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This is just amazing-updated
Posted by: Lance on Wednesday, September 17, 2008

A quick post for a fast developing market situation. Today the Fed went to the Treasury and asked for a line of credit. You know, the lender of last resort has had to turn to our Treasury to protect their balance sheet.

Want to see something weird. Go here and look at the treasury market. In the bond world, a 1% move is huge. So check out what has happened in the US Treasury market. Especially the 13 week Treasury bill. It's yield has collapsed by over 90% at this moment in time.

Astounding, truly astounding.

My father who invested (and very successfully) through the late sixties/early seventies nifty fifty era, the bear market of 72-74, the market low in 1981 and Black Monday in 1987 says this is the most incredible market in all of his experience. It certainly eclipses anything I have seen from 1980 forward.

Update: Courtesy of Eddie Elfenbein:
At one point today, the yield on the three-month Treasury bill (^IRX) hit 0.01%!!

One Freakin Bip!!

This means that the risk-free rate is now in direct competition with the underside of your mattress.

 
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Previous Comments to this Post 

Comments
Lance, what does this index mean?
 
Written By: Grimshaw
URL: http://
Looking at the 13 Week chart for the year, didn’t it have a similarly sized dip back in March?
 
Written By: Keith_Indy
URL: http://asecondhandconjecture.com
I have (what I think is a) basic understanding of economics, but isn’t the Fed asking for a line of credit from the Treasury akin to asking them to warm up the printing presses?
 
Written By: Nathan
URL: http://
Grimshaw,

It means the bond yield declined by 94%. The yield is what you get paid for holding a bond.

Say you have a bond that cost you $1000 yielding 5%. That means you earn $50 a year in interest. Now lets say the bonds yield fell 95%. That means someone who bought that same bond from you would now only receive a yield of .025%. Why? Because the price of the bond has gone up so much. That means the bond, which still pays $50, cost that person $20,000. Now why would someone pay 20k for the privilege of earning $50 a year? Very good question. The only reason would be extreme panic and believing that getting anything, essentially nothing, is better than taking any risk at all. This means they don’t trust cash, longer dated bonds, anything enough to not buy a short term treasury bill that is paying almost nothing.

This means extreme panic.
 
Written By: Lance
URL: http://asecondhandconjecture.com
Thanks Lance. So this yield is reflecting the trading price of the bond, after it has been initially purchased directly from the Treasury, yes?

I can’t fathom why anyone would panic that much. Can you short 13-week tbills?
 
Written By: Grimshaw
URL: http://
Keith,

Yes, we saw something similar, though not quite as bad, last March. It got pretty low back in the last recession as well. Declining that fast in a day however is just incredible, and last March was the only time I have seen anything even similar in treasuries. This market is making history in many many ways.
 
Written By: Lance
URL: http://asecondhandconjecture.com
Can you short 13-week tbills?
You can short just about anything, but I don’t know how in this instance.

Also, this isn’t the price in the secondary market, but the price from the treasury itself. Actually, it really doesn’t matter. Arbitrage will keep the prices essentially equal. Thinking about it, my guess it is money market funds trying desperately to own things which will not under any circumstances default after the news that a huge fund has allowed their NAV to go below $1 due to losses. They will hold them to maturity, so when this reverses they won’t be hit with large losses, just minimal gains. 13 weeks isn’t long to have to hold something. So later prices don’t really affect them as long as they don’t need to sell them.
 
Written By: Lance
URL: http://asecondhandconjecture.com
The 30 year barely moved. The 10 and 5 years showed yield declines you could call inversely proportional to their term. So Mr. Market thinks this current crisis has a short-medium event horizon, no?
 
Written By: CR
URL: http://
Here’s another one for you Lance. Check out the spread between constant-maturity Treasuries and AAA-rated muni’s. This spread is typically about 40bps. It’s been negative since about March or so and now it’s about -60bps. That’s 100bps from the norm. That’s just crazy.
 
Written By: Marco
URL: http://
So Mr. Market thinks this current crisis has a short-medium event horizon, no?

Probably, but if they are buying 13 weeks for no return they expect it to be a big short term event.
 
Written By: unaha-closp
URL: http://warisforwinning.blogspot.com/
Why buy t-bills that essentially have no return as opposed to just sitting on cash? Isn’t the net effect the same (or worse if there are transaction costs)?
 
Written By: Grimshaw
URL: http://
You can still borrow against Treasuries, among other possible reasons.

It’s worth noting that, during the Great Depression, treasury yields at one time actually went negative.
 
Written By: Silussa
URL: http://
Grimshaw,

The funny thing is that cash really doesn’t exist as we commonly think of it. If you are a money market fund, the transfer is just an electronic movement of funds which have to go somewhere. Some kind of security has to hold it. Short term instruments are the medium of choice. If you fear everything but treasuries then you take what you have to take because right now everyone wants them.

Silussa also makes a good point, and treasuries have no transaction costs.

CR,

I agree this is a short to medium term issue (3 months to 2 years). The economic issues may last quite a bit longer however. This is a huge event as unaha-closp pointed out. It won;t become one, it already is, we are in uncharted and historically significant waters here. As a long time bear this is starting to resemble not my considered judgment of what was likely, but those scary nightmare scenarios that you could see occurring if everything fell just so.
 
Written By: Lance
URL: http://riskandreturn.net
So what happens when the Social Security Trust starts selling those T-bills in the filing cabinet down in West Virginia ?
 
Written By: Neo
URL: http://
"At one point today, the yield on the three-month Treasury bill (^IRX) hit 0.01%!!

One Freakin Bip!!

This means that the risk-free rate is now in direct competition with the underside of your mattress."
I wasn’t watching the numbers, but that must’ve point today where a CNBC commentor pointed out that customers were paying for the privilege of T-bill protection. There was no yield at all.
 
Written By: Billy Beck
URL: http://www.two—four.net/weblog.php
I bet you can answer this question, Lance. How can these giant bailouts - say, for example, of AIG - not cost taxpayer money? Let’s say AIG specifically for simplicity’s sake. How can this $85 billion come from the government and not impact the federal budget?

I may have misheard someone, but I swear I heard someone (NPR?) claim that this was off-budget.

I guess my second question would be - how long do we have until these impacts start messing with corporate bottom lines in a broader way? Borrowing costs are shooting up and market returns don’t exist - this has to be hurting a lot of large corporations, I would expect.
 
Written By: glasnost
URL: http://
Lance, thanks for the clarification. When I think of cash I think of my brokerage account money that’s not in stocks - but then I remember that it gets rolled into a money market.
 
Written By: Grimshaw
URL: http://
Hey glasnost! Good to hear from you. Of course this puts our tax money at risk. In AIG’s case the Fed may be able to turn a profit on the deal if AIG pays off the loan. I find that doubtful myself, but it is possible. In Fannie and Freddie’s case it is theoretically possible, but in all likelihood we eat somewhere around 200 Billion.

I suspect the fed will eat a good bit of Bear Stearns obligations as well. A lot of what they are stuffing their balance sheets with now is pretty dicey, and if that goes bad the Treasury will have to bail them out. Some money supply. The Treasury gives money for the Fed to create a money supply that allows the Treasury to tax to cover the obligation. Sounds like a ponzi scheme.

As for corporate America, yes earnings will continue to fall, and precipitously. Let me give you a real negative, but very possible case.

Let us say earnings decline to about $50 per share on the S&P500. That would be in line with a normal recessions sales and trough profit margins. Slap a trough P/E of 12 on that number. That gives you a 600 on the S&P 500. If the trough P/E goes to the low levels of more serious bears and we get a 10. That is a 500 on the S&P500. Match the 1982 low P/E and we get to 400 or lower. Earnings could decline more than that.

Will that happen? I don’t know, I think the low 60’s is a more likely number for earnings, and I expect the trough P/E is a couple of years away after another bear market rally like we had from 2003 to 2007. Still, it is very possible. Frighteningly so. I thought it would be bad, and these kind of outcomes I have always considered possible, but now they are starting to look far more than merely plausible, but a real present danger.

In 2005 and 2006 I was considered unreasonably gloomy. My baseline case was that we would eventually lose all of the gains on the S&P500 since 2003. The question from there was how much further would it go? Well, at the end of 2003 we were at 1108.48. We peaked above 1560 and today we finished at 1156 and the situation is deteriorating. The question now is will my ultimate endgame of retesting the 2002 lows come true? I think that is now highly likely, and the risk is we fall well below that.

Been cheered up enough!
 
Written By: Lance
URL: http://riskandreturn.net
Nice to know what Carter/Clinton gave us. The gifts that keep on giving.
 
Written By: Don
URL: http://
Lance:


Thanks for the thoughtful (if alarming) analysis. Though I cannot understand why you choose to associate with the clowns who now populate this website, to each his own. Good luck in the market.

David
 
Written By: David Shaughnessy
URL: http://
SEC adopts rules against naked short-selling

When I heard about this practice, I thought they had gone nuts.

"naked short selling" is basically fraud, and has no use except to manipulate.
Most brokerage houses would drop your account if you tried this yourself.
 
Written By: Neo
URL: http://
Thanks for the thoughtful (if alarming) analysis. Though I cannot understand why you choose to associate with the clowns who now populate this website, to each his own. Good luck in the market.
Rather than the clowns who want to make it worse by voting in Obama? :)

Quick question David, which candidate made a lot of money off the people behind all these collapses? Who are the major advisors behind a certain candidate and at the core center of these problems.
 
Written By: capt joe
URL: http://
which candidate made a lot of money off the people behind all these collapses? Who are the major advisers behind a certain candidate and at the core center of these problems.
Capt Joe - well, whoever they are, they’re Republicans, and they’re supporting McCain.
We’ll just keep saying that until it becomes a widely known fact beyond dispute.
A few more SNL skits, couple of Jon Stewart shows, an obliging media, more hacked/stolen emails, couple more fake but accurate stories about Sarah Palin. It’s all under control.


David - so the Democratic Congress has now stepped forward to say they don’t know what to do about it (which, is good in two ways, they probably ought to stay out as they’ll only make it worse, and for once, they’re actually telling the truth....).
How, exactly, is ’the One’ going to solve this problem without the legislature David (I trust you understand how our government actually works, right?)
 
Written By: looker
URL: http://
Capt Joe - well, whoever they are, they’re Republicans, and they’re supporting McCain.
Well, maybe it is just me, but I find all that stuff about the big O quite disturbing. Maybe if I find asleep and woke up one of the pod people like David and Glassnose there, I would think your statement was all so dang logical.

 
Written By: capt joe
URL: http://
From an article in that fascist right wing rag the New York Times, we have this:

As for the effects of regulation:
Fannie Mae, which was previously known as the Federal National Mortgage Association, and Freddie Mac, which was the Federal Home Loan Mortgage Corporation, have been criticized by rivals for exerting too much influence over their regulators.

’’The regulator has not only been outmanned, it has been outlobbied,’’ said Representative Richard H. Baker, the Louisiana Republican who has proposed legislation similar to the administration proposal and who leads a subcommittee that oversees the companies. ’’Being underfunded does not explain how a glowing report of Freddie’s operations was released only hours before the managerial upheaval that followed. This is not world-class regulatory work.’’
As for what the democrats think:
’’These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,’’ said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ’’The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.’’
When in doubt, it is BOOOOOSHHH!

By the way, I tracked down a short vid clip of David as as he is faced with something that conflicts a teaching of the One

 
Written By: capt joe
URL: http://
w8VCPE bzqhoiwfnkvs, [url=http://agdvbfkjiiva.com/]agdvbfkjiiva[/url], [link=http://oukfinmzqugq.com/]oukfinmzqugq[/link], http://hrgxnjgnkacy.com/
 
Written By: 3
URL: http://dcfaueedsyjw.com/

 
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