Russ Certo: "Fire In The Hole"

From Gleacher's head of rates, Russ Certo

Fire In The Hole

Not rocket science but perusing my launchpad observing bleeding indicators which reveal more carnage (than usual) today which are the underbelly of seemingly contained or benign moves in headline equity indices. First notable observation is that commodities are getting whacked.  Wheat down 7.22%, corn down 6.32%, sugar, copper down 3.5% and the list goes on... This likely represents CHINA slowdown.  We talked about this in earlier notes and watch out for that Chinese PMI print tomorrow that you won't get to trade til Monday.

Oil just broke below $80/barrel AGAIN.  Guessing some stops running and could continue.  Been down here before. It feels like it can break lower and I'm thinking of Copper down 25% ish in a month due to economic slowdown/increased chances of recession. 

Kodak on the verge of filing, and lost 27% of its market cap.   But good stuff getting hit like Tiffany. This concerns me as U.S. GDP is 70% consumption and high net worth would likely be 68% of that, decidedly not WalMart.  Some times you hit bids that are fully valued and despite silver being up today the gold/silver/metals space has been liquidated for a variety of reasons recently and from a variety of players, but its all about liquidity.  Like Tiffany?  Retail stocks today and recently? Like selling Alt-A at par or moving your shorts up the capital structure or coupon stack years ago versus hitting a down CMBX or ABX synthetic index.  Sell what you can, what is fully valued to extract alpha.

International banks/financials getting trashed as UBS/ING down 8+% and the rest of the lot following suit.  Any number of Basil capital requirements, financial transaction surcharges, or collateral damage of operating businesses.  Just a note on this topic as U.S. financials not faring well either but something is brewing in quarter end.  It is clear that BWICs in subprime or ABS space are validating or exposing dysfunctionality in banking, balance sheets and markets.  Even vanilla pass-thrus LAGGING by anywheres of 20 ticks today.  Homebuilders are homely today, down as much as 6% selectively. 

If the equity crowd only knew how difficult it is to trade financial instruments in secondary markets (or primary markets with IPOs non-existent and IG issuance taper off etc) and what each new non-agency valuation mark means for the next quarterly earnings report, given top five banks own near $800 billion of second liens and stuff not to mention other variations of housing stock.  Record long mortgage exposute in all its forms.  These asset markdowns will be reflected across the street in next slate of earnings statements.   Litigious environment too blurring liability thanks to partner government.  Financials CDS anywhere from +15 bps to +25 bps wider.

Another thought is that this particular primary banking group is actually the lubrication, artery or aorta for the liquidity of the U.S. Treasury as primary role for distributing U.S. and other sovereign debt.  What does it mean when the equity valuations of these players plummets, what their OWN liquidity dysfunction and willingness and ability to raise liquidity for U.S. or any debt?  I suppose with the recent Op Twist release a few minutes ago, the Fed will buy some of it.  http://www.newyorkfed.org/markets/tot_operation_schedule.html. 

Fed's Bullard today suggested he is lowering HIS inflation "expectations".  Rut Roh.  That is the main metric for policy wonks who determine policy and easings but normally it is reserved by the Fed evaluating OTHER peoples inflation expectations.  Quote of the day (from Bullard) is "Fed is not now, or ever, out of ammunition".  Can't tell you the type of responses on the distribution list observing the cryptic irony of when other institutions made similar symbolic (desperate)  proclamations.   Cover of TIME magazine? 

This is all why the long bond was just up 3.5 points, or 3.5% price gain on the day.  Actually dropped a full 3/4 point since last paragraph.  Extreme volatility!  Is that good for markets?  2s/30s curve was 15 flatter on the day as the market has adjusted its own "inflation expectations". 

Russ