MBS take big hit today

Tuesday, November 27, 2007

ECONOMIC DATA / NEWS

The lack of consumer confidence is growing.  The Conference Board’s index fell from 95.6 to 87.3.  Oil prices close to $100 has to be a major fear for consumers.  The general consumer has no idea how much higher gas prices might go, even though we know that oil prices are dropping off at the moment.  Oil prices plunged to $94.77 in morning trading for the very reason that consumers are worried.  That is, if the economy slows down too much, then there might be less demand for oil.  But oil prices aren’t the only issue.  The stock market has taken huge losses over the last two months, and we know that many of them are losing equity in their homes.  Plus, there is the constant uncertainty of whether or not they will have a job tomorrow.  Not all of these variables will be corrected in the next month or two.  Until there is an overwhelming sense that economic growth is returning, we are likely to see consumer confidence fall even further.  That then feeds into the economic slowdown and increases its momentum.

Just like Countrywide sold a stake to Bank of America a few months back, Citigroup has sold a portion of its company as well.  They received $7.5 billion from an investment group in Abu Dhabi called Investment Authority.  This equates to 4.9% ownership in the company, but they will not be able to hold any board positions.  This clearly frees up a lot of cash, making lending to consumers much easier.

The Dow has rallied 160 points already.  Credit concerns have been the main reason cited for stock market losses, so the Citi announcement has to be instilling some fresh confidence for traders.  Plus, the steep declines have created some bargain basement deals for some stocks, allowing for plenty of growth potential.  Stocks are deep in oversold territory, which means there is a good probability that the Dow could make its way back over 13,000.  If that’s the case, we will see some quick declines for bonds.

TECHNICAL ANALYSIS

The FNMA 30-year 6.0% has fallen all the way back down to the previous resistance at 101.12.  It is sitting on this ledge, down 25bp from yesterday’s close.  Considering the strong downward swing, over bought conditions, and the massive turnaround in Treasuries, there is probably enough force to break through this level.

The 10-year Treasury yield has bounced off a two and a half year low and climbed all the way to 3.98% in a matter of two hours.  The 10-year has been in deep overbought territory for a month, and there has to be some profit taking going on after the incredible gains of the last couple weeks.  We’re due to break back over the 10-day moving average, which means the yield could rise in the high 4.10’s in the next week.

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