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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: russwinter who wrote (77921)	1/20/2007 12:13:18 PM
From: westpacific	Read Replies (2) \| Respond to of 110194

This from Doug Noland is numbing...... ---- Financial Times (Gillian Tett): “Last week I received an e-mail that made chilling reading. The author claimed to be a senior banker with strong feelings about a column I wrote last week, suggesting that the explosion in structured finance could be exacerbating the current exuberance of the credit markets, by creating additional leverage. ‘Hi Gillian,’ the message went. ‘I have been working in the leveraged credit and distressed debt sector for 20 years . . . and I have never seen anything quite like what is currently going on. Market participants have lost all memory of what risk is and are behaving as if the so-called wall of liquidity will last indefinitely and that volatility is a thing of the past. ‘I don't think there has ever been a time in history when such a large proportion of the riskiest credit assets have been owned by such financially weak institutions . . . with very limited capacity to withstand adverse credit events and market downturns. ‘I am not sure what is worse, talking to market players who generally believe that ‘this time it’s different’, or to more seasoned players who . . . privately acknowledge that there is a bubble waiting to burst but . . . hope problems will not arise until after the next bonus round.’ He then relates the case of a typical hedge fund, two times levered. That looks modest until you realise it is partly backed by fund of funds' money (which is three times levered) and investing in deeply subordinated tranches of collateralised debt obligations, which are nine times levered. ‘Thus every €1m of CDO bonds [acquired] is effectively supported by less than €20,000 of end investors' capital - a 2% price decline in the CDO paper wipes out the capital supporting it.’” Scary - and it all gets back to everyone thinking as long as the CBs keep on printing more and more and more and more and more and more and more and more fiat paper we go are all ok.................................................................................................................................................................................................................. Time to dig the bomb shelter. Doug Nolands weekly is just the best....I love this! ----- January 18 – Bloomberg (Otis Bilodeau and David Scheer): “Madeleine Albright, the former U.S. secretary of state under President Bill Clinton, raised $329 million from a Dutch pension fund that her money-management firm will invest in emerging markets. Albright Capital Management LLC, an alternative-investment firm chaired by Albright in Washington, said it will make a ‘long-term, multiclass investment…’” West

To: russwinter who wrote (77921)	1/21/2007 1:52:08 AM
From: bart13	Read Replies (1) \| Respond to of 110194

Although the MBS component is high, I'm trying to figure out the relevance of this, so let me just guess? Does it mean the dealers are going extensively to the Fed funds and/or discount window to borrow for MBS purchases. Are the numbers presented here the collateral for these MBS transactions? Just in case, I'm almost as much in the dark as you on the full picture. The whole GSDS area is something that no one of which I'm aware has ever brought up, and in that sense it's much like TIOs. But in this case its more that I have both done little analysis in the area, and also don't believe I'm as familiar as you & Lee and probably others with these types of flows. GSDS stands for Government Securities Division Statistics and is part of the Fixed Income Clearing Corporation, and contains the activities of the 22 primary Fed dealers. The total of all 4 segments (Gov't securities, Agencies & GSEs, MBS & Corprate Bonds) has had a weekly range of $900-1,400 billion since 2001. The MBS segment has run between $200-532 billion per week since 2001, and the $532 billion is this week's number and a record high since 2001. I've simply been posting it because it's way off the beaten path, it marked a turning point in real estate stocks and other items over the years, and I've made (or not lost by getting out) a few dollars trading it much like I did with TIOs. My best guess though is that there sure is action in Fed Funds via Fed credit (and likely other unknown sources too) to help fund the activities. Here are all three GSDS charts from my site:

To: russwinter who wrote (77921)	1/21/2007 6:39:03 AM
From: Crimson Ghost	Respond to of 110194

Boost Exposure to U.S. Mortgage-Backed Securities Range-bound yields should provide some upside for U.S. MBS. The probability of a Fed rate cut in the first half of 2007 has tumbled as retail sales surprised on the upside and investors upgraded their growth expectations. Treasury yields are back in the middle of a trading range and unlikely to test either end in the near run. This drop in volatility provides a green light to assume more convexity risk in the bond market. Specifically, MBS and callable agency bonds tend to outperform when volatility is low or declining. Moreover, the mortgage index is reasonably attractive; the option-adjusted spread of the fixed MBS index has widened to about 40 basis points, its highest level since mid-November. Bottom Line: Our U.S. Bond Strategy service recommends upgrading MBS to overweight at the expense of Treasury securities. Bank Credit Analyst