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Morning Notes For November 15th 2010 at Trader’s Narrative

Morning Notes For November 15th 2010

The following is a guest post by a buy-side analyst working in a US asset management firm. The author’s comments are in italics. I welcome your feedback in the comments:

  • Gary Shilling, who predicted the U.S. housing collapse, says the stock market is overvalued and foresees a “significant” selloff within a year. – Bloomberg
  • Richmond Fed President Jeffrey Lacker said the central bank may soon need to tighten policy even amid a high U.S. unemployment rate to avert a rise in prices similar to the 1970s. – Bloomberg
  • The US should curb the Fed’s power over the money supply and return to the gold standard, James Grant, publisher of Grant’s Interest Rate Observer, wrote in a NYT opinion piece. – Bloomberg
  • The benefits of open trade generally outweigh the costs, according to a report from the OECD, the International Labor Organization,the World Bank and the World Trade Organization presented at the G-20 summit. The report recommends that to sustain support for open markets, the costs must be recognized, “and policies put in place to assist workers and communities to adjust to a more competitive environment.” – OECD – Organization for Economic Cooperation & Development
  • US homebuyers can borrow more cheaply than the government for the first time. – Bloomberg

30 Year Mortgage Rate vs. 30 Year Treasury Yield
30 year mortgage rates Treasury yield Nov 2010

This is because the ten year treasury yields are usually the benchmark for 30 year mortgage rates (not 30 year treasury yields). In QE2, the Fed is targeting ten year treasury rates more than 30 year. Thus, by holding down ten year treasury yields, the fed is effectively holding down 30 year mortgage rates.

  • Dollar strong/Treasury weakness – the “anti-QE2″ trade continues – some catalysts: 1) continued pressure applied on the Fed re its asset purchase program (see this morning’s WSJ), prompting speculation Bernanke may not follow through w/the full authorization; 2) policy gap between Fed and ECB seen as narrowing (with talk of Ireland assistance); 3) growth gap between US and ECB seen widening in US favor (following the sluggish Eurozone GDP numbers released on Friday). – JPM
  • Municipal debt markets received a lot of attention after their drubbing last week (the WSJ and NYT both had features discussing the sell-off in the muni market; note that there are ~2.5x the amount of muni sales scheduled for this week vs. last). – JPM

Yields on AAA 10 year Munis
10 year AAA muni rate Nov 2010

  • “We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment” – WSJ
  • WSJ economics survey – economists don’t expect there to be a QE3. Most see growth of 2.4% in Q4 and 2.6% in the first half of 2011. Growth is seen accelerating slightly to 3% in the second half of next year. – WSJ
  • Greenspan on Meet The Press warned about a potential crisis in the Treasury markets unless action is taken to cut the US budget deficit – Reuters
  • Cigarette companies are ramping up efforts around the globe to combat new efforts on the part of emerging market (EM) governments to restrict the sales of tobacco products. Cigarette companies view emerging markets as critical growth opportunities as smoking rates in the US and Europe decline. – NYT
  • Scientists now think sea levels could rise ~3 feet this century while other are fearful of a rise of as much as 6 feet; the former number would pose serious risks to coastal regions around the world, w/flooding becoming much more frequent, while the latter would jeopardize some of the world’s great cities – NYTgo see Venice while you can.
  • Currency wars hit the Youtube mainstream in a U.S.-China rap battle animation that had more than 150,000 viewers as of Sunday. “They’re not enemies, but frenemies, with co-dependent economies,” according to the chorus. – Bloomberg/Youtube

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