Farrell: Time To Hit The Road

I try to stay hidden, but every now and then I get on the road to visit with Soleil clients. It is nice for the market to behave itself while you're spending time in conference rooms and airports. Thursday's market acted like it wanted me to enjoy the trip. The S&P had a nice advance and put some more distance between itself (832) and the 50-day moving average (792), which is encouraging if the bottoming process we are fixated on is to continue. Technology stocks led the way, and we need a group like that to assume leadership. Volume was light, and we still need the VIX to improve meaningfully. Light-volume rallies do not last, so we need to hope for that to develop.

Q4 GDP was down a lot, but no worse than originally feared. With all the hints of better news lately (new and existing home sales a touch better, durable goods orders up more than anticipated, mortgage applications up in response to lower interest rates), it's likely that the fourth quarter will be the worst of this recession. While unemployment claims were no better than they have been when reported Thursday morning, they were no worse either.

Wednesday saw a failed auction of British bonds, and our own auction that day of five-year notes was poorly received. Thankfully, Thursday's offering of seven-year Treasury notes was enthusiastically bid. The cover ratio was better than 2.5 to 1 despite the fact that foreign buying was decidedly light. With the G-20 meeting next week and the spat between us and China in the headlines, it would have been very odd for China to have been in this auction in any meaningful way. Even without the overseas orders at their normal level, the auction was a success.

What needs to improve are credit spreads. What appears troublesome is the reluctance of the three-month Treasury bill to revert to a more normal yield. At 15 basis points, it seems stuck in a rut. But a few thoughts: We are at quarter-end and a lot of banks want to look bullet-proof and show as rock-solid a balance sheet as possible. Japan is at fiscal year-end and has the same bias. Also, if Bank of America and Goldman Sachs are serious about paying the TARP back ASAP, any liquidity they might free up would probably be kept in the shortest, most liquid paper possible, and yield wouldn't matter. But this had better normalize itself before too long.

Further to the point of hogging liquidity, the New York papers have reported that Citi and BAC are bidding for toxic assets in the open market. But these banks are supposed to be selling these assets to the public/private partnership to create liquidity for making loans. I'm guessing that they know what these assets are worth, and if they can get away with a low ball bid, the newly acquired paper will be the assets they sell into the TALF for a turnaround profit. I'm guessing at this, but it makes sense to me. And besides, it was reported in the New York Post. If it's in the Post it must be true! OK, back to the airport.

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