What is credit? I was watching the Davos Conference held a few weeks ago and they had a round table discussion with a few heads of state, among them was Prime Minister Gordon Brown. PM Brown began speaking by defining the origin of the word “credit”. The word comes from the Latin “Credo” he said, which means Faith, faith that a person, company, country, etc that you lend money to will eventually repay you. The problems that have brought us to what we are facing today have many arms (subprime, toxic assets, frozen markets, etc), however, one of the most fundamental factors that affect this situation is precisely a lack of trust. There is little trust in how our financial system operates and there is little trust in the safety of our investments.
Investors and market participants were desperately looking to regain this “trust” via a new TARP2 that the Treasury department unveiled Tuesday. However, the lack of clarity that came from Secretary Geithner’s announcement failed to convince the markets that a new path has been designed to deal with this situation. It will continue to be difficult to stabilize the market without a clear strategy that can provide this all-important trust.
Secretary Geithner’s announcement on Tuesday had a direct impact on both equities (380 points drop in the Dow) and bonds where there was a significant gain in Treasuries across all maturities (from 1 point on the 10-year to over 3 points on the long bond). This performance was attributed to what investors considered a financial stability plan that lacked clarity and direction (main points included below). The markets continued to be heavily influenced by politics on Wednesday as the equity markets viewed the news that a stimulus deal had been reached in the senate favorably, and the Dow gained 50 points to close at 7,939. For the record Congress agreed on a $789 billion economic stimulus plan with 35% comprise of tax cuts and the rest government spending. Treasuries had mixed results as short maturities lost value while demand for the intermediate and long bond increased. The 5-year note was basically unchanged at 1.76% while the benchmark 10-year gained 15/32s to yield 2.76% and, despite today’s 30-year auction, the long bond rose 25/32s to yield 3.45%.
Financial Stability Plan
1. Financial Stability Trust
- A Comprehensive Stress Test for Major Banks
- Increased Balance Sheet Transparency and Disclosure
- Capital Assistance Program
2. Public-Private Investment Fund ($500 Billion - $1 Trillion)
3. Consumer and Business Lending Initiative (Up to $1 trillion)
4. Transparency and Accountability Agenda – Including Dividend Limitation
5. Affordable Housing Support and Foreclosure Prevention Plan
6. A Small Business and Community Lending Initiative
Source: http://www.financialstability.gov/
Treasury prices are reversing yesterday’s course with the short maturities gaining demand while the long bond is dropping in price as market participants prepare for the auction of $14 billion of a 30-year bond at noon today. The 5-year note is gaining 6/32s to yield 1.71% while the benchmark 10-year has risen 7/32s to yield 2.76% and the long bond has dropped 16/32s to yield 3.47%. On the economic front, the Advanced Retail Sales number was released with stronger than expected results indicating that sales grew in January for the first time in 7 months by 1.00%. Analysts were expecting a 0.80% decrease. The Less Auto or “core” number was also stronger than expected at 0.90% versus the expected -0.40%. Advance Retail Sales is a measure of sales at retail establishments which does not include spending on services and sets the tone for personal consumption, a major component of GDP.
The headline Advance Retail Sales number reflects stronger than expected data across a number of different sectors. Gasoline stations sales grew at a rate of 2.60% in January (partially due to an increase in gasoline prices). Sales of motor vehicles and parts grew by 1.60% and food and beverages increased 2.10%. Offsetting these monthly increases were, among others, building materials and furniture sales which fell 3.20% and 1.30% respectively. Additionally, the Department of Labor released its weekly Initial Jobless Claims report in which claims dropped 8,000 from the previous week to 623,000 but were still higher than expected as analysts had anticipated a 610,000 reading for the week. Continuing claims increased 11,000 to 4.810 million, surpassing the previous record high of 4.713 million recorded in 1982. The less volatile 4-week average number of initial claims was also higher than the previous period reporting an increase of 24,000 from the previous week to 607,500.
Finally, the Business Inventories Index, which contains data from all three stages in the manufacturing process, will be released at 9:00 am CST. Analysts expect this number to decrease by 0.90% for the month of January.
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