10YR Bond Yield Falls / Schumer Letter
A: The credit crunch is stealing all headlines today, and you know it will spur major media during the week to write fairly negative articles that will reach millions of investors across the country. I feel that a capitulation day for the stock market is nearing; just a gut feeling after trading for so long.
Capitulation - In the stock market, capitulation is associated with "giving up" any previous gains in stock price as investors sell equities in an effort to get out of the market and into less risky investments. True capitulation involves extremely high volume and sharp declines. It usually is indicated by panic selling.
Great stuff for guys like me that try to profit from the volatility of these types of trading days. Anyway, I think all we need is one piece of really bad news to start a panic selling day, like a Countrywide Financial filing for Bankruptcy protection as credit downgrades limits availability to raise cash; or something like that. Give us a DOW day of -450 and a NASDAQ -80 or so, and I think it will be enough to qualify.
As the stock market reacts to the uncertainties brought on by the evolving credit crunch, a flight to safety is bringing the yield on the 10YR Bond down to levels not seen since 2004! This is a sign of rising uncertainty and the markets way of trying to tell the fed that action is needed! I think they may get some action by years end, as I discussed in a past post about my expectations for a surprise rate cut; especially in discount window.
Check out what 10YR Bond yields have done over the past 4 weeks, and keep in mind today's drop down to a yield of 3.847% is not reflected (down about 60 basis points in past 3 weeks or so):
Rising Uncertainty ---> Stocks Selloff ---> Bond Prices Rise & Yields Fall ---> Investors Flee To Quality
Just think what your money could become getting 3.85% for 10 years!! Great world we live in.
Meanwhile, Senator Schumer sent a letter to regulators today urging them to examine (via WSJ.com)...
"potential risks posed by a sharp increase in lending by the Federal Home Loan Bank of Atlanta to Countrywide Financial Corp., the nation's biggest mortgage lender. In a letter sent today to Ronald Rosenfeld, chairman of the Federal Housing Finance Board, which regulates the 12 regional home loan banks, Sen. Schumer said: "I am concerned that the loans being pledged by Countrywide to secure these advances (borrowings) may pose a risk to the safety and soundness of the FHLB system as a whole." He called for a review of the Atlanta bank's policies for evaluating collateral and of the loans pledged by Countrywide to secure its advances."
Thoughts?
What is the bond market trying to tell us?
Is Countrywide Financial screwd?
Comments (2)
I think countrywide is in trouble. Didn't they say they would be profitable in the upcoming quarter. How can anyone trust that?
And for the bond market, thanks, but Ill keep my money in cash for now and let all this selling get out of the way
Posted by Jeff G. | November 26, 2007 7:33 PM
Jeff - agreed. no way CFC is profitable next quarter and if they are then they found an innovative way to hide losses. they got problems, as do many other hedge funds and mortgage insurers.
I was getting 5.1% in free online checking account with HSBC, but thats down to 4.5% now, 8 months later; for cash on side. You may want to start nibbling though at some quality companies that have no mortgage risk/exposure, (BA, IBM, MO, KO, etc) as this selloff continues. Open a position now with 20% of your total expected share size, and buy more if it goes down in increments. Its a good strategy if you put into right stocks during selloffs. I wouldnt touch financials though.
Posted by Noah | November 26, 2007 7:52 PM