I have some preconceived notions about various bond/libor rates and so on though so I'll share that for now. I'm not an expert on it and haven't had much motivation to look it up in detail before, as I see it as not that useful. I'll explain below.
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Originally Posted by Grizzums
Well, I have found myself doing a lot of spread watching lately. This can be a place where we talk about rates and spreads. Let's talk about what sorts of assumptions we can make when looking at them and just what sort of information can be extrapolated from them.
What are they telling us?
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About a year ago (might have been longer, can't recall, it was a long time now) I've looked at the yield curve and so on as a possible indication of a housing downturn, I recall various people describing it as pointing out a problem. Back then I was mainly interested in researching housing prices and what appeared to be an inevitable drop (how prescient). However the yield curve being out of whack was just minor icing on the cake, the really valuable indicator of that in my mind at the time was watching the median mortgage payment relative to the the median monthly take home pay for a local area. The last time the take home pay tapped out home prices in my area fell 50% shortly thereafter, and it seemed well on it's way to happening again.
The real problem with things like the yield curve is that there is just no way to predict when the bad event will happen precisely. Well, you can narrow it down to about a 3-5 year range but that's totally useless for daytraders. Even more annoying, a lot of the problems occur in the form of "the biggest hugest gains occur right before the gigantic fall". So sitting out too early was nearly as costly as betting on a permanent bull, it would do something ridiculous like gain 20-30%, then drop 50% all at the end. Ideally you'd like to right the bull up, and jump off at the last minute, but that's hard to do if you're using yield curves and things with an accuracy approximately spanning 5 years or so. Just useless. The total lack of usable accuracy causes me not to care about a yield curve much other than as a long term radar (ooh there's a problem coming 3-7 years from now, better start preparing to screen for it somewhere useful).
IMO the biggest benefit to bonds is that they are so boring they tend to avoid the short term manipulation that goes on in equities and give a less distorted view of what the larger longer term money in the market thinks. I also suspect they might be a good indication of large money flows into and out of equities as the more timid large investors flee and return, becoming probable up/down trends over the following quarter.
To me, more interesting than the rates themselves, would be the volume of trading, but I don't have those numbers and am not sure where to look.
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Originally Posted by Grizzums
The last couple days I have been following this whole LIBOR (possible manipulation) story that was really brought up, shoot, 6 Mos or so ago if I remember correctly but has just been brought more to the MSM forefront in the last few days. And that had me learning more about the Ted spread (LIBOR/3 month t bills). I have found it interesting that all of these CEOs in the financial sector have been coming out talking about how this credit crunch is nearing the end.....I'm not buying it.
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Most of the rating services quotes (think S&P/moody's type thing) I've seen more often said that they thought the subprime crisis was nearing an end, then some useless analyst filled in that meant the credit crunch was over, which is not the same thing at all.
But then, banks and rating agencies believe that if they can convince investors that everything is ok and they should lend them money again, then everything really will be ok. So of course they have to say that. Of course, rating agencies with the exception of fitch are not worth anything anymore, and that's pretty obvious across the board. Anyway, I think they've finally begun to grasp that they cannot BS their way out of this one.
These days they try to sell this "everything is cool" thing to the market, and the market hands it right back saying "your pig needs more lipstick", meanwhile it's like 90% lipstick, 10% pig already.
Besides, if there is another wave of problems, it doesn't have to impact the banks first, even if it does, it doesn't have to start in the US. Things like credit derivative problems would start with corporate bankruptcies, then riccochet into banks, which you probably wouldn't see in credit markets until the day before it happened. I don't see the continuation of a bear as necessarily being predictable through credit markets except in a too late sense. I see them as being largely non-predictive until a failure in the background has already occurred, which at that point the "warning" is just insider trading among banks etc until it becomes public the next day or so.
I don't remember any libor manipulation story at all come to think of it. I mean other than a ton of loans are tied to libor and that's had pretty good fluctuations in the last 6 months. Got a link to what you're referring to?
In reality there are some large credit related problems that need to get sorted out among government institutions (ignoring banks for the moment).
Student loans for example, are completely bust and requiring intervention if not outright nationalization at this point, that will have to get done this summer. I saw one proposal that would turn the dept of education into a fed like institution that could take student loans onto it's books to bolster the market (sadly, not even kidding).
Similarly, a lot of american cities/counties have been lavishly funding everything from public works and infrastructure projects to sporting arenas through cheap credit, and not really paying the true cost at all. Well if there's gonna be a fight over how governments dictate investors lend to them and whether they need insurance or not, you can pretty much kiss cheap credit for cities goodbye for a long time. Local politicians don't get it, they're likely going to either need to jack property taxes big time or default. They see that, and they think they can just stomp their feet and force investors to give them what they used to have. IMO municipal/state politicians have gotten spoiled by easy ubiquitous credit and are going to force upon themselves a painful lesson about the mobility of capital. This problem is too big to nationalize without breaking the budget I think, it's going to be a horrible decade for governments as all their porkbarrelling is pretty much over, and telling people to pay more taxes and get less service is never popular. And the end of public works projects means the end of expanding gov't sponsored jobs to do all that.
I saw that freddie mac offered to buy jumbo junk loans from the major banks. This is of course totally useless. The banks they buy it from won't be using it to lend to anybody, they'll just horde it having unloaded illiquid assets. Meanwhile, freddie will strap itself into an even more untenable position. That company is heading towards major federal bailout in the end.
Now one thing I'm somewhat concerned about is not in the US at all. I've heard suggestions that certain euro countries are not that healthy. Notably spain/england/italy. Apparently the housing/debt/credit to income ratios and lack of affordability is even worse in london than it is in the US. I think we're within 3-6 months of the UK mortgage market flying apart. While probably smaller in absolute terms, I think it will devastate them more, I can really see a near knockout punch to england starting there. Now, if I recall, the L in LIBOR stands for london. And if the london mortgage market flies apart I could totally see UK banks getting wiped out or nationalized by the dozen, which should very likely jack LIBOR up to new heights. Of course that will raise credit costs for anything dependent on it in the US as well, insert new round of US losses and corporate bankruptcies.
In short, I think the UK mortgage business is about to break, and their financial services arena right behind it. My understanding is the UK doesn't have much if you wipe out the financial district, if that goes it could be a heavy piece of ballast on the global economy, and more importantly could really rattle confidence. Also keep in mind that the unwinding of UK bank commodity or equity positions from banks going under could really lead to some major disjointed effects in all kinds of markets.
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...and what if that LIBOR rate goes up in the days ahead after it comes under further scrutiny?
How about that a2/p2 spread? Take a look at it. Ill do some explaining on these tomorrow (hopefully) with more links but I'm going to bed tonight.
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I am sort of waiting for either another shoe to drop here, or else for london's housing to slide into the abyss to kick off another jump in libor rates. You expecting something more specific or sooner?
a2/p2 spread, not too interesting to me, as I can't see an implication that would result in anything at the moment. Waiting to see what you come up with or if something you say makes me think of something. I mean that's like saying small/mid caps or distressed businesses have credit problems or are about to go bust. Yeah that isn't much of a surprise at this point. As for the head and shoulders possibly forming there, it worries me in a short term sense into wondering if we aren't about to get another burst of irrational exuberance in the coming days.
I'd be interested to see if you dig up anything that makes me interested in researching rates further, I'll check out whatever you post and see if it makes anything occur to me.
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So, let's talk rates here....sky, where are ya?
Bottom line.....I'm not sold on a financial bottom yet....and I'm not sold that all is well and the credit crunch is coming to an end or only gets better from here. Rates show round 3 may be approaching.....the seldom discussed money markets....let's analyze it with our rookie eyes...or some experts can come in here and help educate.
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Well since you asked, I tend to post less when I'm stuck waiting for a dog of a stock to do something so I can get my money out, right now that would be General Electric which I was hoping to skim a freebie or two out of but it's flatlined and making me sorry I touched it. Waiting to see what happens in the morning, they just bought stuff from citigroup and the morning should be interesting one way or the other.
As for financial bottom and all that. I don't know what to think at this point. Should start a new thread for that. Basically I need to get my calculator out and start analyzing the bank stocks. I half wish there was an analyst to do this kind of stuff (only joking). They certainly don't look cheap to me for the most part, especially with ong term crippled dividends.
The more interesting thing to me is actually what constitutes a top now for financial stocks. The value of these stocks is no longer what it was last year by a number of measures. They've been diluting huge amounts left and right, getting wiped out of all kinds of businesses, selling, shuttering or liquidating all kinds of stuff, and straining trying to carry huge encumbered assets. Dividends are getting slashed in likely a long term sense across the map, and a number of them are staring at the barrel of either deleveraged businesses or government regulations which will further restrain them. Not to mention the possibility of inflation wiping out the value of their asset base.
All these investors/analysts are sitting here acting like these stocks are on some kind of huge sale and there's huge value to be reclaimed but I'm no longer sure of that. Their business sucks now, and will for many years. I need to sit down and figure out what these things are probably worth now long term, so as to recognize when real sales occur.
Another concern of mine is sort of sharp upside kicks from international monetary/government interference. They're paddling around and squawking like we can expect major government interference at frequent intervals for the 6 months or so, in increasingly desperate quantities. They're mostly just dense, and perfectly willing to damage their entire citizenship just to score points saying they did something and give themselves some awards, but they can really do a lot to damage shorting investors. I saw something somewhere that suggested in 100 days (less now) they've made some commitment to some kind of undeclared intervention, and probably more after that.
I also think the food/currency swings are really scaring them, although I don't believe they grasp that it's the natural order of where they've led us for the last decade. They are out of touch enough that they run the risk of failing in a poorly planned coordinated intervention, which could easily turn catastophic if a failure like that occurred. By the time they're done Russia might be the only healthy economy left, as scary as that is (I say Russia because they have a lot going for them, especially resource wise, and they don't participate in this monetary nonsense).
I also have Ciao's K-cycle deeply in my mind these days. I wonder if the war that starts the next K-winter isn't really a massive one started by food supply problems in poor nations bordering nations closing their doors to exports. Faced between food disruptions and riots or destroying their citizens with inflation (ie, some variation of printing enough money to buy all their people subsidized food forever), I think a lot of nations are going to lobby for massive global inflation.
Will be interesting to see what you post on rates, look forward to it. At a minimum, I wouldn't mind enhancing my tools to include something to view that in more depth.
Rates @ Spreads
) at the same time I might have misunderstood your post….. 
but IMHO I still believe that make an interesting read…..
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