Interdum stultus opportuna loquitur...

Friday, October 01, 2004

Fed Saves Fannie's Fanny

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Note: "Fanny" is used here as American for BUM rather than the Australian usage.

Federal Reserve Open Market Operations

The Fed's OMO desk did two pretty huge repurchase operations last night -

  • a $7 billion overnight (with a meagre 0.25 billion in Treasury-backed collateral); and
  • a $9 billion, 14-day term repurchase with $6.564 billion in T-backed.

Since the overnight repurchase had little in the way of T-backed, it was neceaary to wait for teh 14-day to be processed (which always takes longer when there are 2 repurchases). Still, conditioned "repo pump" watchers are supposed to buy at midnight if there's more than $5 bill in T-backed repurchases undertaken.

So long as you held your nerve, that strategy played out just fine (and it almost always does; the number of times it doesn't are few and far between). Sure, there was a requirement to sit through a 2.5-point downdraft, but after an hour the trade was up two points and by the close it was up 5 points.

To be frank though, it was a pretty unimpressive repo pump last night; I certainly would have expected better given the size of the 14-day repo.

The interesting thing about the $7 billion operation was the huge amount in mortgage-backed collateral; $4.5 billion. That money is generated by buying securities issued by the major mortgage GSE's (government sponsored entities)... Fannie Mae and Freddie Mac.

There has been a whirlwind of speculation about FNM and FRE for a couple of years now - they now write almost 40% of all mortgages in the US, and issue the overwhelming preponderance of mortgage backed securities.

FNM was recently found to have been "massaging" earnings reports in order to meet management bonus targets. What a surprise - if you remunerate management based on very short tterm targets, you've got no cause for whining when they do everything in their power to maximise their own earnings.

FNM and FRE stock prices were both weak last night - dropping 4.3% and 2.6% respectively. This was partly due to the Department of Justice getting involved in investigating FNM, but also because of FNM cutting the dividend rate on Series G of its variable-rate non-cumulative preferred stock.

The dividend rate decrease was not a surprise, because the yield on Series G variable non-cum prefs are tied to the yield on 2-year constant maturity treasury notes and that yield has fallen in the past 2 years (and the G-Series note yield is adjsuted every 2 years).

The bottom line: the Fed is doing what it can to shore up FNM and FRE paper otherwise there is a risk of a major disconnect in the mortgage market.

Currently FNM and FRE can collateralise the mortgages they write (effectively, parcel them up and call them mortgage bonds); they then are able to issue those bonds with a decent rating. If that stops, bond managers will have to pare back their allocations to those bonds.

See, currently FNM and FRE can issue bonds and pay a teensy default insurance premium in order to have those bonds rated highly - which enables the bonds to be included in the "low risk" allocations (like US government bonds). Any widening of the default premium will hurt FNM's earnings by increasing costs - but it will hurt bond managers via the likely fall in every tranche of new FNM and FRE CDOs.

Economic Statistics

There wqas plenty of data on offer again last night.

New Jobless Claims numbers rose to 369,000, well above the 340,000 consensus estimate (and in fact slightly above the top end of the estimate range - which was 330k-365k).

That's the worst outcome for claims since February... more evidence of Greenspan's "the economy is gaining traction" waffle. Of course, the number is all being blamed on the multiple Hurricanes and their effect on Florida.

Personal Income and Outlays data was released and was slightly below expectgations on the outlays side. Income rose to match expectations (0.4%) but consumer spending was flat (versus a consensus estimate of a 0.1% increase).

At 10 a.m. NY time, the Chicago NAPM business conditions survey was released and showed a reading of 61.3 as compared with consensus of 58.

Major US Indices

Before the market opened, Merck (MRK) - a Dow component - announced that its Vioxx pain-killer could cause incresed risk of heart attack and stroke. They are recalling Vioxx, since they don't have Donald Rumsfeld in their corner (unlike G.D. Searle - the makers of Aspartame. Rumsfeld's presence enabled Searle to release the aspartame neurotoxin as NutraSweet - despite the strident objections of the FDA's expert panel... who were replaced in order for the sweetener to be passed later in the form of large stock gratuities to Rumsfeld). Merck shares fell an astonishing... wait for it... twenty six percent. Yikes.

Without MRK's contribution, the Dow would have risen modestly - and would have been in line with the other indices (i.e., pretty much unchanged).

The DJIA lost 55.97 points (0.55%), closing out the day at 10080.27 points; the broader S&P500 lost 0.22 points (0.02%), finishing the session at 1114.58.

Over at Times Square, the Nasdaq Composite gained 2.9 points (0.15%), to close at 1896.84, and larger-cap tech stocks were even less impressive with the Nasdaq100 adding a scant 1.88 points (0.13%), to end at 1412.74 points.

The broader stock market measures rose: the NYSE Composite Index gained 9.57 points (0.15%), closing at 6570.25, while the broadest measure of US equities, the Wilshire 5000, posted a gain of 9.59 points (0.09%), finishing the session at 10895.48 points.

NYSE Volume was chunky, with end-of-quarter book-squaring leading to a strong 1.75 billion shares traded. Nasdaq Volume was jsut above average, with 1.68 billion shares crossing the tape.

This quarter marks worst quarterly decline for the major U.S. indices since Q1 of 2003; for the quarter the Dow lost 3.4%, the S&P dropped 2.3% and the Nasdaq slid 7.4%.

Nasdaq Composite1896.842.90.15%
NYSE Composite6570.259.570.15%
Wilshire 500010895.489.590.09%
NYSE Volume1.75bn--
Nasdaq Volume1.68bn--
US 30-yr yld4.89%0.03%0.62%

Market Breadth & Internals

On the NYSE advancing Issues outpaced decliners by 1981 to 1321 for a single-day A/D reading of 660; Nasdaq gainers shaded losers by 1732 to 1317.

NYSE advancing volume exceeded volume in decliners by 1056.92 to 667.41 million shares; Nasdaq advancing volume outpaced volume in decliners by 590.38 to 377.88 million shares.

178 NYSE-listed stocks rose to new 52-week highs, and 13 posted fresh 52-week lows, while on the Nasdaq there were 87 stocks that hit new 52-week highs, and 31 which fell to fresh 52-week lows.

All of those breadth numbers were "coloured" by the end-of-quarter tape-painting that is now an indelible part of the "investment" landscape. Professional money mis-managers use OPM (other people's money) to make their portfolio performances look good for the one day a quarter when it matters.

Advancing Volume (m)1056.92590.38
Declining Volume (m)667.41377.88
New Highs17887
New Lows1331

Market Sentiment

This "13-handle VIX" is doing my head in. I can't come to terms with a non-mania market in which option implied volatility for stocks is lower than it is for bonds.

Couple that with the fact that expected returns from stocks are both above the historiical average and higher than bonds, and you have a market where people expect to get a market-wide return in excess of the risk-free rate with lower volatility. So they will get positive risk adjusted returns without having to do anything.

No, I don't think so. The equity put-call ratio dropped again, to 0.78 from 0.82 yesterday. Equity call volume is back above 2 million, which means that all the ducks are beginning to line up from a contrarian perspective.

Equity Call Volume2.11m0.12m6.19%
Equity Put Volume1.64m0m-0.15%
CBOE Volatility Index13.340.130.98%
CBOE Nasdaq Volatility Index20.48-0.19-0.92%


Bonds fell along the curve, with the yield on the benchmark US 30-yr bond rising 3.1 basis points to 4.893%. Some time in the nbext few days I will try and get a decent snapshot of the yield curve to include with each day's Rant; there is a brilliant one at - it is dynamic and everything. Check it out (if this link works).

UST 2Y (yld)2.6050.020.77%
UST 5Y (yld)3.3660.0150.45%
UST 10Y (yld)4.1210.030.78%
UST 30Y (yld)4.8930.0310.64%
The Banks Index lost 0.15 points (0.15%), finishing the session at 97.58; within the index,
  • the Derivative King - JPMorganChase gained $0.05 (0.13%) to close at $39.73; and
  • Citigroup lost $0.58 (1.3%) to close at $44.12

The Broker-dealer Index gained 0.93 points (0.74%), to clsoe at 126.61; the ticket clippers lined up as follows -

  • Merrill Lynch slipped $0.45 (0.9%) to close at $49.72
  • Morgan Stanley Dean Witter fell $0.20 (0.4%) to $49.30
  • Goldman Sachs lost $0.04 (0.04%) to $93.24
  • Lehman Brothers shed $0.47 (0.59%) to close at $79.72

The Philadelphia SOX (Semiconductor) index gained 3.58 points (0.94%), closing out the session at 384.2

  • Triquint gained $0.11 (2.9%) to close at $3.90
  • Micron Technology shed $0.07 (0.58%) to $12.03
  • Intel lost $0.01 (0.05%) to finish at $20.06
  • Altera added $0.28 (1.45%) to close at $19.57
  • JDS Uniphase gained $0.05 (1.51%) to $3.37

Gold & Silver

Gold strengthened by $5.30 (1.28%) to $418.20 per ounce, which contributed to the Gold Bugs Index adding 7.4 points (3.3%), finishing the session at 231.38 points.

Silver's bullet rise continued, with Gold's little sister rising $0.24 (3.6%) to $6.92 per ounce.

The Gold and Silver Index (XAU) gained 2.56 points (2.58%), finishing the session at 101.95

PHLX Gold and Silver Index101.952.562.58%
AMEX Gold BUGS Index231.387.43.3%


Oil was only briefly able to get its head above $50 early in the NYMEX day session, hitting $50.10 about an hour into the session. Then the market reversed with some alacrity, with Texas Tea eventually finishing the session down $0.05 per barrel, closing at $49.47 per barrel.

The Oil and Gas Index (XOI) gained 4.16 points (0.6%), finishing the session at 698.74 while the Oil service stocks (OSX) Index added 0.7 points (0.58%), finishing the session at 120.79 points.

Reuters CRB285.12.10.74%
Crude Oil Light Sweet49.47-0.05-0.1%
AMEX Oil Index698.744.160.6%
Oil Service Index120.790.70.58%


The US Dollar Index got pretty well hammered last night; major contributors were the Aussie dollar (which rose more than a cent - 1.5% - against the greenback and is now above 40p against the Pound) and the Euro which also rose by over 1c against the US dollar and sits comfortably above 1.2400 for the moment.

US Dollar Index87.5-0.79-0.89%
Australian Dollar0.72730.011.52%
Swiss Franc1.2455-0.013-1.03%

European Markets

France's benchmark CAC-40 Index lost 42.06 points (1.14%), ending at 3640.61; the German DAX-30 Index lost 27.46 points (0.7%), finishing the session at 3892.9; and in the UK, the FTSE-100 Index lost 17.3 points (0.38%), closing at 4570.8 points.