It's time to make a stand. Is it different this time? That is the question. As you know the Yields on U.S. Treasury bills fell the most in two decades on demand for the safest securities amid concern over a widening credit crunch.
Treasury Bill yields have fallen five straight days as money market funds dumped asset-backed commercial paper in favor of the shortest-maturity government debt. Three-month yields dropped the most since the stock market crash of 1987 and more than in the wake of the Sept. 11, 2001, terror attacks in the U.S, as funds shunned assets that may be linked to a weakening mortgage market.
But wait, this is a good thing not bad.
There are two defining moments from late last week - an incredible rush to safety, and a washout in terms of market breadth.
There are many ways to watch for extreme moments of risk-aversion. One sign of that came from Rydex mutual fund traders, as they were three times more likely to invest in a "safe" fund than a "risky" one. But in the bigger scheme of things, Rydex funds are small potatoes. The Treasury market is not.
And in that Treasury market, we saw a huge rush to one of the safest of all instruments - the three-month T-Bill. Over a two-day period, the yield on T-Bills dropped by more than 20% (near Thursday's nadir), which means that there was a big demand for those Bills. Like all credit, when demand is strong and supply is restricted, then prices rise and yields fall.
That two-day decline was one of the steepest in five decades. Using data from the Federal Reserve for secondary market rates on T-Bills, I could find only two other times since 1950 that yields dropped so much in such a short period. Those two times were February 24, 1958 and September 17, 2001. Both led to an imminent halt in selling pressure in equities (or very close to it in 2001), and the S&P 500 was about 8% higher a month later both times.
So history would suggest starting today we have an 8% run ahead of us. Not a systemic calamity ahead of us. This rush to safety.... is it a crystal ball into the future?.... Or the past? Think about it.
That rush to safety was accompanied by traders dumping shares at a record rate. NYSE volume set a record on Thursday, and the past two weeks have seen several days with volume nearly as high. Large share turnover in the midst of a decline is typically a mark of a bottoming market.
Going back to the 1960's, I looked for any time total NYSE volume was at least 50% above its one-year average for at least five out of the past ten sessions, AND the S&P 500 was at least 5% below it's highest point of the past year. Looking ahead three months, the S&P was positive 90% of the time (92 out of 102 days) with an average return of +7.6%.
There's that 8% figure again folks accident or not?
Much of that volume was traders wanting to get out of their shares, and selling at any price. By Thursday, a phenomenal 1,132 stocks had hit new 52-week lows, the second-most in history.
Expressed in terms of total stocks traded, that comes out to 33%. There have only been three times in the past 20 years that more than 30% of stocks hit a new low on the same day - 10/19/87, 8/23/90 and 8/31/98. Those were exceptional times to initiate intermediate-term long positions.
Also near a couple of those dates, we saw extraordinary one-day reversals on heavy volume, and brokers exploding out of one-year lowsâ¦just like Thursday. Fundamentally, there are many reasons to expect more bad news and possible selling pressure to come. And technically, the markets look quite weak. But looking at some of the intangibles, a good argument can be made that despite some likely short-term testing of Thursdayâs low, that testing should succeed and result in a one- to three-month recovery.
``The market is totally, absolutely, completely in fear mode,'' said John Jansen, who sells Treasuries at CastleOak Securities LP in New York. ``People are afraid that lots and lots of mortgage paper and mortgage paper derivatives of all sorts is completely opaque and they can't price it.''
``I've never seen it like this before,'' said Jim Galluzzo, who began trading short-maturity Treasuries 20 years ago and now trades bills at RBS Greenwich Capital in Greenwich, Connecticut. ``Bills right now are trading like dot-coms.''
Investors fled even money market funds, considered among the safest instruments, on concern that the funds, which hold $2.5 trillion, have invested in risky collateralized debt obligations backed by subprime mortgage loans.
``We had clients asking to be pulled out of money market funds and wanting to get into Treasuries,'' said Henley Smith, fixed-income manager in New York at Castleton Partners, which oversees about $150 million in bonds. ``People are buying T-bills because you know exactly what's in it.''
Institutional investors added $39.7 billion from Aug. 14 to Aug. 17 to money market funds holding primarily government securities, a 12 percent increase, according to Connie Bugbee, managing editor of the Money Fund Report newsletter in Westborough, Massachusetts. Assets in funds that may also hold commercial paper, certificates of deposit and floating-rate notes fell 2 percent, or $24.5 billion, in the same period.
Three-month Treasury bill yields have fallen to 2.40 percentage points less than the London interbank offered rate, from 1.74 percentage points on Aug. 17. The ``TED'' spread, as it is known, is larger than after the 1987 crash. TED originally stood for Treasury-Eurodollar.
The Federal Reserve Bank of New York said in a statement it won't re-invest the $5 billion of Treasury bill holdings maturing on Aug. 23 through its System Open Market Account to give it ``greater flexibility'' to manage reserves. It is the first time the Fed redeemed the bills since the 2001 terrorist attacks.
The move shows the Fed expects banks to borrow that much at the Fed's discount window, compared with an average $187 million borrowed daily in the past year.
Slower Economy Expected:
More than half of the 21 primary government security dealers that trade with the Fed now expect the central bank to cut its target interest rate by next month from the current level of 5.25 percent.
``The Fed is going to lower the funds rate, it's a question of when,'' said Thomas Tierney, head of U.S. Treasury trading at Citigroup Global Markets Inc. in New York. ``Credit's gotten tighter, and it's going to slow the economy.''
Interest-rate futures traders see a 100 percent chance the fed will lower its overnight lending rate between banks by its next meeting on Sept. 18. Seventy percent of those bets are for rates to drop to 4.75 percent, while the balance is for a cut to 5 percent.
>> So that's where we stand. Today a meeting of the minds with Paulson and as long as he doesn't shoot himself in the foot with weak dollar talk and as long as Dodd doesn't come out spouting about all kinds of regulation.... we could fire out of this mess despite how bad the charts look.
>> I must say I have contacted all my sources for this report and I can safely say I am the only guy on the street calling for an 8% rally! That's stonedinvesting lets see how it plays out, today the S&P is at a point where I think real buying could come in... all we need is a little luck. ~ stoney
Treasury Bill yields have fallen five straight days as money market funds dumped asset-backed commercial paper in favor of the shortest-maturity government debt. Three-month yields dropped the most since the stock market crash of 1987 and more than in the wake of the Sept. 11, 2001, terror attacks in the U.S, as funds shunned assets that may be linked to a weakening mortgage market.
But wait, this is a good thing not bad.
There are two defining moments from late last week - an incredible rush to safety, and a washout in terms of market breadth.
There are many ways to watch for extreme moments of risk-aversion. One sign of that came from Rydex mutual fund traders, as they were three times more likely to invest in a "safe" fund than a "risky" one. But in the bigger scheme of things, Rydex funds are small potatoes. The Treasury market is not.
And in that Treasury market, we saw a huge rush to one of the safest of all instruments - the three-month T-Bill. Over a two-day period, the yield on T-Bills dropped by more than 20% (near Thursday's nadir), which means that there was a big demand for those Bills. Like all credit, when demand is strong and supply is restricted, then prices rise and yields fall.
That two-day decline was one of the steepest in five decades. Using data from the Federal Reserve for secondary market rates on T-Bills, I could find only two other times since 1950 that yields dropped so much in such a short period. Those two times were February 24, 1958 and September 17, 2001. Both led to an imminent halt in selling pressure in equities (or very close to it in 2001), and the S&P 500 was about 8% higher a month later both times.
So history would suggest starting today we have an 8% run ahead of us. Not a systemic calamity ahead of us. This rush to safety.... is it a crystal ball into the future?.... Or the past? Think about it.
That rush to safety was accompanied by traders dumping shares at a record rate. NYSE volume set a record on Thursday, and the past two weeks have seen several days with volume nearly as high. Large share turnover in the midst of a decline is typically a mark of a bottoming market.
Going back to the 1960's, I looked for any time total NYSE volume was at least 50% above its one-year average for at least five out of the past ten sessions, AND the S&P 500 was at least 5% below it's highest point of the past year. Looking ahead three months, the S&P was positive 90% of the time (92 out of 102 days) with an average return of +7.6%.
There's that 8% figure again folks accident or not?
Much of that volume was traders wanting to get out of their shares, and selling at any price. By Thursday, a phenomenal 1,132 stocks had hit new 52-week lows, the second-most in history.
Expressed in terms of total stocks traded, that comes out to 33%. There have only been three times in the past 20 years that more than 30% of stocks hit a new low on the same day - 10/19/87, 8/23/90 and 8/31/98. Those were exceptional times to initiate intermediate-term long positions.
Also near a couple of those dates, we saw extraordinary one-day reversals on heavy volume, and brokers exploding out of one-year lowsâ¦just like Thursday. Fundamentally, there are many reasons to expect more bad news and possible selling pressure to come. And technically, the markets look quite weak. But looking at some of the intangibles, a good argument can be made that despite some likely short-term testing of Thursdayâs low, that testing should succeed and result in a one- to three-month recovery.
``The market is totally, absolutely, completely in fear mode,'' said John Jansen, who sells Treasuries at CastleOak Securities LP in New York. ``People are afraid that lots and lots of mortgage paper and mortgage paper derivatives of all sorts is completely opaque and they can't price it.''
``I've never seen it like this before,'' said Jim Galluzzo, who began trading short-maturity Treasuries 20 years ago and now trades bills at RBS Greenwich Capital in Greenwich, Connecticut. ``Bills right now are trading like dot-coms.''
Investors fled even money market funds, considered among the safest instruments, on concern that the funds, which hold $2.5 trillion, have invested in risky collateralized debt obligations backed by subprime mortgage loans.
``We had clients asking to be pulled out of money market funds and wanting to get into Treasuries,'' said Henley Smith, fixed-income manager in New York at Castleton Partners, which oversees about $150 million in bonds. ``People are buying T-bills because you know exactly what's in it.''
Institutional investors added $39.7 billion from Aug. 14 to Aug. 17 to money market funds holding primarily government securities, a 12 percent increase, according to Connie Bugbee, managing editor of the Money Fund Report newsletter in Westborough, Massachusetts. Assets in funds that may also hold commercial paper, certificates of deposit and floating-rate notes fell 2 percent, or $24.5 billion, in the same period.
Three-month Treasury bill yields have fallen to 2.40 percentage points less than the London interbank offered rate, from 1.74 percentage points on Aug. 17. The ``TED'' spread, as it is known, is larger than after the 1987 crash. TED originally stood for Treasury-Eurodollar.
The Federal Reserve Bank of New York said in a statement it won't re-invest the $5 billion of Treasury bill holdings maturing on Aug. 23 through its System Open Market Account to give it ``greater flexibility'' to manage reserves. It is the first time the Fed redeemed the bills since the 2001 terrorist attacks.
The move shows the Fed expects banks to borrow that much at the Fed's discount window, compared with an average $187 million borrowed daily in the past year.
Slower Economy Expected:
More than half of the 21 primary government security dealers that trade with the Fed now expect the central bank to cut its target interest rate by next month from the current level of 5.25 percent.
``The Fed is going to lower the funds rate, it's a question of when,'' said Thomas Tierney, head of U.S. Treasury trading at Citigroup Global Markets Inc. in New York. ``Credit's gotten tighter, and it's going to slow the economy.''
Interest-rate futures traders see a 100 percent chance the fed will lower its overnight lending rate between banks by its next meeting on Sept. 18. Seventy percent of those bets are for rates to drop to 4.75 percent, while the balance is for a cut to 5 percent.
>> So that's where we stand. Today a meeting of the minds with Paulson and as long as he doesn't shoot himself in the foot with weak dollar talk and as long as Dodd doesn't come out spouting about all kinds of regulation.... we could fire out of this mess despite how bad the charts look.
>> I must say I have contacted all my sources for this report and I can safely say I am the only guy on the street calling for an 8% rally! That's stonedinvesting lets see how it plays out, today the S&P is at a point where I think real buying could come in... all we need is a little luck. ~ stoney
