Incite -- (v) 1: give an incentive; 2: provoke or stir up; "incite a riot"; 3: urge on; cause to act |
Monday, May 10, 2004
Written by: AnonymousUsually in the second week of your first finance class, you learn about asset allocation. Asset allocation, in its incredibly simplified form says this - money has to go somewhere (as most money professionals, in an attempt to remain gainfully employed, tend to shun the "shove it under the matress" play) - and as such, there are three classes of money - equities, debt, and cash (money markets). This theory sequences into an even more simplified extension: when equities are off for the day, the money will be placed in bonds. This theory is ever more powerful as a move in one is amplified. The reason I am bringing this all up is we are witnessing the continuation of the 1% FFR hangover that started on Friday. Today, the DJI blew through the 2004 low, set back on 24 March, and made balsa wood of the support at 10,000. So, where did the money that was being taken out of the market go? Did it follow our simplified maxim of finance? Did it "fly to quality" in bonds? The ten-year traded at 4.78% yield at the NYSE close. So, no new bids over there. (Even more troubling were the swap spreads - this is the market where floating rate payers can swap for fixed rate instruments, attempting to lock in rates as they start to soar. The behavior of this market is a great indicator of the aggregate attitude of rates for the mid - to - long term. Well, spreads have blown out here, as offers for fixed rate instruments are becoming ever more precious. They traded at the NYSE close around 57bps (which means that in the wholesale debt market - which is the cheapest price possible, reserved for those who can trade in minimum increments of $1,000,000+ - it costs over half a percent to switch from floating to fixed on a 2-yr agreement. The mood is GRIM) So, where is the money going??? Well, interestingly enough, effectively, its vanishing. Now, I am not telling you that any money that currently exists is vaporizing. It still and will continue to exist ad infinitum. But, there is a new premium being priced into risk models throughout the land. The days of the accommodative Fed stance are done. And during the accommodative Fed stance, the treasury was monetizing debt at an unprecedented rate. There was so much liquidity, that dormant money was everywhere, looking for a home. Well, you gotta put it somewhere, and you've gotta beat your benchmarks if you are going to keep a job. Now, the liquidity game is done. So, the money coming out is looking for new homes, but demands far greater premiums, which means that prices have to soften before these funds are committed anywhere. These are some very interesting times. OF NOTE: The SEC came out this morning and told Fannie Mae (FNM), that they will NOT be required to restate earnings (this is unbelievable, and is pretty much evidence of one thing, there are some errors that would create holy panic if they were to be published), but must, from henceforth on, recalculate positions under some obscure new policy (of which I am wholly uninformed). Keep your eyes wide, these days are very interesting.
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