically…thus skewing their risk/reward tradeoff.  This is a lot like the sub-prime borrower/investor assuming that home prices will never drop because it almost never happens…there is a very low probability of that outcome occurring so they ignored it.  However…what they also ignored is that given their exposure, the severity of such an outcome would be crippling. 

 

The way the shark guys are looking at it is this: if they are successful they might catch a three foot shark, if they are really successful they might catch an eight-footer...if unsuccessful they catch nothing.  It’s a pretty sweet risk reward profile.  It offers plenty of reward and not too much risk.

 

A more realistic view of their risk/reward profile is that if they are successful they catch a three-footer, really successful an eight-footer, unsuccessful they get nothing, and by using the fish-covered kayak they are really upping the probability of the previously unmentioned “very unsuccessful” scenario where the whole family gets to watch as one of them is eaten “Discovery Channel style” by an eight-footer.  Given this more inclusive risk/reward profile people might make a different decision on how they fish for sharks.

 

In summary: when the low probability events just hurt you then you can probably get away with ignoring them.  If however the low probability events can actually KILL you…then you need to pay more attention to them. 

 

From a risk management standpoint fishing from the beach is a hedged bet.  Using a kayak full of dead fish at dusk in shark filled waters to get your bait right where you want it is a leveraged bet.  The risk/reward profiles can be wildly different.  This provides a nice analogy for our sub-prime mortgage investors.  

 

Chumming shark infested waters from a small kayak during prime feeding times for sharks isn’t all that different from buying houses in a real estate bubble using neg-am, interest only, whole loan hybrid arms and betting on the appreciation of the property to get you out of the loan. 

 

They are both classic examples of low probability/high severity combinations.  Both could easily kill you if the dice come up wrong. 

 

In closing

 

Ultimately I’d say that if you want to help out in any way with this oil spill then the best way to do it is to go to Florida right now.  Hit the beaches, enjoy the seafood, take in the sunsets…it’s all still there.  I don’t know if the oil will hit these places at a later date or not…but I do know that it’s not there right now. 

 

From Destin to Panama City, Port St. Joe, Apalachicola, Carrabelle and beyond it’s all pristine Gulf of Mexico beaches, waters and bays…and it can’t be beat.  If you make the trip I know they’ll be glad to see you, you’ll help some hard working American’s keep their jobs, and you might even be able to see some sub-prime investors get eaten by sharks.  What could be more fun than that?

 

Steve Scaramastro, SVP

800-311-0707

 

Market Update 5 26 10 _ Durable Goods

A bit of relief

The pressure in the market is easing a bit this morning after a strong Durable Goods release and higher than expected New Home Sales.  The 10 year Treasury is off almost ¾’s of a point to trade at 3.24%.  The Dow is up about 100 points to trade at 10,147. 

Durable Goods was expected to post a 1.3% increase but actually posted a 2.9% figure.  New Home Sales were expected to come in at 425,000 but posted 504,000 instead.

A matter of perspective

Many times in life people can look upon the exact same set of data and come away with very different conclusions. 

For example, yesterday my wife asked my 7 year old daughter “Is daddy’s hair more brownish or blondish?”

She replied “It’s more BALDISH.”

If I’d been there for the insult I’d have sent her to her room.

This difference in perspective reminds me of today’s Durable Goods data.  While it is certainly good news to see that Durable Goods orders are rising, I find it difficult to use that number as a basis for concluding that a recovery is imminent.  One person sees “recovery” in the number, another looks deeper and sees “baldish”. 

One of many headwinds that Durable Goods must overcome is the decline in value of the Euro.  The most recent Durable Goods figure covers the 3/31/10 to 4/30/10 time period…one month.  Durable Goods orders were up 2.9% over that 30 days (the bulk of which was comprised of aircraft orders…a typically volatile sector).  To get a better look at core activity we can use Durable Goods Ex-Transportation which posted a -1.00% figure vs. an expectation for a 0.5% gain. 

So Durable Goods Ex-Transportation was -1.00%.  Over that same time period the Euro was down only 1.6%. 

Since the start of the new Durable Goods reporting period the Euro has dropped an additional 8% in value.  That trend can only continue for so long before it begins to price our exports out of the picture…and a drop in exports will be reflected in Durable Goods orders. 

It will be interesting to see how well Durable Goods orders can hold up when the value of the Euro is dropping like a rock and austerity measures kick in across the European continent.  Time will tell but given the overall macro picture right now it seems that Durable Goods orders would have a difficult time gaining much momentum. 

 

 

Looking forward

Tomorrow we get GDP, Personal Consumption, Initial and Continuing Claims, and Core PCE (the Feds favorite measure of inflation).

There are no new stories out of Europe or the Korean peninsula to spook the markets this morning.  All in all it’s just a steady but quiet trading day.

If you have any questions or if there is anything I can be doing for you just let me know.

Steve Scaramastro, SVP

800-311-0707

 

Market Update 5 20 10 _ An ugly start

 

Who remembers the Bionic Man?  Remember the intro to the show when Steve Austin is squawking over the radio saying “Flight Con! I can't hold it! She's breaking up, she's break—"…and then the plane crashes and rolls across the desert in a giant smoking flaming trail of dust and debris?  This market has that feel to it. 

The markets are taking a beating again this morning.  The Dow is off 200 points to trade at 10,240 and the 10 year Treasury is up over a point to trade at 3.23%. 

Fear over sovereign debt problems in Europe continues to reverberate through the markets.  In addition to the steady drumbeat of fear out of Europe the market is joined this morning by a chorus of higher Initial and Continuing Jobless Claims. 

Initial Jobless Claims were released at 471,000 vs. an estimate of 440,000.  Continuing Claims were released at 4.625 million vs. 4.605 million.

If you want to buy it’s not the best day…if you want to sell then now would be a good time.  There’s not much more to report…I think I might go fishing. 

If you have any questions or if there is anything I can be doing for you just let me know.

 

Market Upate 5 19 10 _ Another Fed President weighs in

The Fed continues to telegraph their preference to maintain the language in the FOMC statement regarding “exceptionally low levels of the Fed Funds rate for an extended period” and today’s  economic data only provides more support for that stance.  CPI shows no inflation. 

Last week the Minneapolis Fed President (soon to be voting member) expressed his support of the “extended period” language and this week Cleveland Fed President Pianalto (current voting member) did the same.

Pianalto’s remarks were in a speech to the Economics Club of Pittsburgh.  The bulk of her speech was directed at how the Cleveland Fed does their forecasting (yawn), but at the end she tacked on her current thinking with regard to the economy…and therefore provided a clear window to how she will be voting.

She began by reiterating the Feds dual mandate of maximum employment and stable prices.  The bit about “maximum employment” has to be a tough bit lately…but  with inflation nowhere in sight I’d give them an “A” on stable prices…for now.

I’m going to skip over much of the material she covered…it was basically a “Forecasting 101” type presentation.  Where things get interesting for you and I is toward the end where she lists her yardsticks for measuring the health of the economy, where they are, where she sees them going, and what that means for the Fed Funds rate.

Use the Force

Force 1 - Unemployment

Pianalto lists two major “forces” affecting the recovery from this recession.  The first is Unemployment, the second is a “heightened sense of caution” among Americans. 

With regard to Unemployment she points out that half of those that are unemployed have been that way for at least 6-months.  Over that time period essential job skills can erode which leads to lower productivity if/when you do get a job.  In many cases the unemployment will be structural…meaning that the job just ain’t coming back.  This leads to an even greater loss in productivity because now you have workers looking for jobs outside of their industry…jobs for which they don’t have any skills.  The longer the Unemployment rate remains elevated the bigger the negative impact from these forces.

Force 2 - Caution signs

The next force is that of the “heightened sense of caution”.  I’ve referred to this as a “change in behavior” over this cycle.  This is the type of economic event that leaves a deep and long lasting mark on those that travel through it.  If you lose your house you remember it ‘til the day you die.  If you go 6 to 12 months with no job you remember the pain and uncertainty that accompanies that status…and you will do whatever it takes to avoid being in that position again.  It’s the type of thing changes behavior going forward...by definition your behavior over the next 5 years won’t resemble that of the last 5 years.  This evolution toward more defensive behavior (one might also call it a return to more rational behavior) will in turn serve as a drag on GDP (one of several). 

Pianalto gives further evidence as to the “heightened sense of caution” among Americans:

“In a recent survey by Ohio's Xavier University, 60 percent of those polled believe attaining the American dream is harder for this generation than ones before. And nearly 70 percent think it will be even more difficult for their children. Many people are now just aiming for “financial security” as their American dream.”

Many people are just aiming for “financial security” as their American dream?  If that doesn’t signify a seismic shift in behavior then I don’t know what does.  It’s no longer that people want a house, 2.5 kids, a big screen TV and an  SUV.  Now the goal for many Americans is simply to avoid be kicked out on the street with no job.  Do you remember Maslow’s Hierarchy of Needs from Psych 101 in college?  People aiming for “financial security” as their new goal just got knocked down a few notches on that pyramid.   The need for recognition and social status has perhaps been replaced with the need for survival.    

Pianalto sums up her outlook on the “two forces” with the following: “These two factors—overall caution and the effects of labor market damage—lead me to an outlook for relatively subdued output growth through this year and next, with unemployment rates that decline only gradually.”

So here she echo’s the same sentiment as the Minneapolis Fed last week…there will be no quick recovery and expect the unemployment rate to remain high.

Moving on to the Inflation front she says that current data point to disinflation rather than inflation.  Of the two measures that the Cleveland Fed uses to track inflation they have both been on a disinflationary trend since the middle of 2008.

Her conclusion

For the next couple of years, I expect employment levels to remain well below what I would consider full employment. Similarly, I expect inflation to only gradually drift up from its currently low level but nonetheless remain subdued. In my view, this outlook warrants exceptionally low levels of the federal funds rate for an extended period of time.

Put Pianalto down in the column that lists “people voting to keep rates at zero”.  Before the month is up we’ll have more statements from Fed Vice Chairman Kohn (retiring on June 23…Yellen will replace), NY President Dudley, St. Louis President Bullard, Chairman Bernanke, Richmond’s Lacker, Philadelphia’s Plosser, and Chicago’s Evans.  The next FOMC meeting is on June 23^rd. 

Vice Chairman Kohn retires at the next FOMC meeting.  I picture his retirement party at the Fed being more of a “sheet cake and fruit punch in the lobby” type of deal where they present him with a big oil painting of his likeness that will hang in the hall at the Fed rather than the “midnight flight to Vegas” type.  If I’m wrong, and if anyone out there has an extra wristband that will get me in to the Vegas party let me know…I’d pay top dollar to see the open market committee let loose in Sin City. 

I’ll provide more color as we hear from the other Fed members over the remainder of the month.  If you have any questions or if there is anything I can be doing for you just let me know.

Steve Scaramastro, SVP

800-311-0707

 

Market Update 5 14 10 _ The Fed speaks

In the beginning

Today is May 14^th, 2010.  Three years ago the 10 year Treasury was trading around a 5.20% level.  Then the Bear Stearns hedge funds collapsed and kicked off the Armageddon World Tour.  Today the 10-year is trading at a 3.45%.  It’s been three years since the Big Bang and I’m still writing updates discussing why yields are low or going lower.  Three years.  Somewhere in Japan there has to be a fixed income analyst/economist/second rate comedian that understands exactly how I feel. 

Along the way we heard Fed Chairmen say that the Sub-Prime problem was contained, that it wouldn’t spread to the general economy. We heard that housing prices had some “frothy pockets” but that they weren’t in danger of a general decline.  We heard some real doozies. 

Today

Now it looks like the Armageddon World Tour has some dates scheduled in Europe.  If European soccer fans get angry enough to burn down their home stadium over a loss to a rival team I can’t WAIT to see their collective reactions once they figure out what’s coming their way over this sovereign debt deal.  Gas prices could rise on Molotov Cocktail activity alone.

Perhaps the most interesting news of the day comes from the Fed.  The Fed is sending out messengers again this morning and the Minneapolis Federal Reserve President is speaking in tones that sound terribly candid.  It almost sounds like he never took the class on “fed speak”.  Fed Speak is a bit like the Jedi Mind Trick…it’s the thing where you speak but nobody listening really gets the true meaning of what you just said.  Greenspan was a master of this technique.  Fed President Kocherlakota didn’t get the memo.  He spoke in a straight-forward manner today and much of it lines up with what we’ve been saying for quite a while.

His outlook

Kocherlakota says he is mildly optimistic at this point.  He believes the recovery is firmly underway but that it will not be a “V” shaped recovery.  For those interested in the different “shapes” of a recovery you can pull up the Market Update from 5/7/09…it goes over the various types of recoveries.  It’s a bit disconcerting that a year after I wrote that piece we are still discussing what the shape of this recovery might be.  Threats to the recovery include higher future taxes that will be necessary to repay the amount of money we’ve borrowed.  Higher future taxes reduce the amount of capital that is available to be invested by the private sector, which leads to lower growth and slower rates of job creation.

It’s important to note that next year Kocherlakota will be a voting member…so here we’re getting a nice glimpse into the way a future voting member views the world.  In his statements he leaves no questions about his views on the language “likely to warrant exceptionally low levels of Fed Funds rate for an extended period of time.”  He states categorically that he would have voted for that language at the last meeting.

Why would he have voted for the language?  Because he sees the economy struggling with the Unemployment Rate remaining high and expected inflation remaining low.  Specifically he states that it wouldn’t surprise him to see the Unemployment Rate remain above 9.00% through the end of this year, nor if it remained above 8.00% by the end of next year.  Regarding inflation he states that he sees 5-year inflation expectations running at about 2.00%.

In summary he sees a weak economy, very high unemployment for at least two years, no inflation for 5 years, he agrees with the majority of voting members that a zero level on the Fed Funds is appropriate and that he’d vote for keeping it that way for an extended period.

We’re three years into the Armageddon World Tour/quagmire and this soon-to-be voting member of the Fed is laying out language that hints at another two years of exceptionally low rates. 

After stating all of this, Kocherlakota goes on to state that it’s all data dependent and the Fed stands ready to raise rates quickly whenever they need to whether it be “3 weeks, 3 months, or 3 years”.  This statement reminds me of the old playground threat… “don’t make me”.  I hear it occasionally when a big group of kids is outside playing.  Invariably there will be a disagreement of some sort and someone will always invoke this vague threat in an attempt to get what they want.  It’s always a hollow threat, nobody ever actually DOES anything.  It’s just a convenient way to appear like you have some control over the situation when in reality things are very close to uncontrollable. 

I find the “don’t make me” phrase to be a nice parallel to Kocheralakota’s statement that he stands ready to tighten in “3 weeks, 3 months, or 3 years” right after he lays out a scenario where he doesn’t see the need to raise rates for at least two years.  The Fed can talk all the trash they want about raising rates but it looks like they have no room to do so anytime soon.  A Marine buddy of mine used to describe people making these types of statements as having “an alligator mouth and a hummingbirds backside” because they lack the muscle to back up their talk.  My friends statement regarding the backside of the hummingbird is a bit more colorful than how I relayed it here…but in the interest of keeping this a family friendly piece I toned it down a bit.

Reducing the Fed balance sheet?

Kocherlakota next addressed the size of the Feds balance sheet and an exit timeline.  He sets the bar exceptionally low when it comes to an exit.  With regard to the pace and size of MBS sales “we want to be careful not to cause large jumps in long-term interest rates, and especially not in mortgage rates. But I believe that we can do so, as long as we commit to a sufficiently slow pace of sales. I’m optimistic that we can get MBSs off our balance sheet by 2020 at the very latest.”

There you have it…a 10 year exit deadline…way to go out on a limb.  I find that strategy terribly amusing.  Base case cash flow projections on new issue 30 year 6% MBS show that for every $1 million in principal you buy today, you will have $5,157 in outstanding principal remaining in 2020.  That is a 99.48% reduction based on pay-downs alone.  I guess I wonder why you’d even bother to issue a deadline…why not just say we’re going to hold them until they have factored down so far that they are insignificant?  In a world where words matter I guess his way is better than saying “we’re stuck and we can’t get out.” 

Reading between the lines

There is an interesting and important wrinkle in his statement this morning.  He states that “Over 2 trillion dollars of those assets are in Treasuries or in mortgage-backed securities issued by Fannie Mae and Freddie Mac. These MBSs are backed by the U.S. government—the Fed faces no credit risk in holding them. However, the MBSs do expose us to interest rate risk and prepayment risk.”

We occasionally get some questions about the safety of debt issued by Fannie and Freddie.  There is a mountain of reasons why this debt will never be allowed to go unpaid.  The multitude of reasons can effectively be summed up by stating that any failure to pay on behalf of the GSE’s would effectively destroy what remains of the global financial system, and that congress would rather not go down in history as the entity that both created and nurtured the institutions behind such an event. 

Today’s statement by Kocherlakota adds just a few more boulders to the top of the mountain of reasons that you shouldn’t be worried about the credit worthiness of the GSE’s.  Fed Presidents openly speak about Fannie and Freddie being backed by the US Government and that they have “NO CREDIT RISK”. 

Kocherlakota is no idiot.  He understands the power of words and he understands the structure of Fannie and Freddie.  He understands that the prospectus on Fannie and Freddie debt contains no explicit guaranty by the US Government…but he also understands the reality that there is no other alternative than for the US Government to make sure that the GSE’s make good on that debt…period.  He’s not the first official to state it…he’s just the most recent. 

If you occasionally field questions from board members on the safety and soundness of GSE debt just add this statement to the file as another piece of evidence that there is nothing to worry about with regard to the credit quality of Fannie and Freddie.  I wouldn’t touch their stock but I’d sleep well at night owning their bonds. 

In closing

That’s it from Memphis folks.  This weekend is the grand finale of the World Championship BBQ competition along the banks of the might Mississippi River.  Many bond trading desks send their traders down to mingle with their Memphis cohorts each year during this event so business tends to get lighter as the afternoon approaches.  This translates to “if you have any business to do then try to do it early because by 2PM the traders will be down on the river, elbow deep in beer and BBQ.”

As always if you have any questions or if there is anything I can be doing for you just let me know.

Steve Scaramastro, SVP

800-311-0707

 

Market Update - A humorous example from todays market

 

I have a gift (some call it an affliction) that enables me to see the humor in even the most chaotic of circumstances.  When I look at today’s train wreck in the market something jumps out at me.  Below is a graph of today’s trading price of Proctor and Gamble, trading symbol PG.  PG is one of the 30 stocks that make up the Dow Jones Industrial Average…”the Dow” as we call it...the index that was off 1,000 points today.

 

We began laughing the moment we pulled this up.  When I see it I realize that somebody woke up this morning holding PG at $60…and he felt pretty good about it all the way through lunch time. When he comes back from lunch he answers a few e-mails, completes a few reports, then he pulls up the internet to check the value of his portfolio and dream of the day he can retire from the drudgery which currently ensnares him.  When he pulls up his stock account he sees the Dow melting down, he checks the price of PG and he thinks “OMG…SELL!”  So he puts in a market order to sell and he takes a nitro-glycerin pill to keep his heart in check.  His fill order comes back at $40…he wants to cry over a big loss like that but he’s just glad he’s off the train.  A few minutes later he pulls up a quote on PG to see just how big a bullet he dodged and he sees that the price is back up at $60.  He then pukes his cheeseburger onto his desk and he goes home sick.

 

Across town someone else just got back from lunch and was answering e-mails, completing reports, and dreaming of the day when he too can escape the drudgery which currently ensnares him.  He was watching the market as well.  This guy watched as PG started to drop…from $60 down to $55 per share and he jumped in with a market order to buy a bunch of it.  His fill order comes back in less than a minute at $40.  He thinks “OMG…SWEET! I got it at $40!”  Ten minutes later he’s still in disbelief at his great execution and he checks the quote on PG and it comes back at $60.  “OMG!  I’m rich! I just made 20 bucks a share in less than a minute…I’m gonna be famous…I’ll probably be on Oprah!”  He now dreams of how much closer he just got to escaping the drudgery which ensnares him.

 

So that’s where I see the humor today.  It’ll be even better if these guys know each other and meet up for happy hour after work.  Imagine the scene where they each talk about their day in the market.

 

Steve Scaramastro, SVP

800-311-0707

 

PS – we were concerned that someone on this distribution list might own Proctor and Gamble and be upset by this example…but then we figured you probably won’t get this e-mail because you went home early after puking your cheeseburger .