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just stumbled across a new blog from annaly dot com that takes a feather from the cap of the bond gurus who do the commentary at pimco. pretty good stuff:


<<July 10, 2009 


According to Morgan Stanley research, by the end of 2009 there is scheduled to be over $3 trillion of Federal Government market support facilities wound down (even more by February 2010).  It’s not crazy to conclude that any unwind of these programs on top of the uncertainty of regulatory initiatives creates a very wide range of potential outcomes (like any patient coming off methadone) which leads to what the bond market colloquially calls FUD (Fear, Uncertainty and Doubt).  Historically, large incidents of FUD lead to greater pricing volatility, unstable and wider credit spreads increased macroeconomic uncertainty and steeper yield curves. The equity market measure of FUD is perhaps best represented by the VIX index and it appears to be underestimating the risk of FUD rearing its ugly head in the coming months as it has traded below 40.00 since the beginning of the second quarter and through July 6 is close to 13 points lower than March 31, 2009.  In contrast, the fixed income FUD measure, as represented by Merrill Lynch’s MOVE index, shows that across the yield curve expectations for increased pricing volatility have moved markedly higher during the second quarter. Since 1990 these FUD measures in the equity market and the fixed income market have generally moved in the same direction (correlation of over 0.60). However during the second quarter of 2009 this correlation broke down quite handily and in fact has been strongly negative for the second quarter of 2009 (over negative 0.70). Thus there appears to be a big divergence for expectations in volatility between the stock and bond markets not seen in recent history. Who’s right? Our money is on the bond market geeks, but we’re biased.>>





<<July 2, 2009

There are many cross-currents influencing the direction of markets and the economy today. All one needs for proof of this is to look at the Federal Reserve’s balance sheet. The Fed is nominally charged with conducting monetary policy in pursuit of maximum employment, stable prices and moderate long-term interest rates, while at the same time supervising and regulating the nation’s banking institutions. As markets have gotten ever more complicated and stressed, however, the execution of this charter has brought the Fed into a much more diverse and far-reaching set of activities. Since the late summer of 2007, the Fed has deployed an alphabet soup of unorthodox liquidity facilities, overseen and backstopped liquidations and rescues of different institutions and brokered consolidations between entities. Its balance sheet has more than doubled in size as it has evolved from lender of last resort to investor of last resort. And its methods and its leaders have been questioned in a way that is not a little like complaining about the color of the fire truck after the fire has been put out.


Indeed, there are so many potentially market moving events on the horizon that an investor can be forgiven for losing his or her head. In no particular order, here are just a few that we at Annaly think about a lot: Housing; household balance sheets and savings; global demand for Treasuries; government activity crowding out private capital; financial regulatory reform and the prospects for its final shape; the dollar and the talk of a new reserve currency; growth in the BRICs and Europe; the health of the banking system and the new paradigm that is taking shape; commercial real estate; return expectations in different asset classes; ramifications of accounting changes…the list goes on and on.

If you check on our new blog, Annaly Salvos on the Markets and the Economy, on a regular basis, you can expect to see posts on these and many other subjects. For compliance reasons, what you won’t find is any discussion of Annaly or FIDAC-managed investment vehicles. For this, our debut Salvo, we cut through all the noise and go right to the basics in what we like to call the Econ 101 slide. The four lines on this slide reflect the fundamental factors in determining the health of the economy and the Fed’s reaction to it: the capacity utilization rate (CapU) in white, core CPI in red, the unemployment rate (UER) in yellow and the Fed Funds rate in green. At the moment, the Econ 101 slide is a picture of extremes. CapU is at an all-time low, UER is at a 25-year high, core prices are barely budging. So while there is certainly a lot going on in the world that affects our markets and the Fed is busily putting out fires, Bernanke & Co. are unlikely to move if they are looking at a picture like this. Look how long it took the Fed to start tightening after the peak in unemployment and the trough in CapU.>>


<<The Economy

The new poster child for excess leverage is the amusement park operator Six Flags Inc., which filed for Chapter 11 protection on June 13, 2009. To us, the bankruptcy is emblematic of what ails the nation. Typically, firms filing Chapter 11 line up debtor-in-possession loans to help provide working capital during the sometimes lengthy bankruptcy process. In the case of Six Flags, they don’t need it. Earnings before interest, taxes, depreciation and amortization (EBITDA) has always covered interest payments, but as the ratio of total debt to total capital ramped up from roughly 60% at the turn of the century to over 100% at the time of the filing, precious little cash remained for operating the business after servicing the debt. It borrowed for growth and ended up with the wrong capital structure for this economic downturn. In other words, Six Flags would be fine if it weren’t for the debt! Relieved of the burden of interest payments, the company estimates that it will have plenty of working capital. If only it were that easy for the U.S. consumer, state and local governments and the U.S. Treasury.

But it isn’t so easy. Six Flags had $2.4 billion in debt outstanding at the time of the filing, and while it won’t be pleasant for those creditors, the world won’t miss Six Flags (or its annoying but memorable TV commercials) when it’s gone. On the other hand, the world is surely feeling the effects of a massive debt contraction in the U.S., even as the Federal Reserve and U.S. Treasury heroically step into the breach. According to the Federal Reserve flow of funds data, the whole domestic nonfinancial sector (household, consumer, non-financial corporate, farm and state and local government debt) has shrunk as a percentage of total credit market debt (CMD) from over 70% at its peak in the early 1970s, to just 50% of the total today. In dollar terms, this sector has now declined two quarters in a row; up until now, there had never been even one quarterly contraction. In this bucket are both mortgage debt and consumer credit. Mortgage debt outstanding has fallen over $100 billion since its peak in the first quarter of 2008, and consumer credit has fallen in seven of the last eight months, the worst string since 1991. The domestic financial sector (ie, repo, financial corporate debt, etc.) now makes up over 30% of CMD outstanding, up from less than 3% back in the 1950s, but it contracted over $70 billion during the 1st quarter (the first quarterly drop since 1975).>>


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