Wednesday, September 10, 2008

Curiouser and curiouser

Given the steps announced by the Treasury Department and the Federal Housing Finance Agency on September 7, it is CBO’s view that the operations of Fannie Mae and Freddie Mac should be directly incorporated into the federal budget. The GSEs’ revenue would be treated as federal revenue and their expenditures as federal outlays, with appropriate adjustments for the manner in which credit transactions (like a mortgage guarantee) are reflected in the federal budget. Peter Orszag, CBO Director

I've been watching the markets with my mouth agape for most of the day. Fannie and Freddie get nationalized, the Director of the CBO says they should be "incorporated into the federal budget" and bonds are higher now than they were last Friday before the announcement- and much higher than they were a few months back.

The old trading "rule of thumb" I learned from Louis Bacon about buying markets that should fall (and vice versa) following a news item comes to mind but I think in this case the risks far outweigh the potential returns, except for the very short-term, nimble trader.

The theory behind the rule is that when capital flows outweigh new news one shouldn't fight that flow.

But, I wonder, on what views are the capital flows in question based?

The rise in Bonds roughly corresponds to the decline in commodity prices, and, I suspect, a distaste for Agencies will shift inflows into Treasuries.

However, while Treasury prices have held firm since the news and have risen quite a bit since April, Bloomberg reports:

Contracts on U.S. government debt increased 3.5 basis points to a record 18, up from 6 basis points in April, according to CMA Datavision prices for five-year credit-default swaps at 5 p.m. in London. Credit-default swaps on German government bonds cost 8 basis points and Japanese bonds 16.5 basis points.

So US Bond prices rise while fears of default rise dramatically.

Curiouser and curiouser.

Meanwhile, Hurricane Ike is spinning in the Gulf of Mexico and the models, which had been forecasting landfall in southern Texas (Brownsville), are now shifting northward which brings the Houston refineries or, if it shifts further still, a fair chunk of GOM offshore platforms.

But, oil prices are brushing off this news as well. Behind the scenes, apparently, the MMS reports: In preparation for Hurricane Ike, offshore oil and gas operators in the Gulf of Mexico have stopped re-boarding platforms and rigs following Hurricane Gustav and are maintaining the evacuated status to protect against harm.

From the operators’ reports, it is estimated that approximately 95.9 % of the oil production in the Gulf has been shut-in. Estimated current oil production from the Gulf of Mexico is 1.3 million barrels of oil per day. It is also estimated that approximately 73.1 % of the natural gas production in the Gulf has been shut-in. Estimated current natural gas production from the Gulf of Mexico is 7.4 billion cubic feet of gas per day.

The Gulf has been virtually shut since just before Gustav hit.

I wonder if one can buy futures default swaps on the NY oil market?


flatland said...

re: with my mouth agape

... when markets exude the irrational, I can't process or even register the activity. It leaves me detached. Oddly calm. Perhaps dangerously indifferent.

D said...

Babalooee says:
I'm afraid the winds of change have been ignored for a much longer time than recently. Carter's Crisis of Confidence speech in July of 1979 centered on an assessment not many wanted to hear. Now, nearly thirty years later, the price of paying attention has risen beyond payment by civilized means.

Jacob said...

Dude, great to have you back

Fullcarry said...

Hi Dude,

Good to see you commenting more often.

It seems to me we are in the midst of a massive Dollar and Yen carry trade unwind.

The cycle is feeding on itself and has nothing to do with any fundamentals per se. Comparing to past Yen carry unwinds I presume we are close to being done. Especially since the 80 level on the dollar index should be huge resistance.

Dude said...

Jacob and fullcarry,

Thanks. I'm glad to be back at the screen.