Subprime Lenders

[rffrydr]

LEND, NFI etc getting whacked today--JP Morgan downgrade on, get this, housing.

Maybe symptomatic of something else. Yesterday's strength was defensive, utes and pharma.
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Alternatively, one can also speculate on what the Fed will do by directly buying or selling Fed Funds futures:

http://www.cbot.com/cbot/pub/page/0,3181,1525,00.html

According to the most recent close, it looks like we probably won't get an ease until the December 11, 2007 meeting at the earliest - although there is a 44% chance we will see one at the October 30/31 meeting:

http://www.federalreserve.gov/fomc/#calendars

The major reasons why most folks focus on the Eurodollar contract are simple: liquidity and the fact that the rate is much more market-driven than the Fed funds rate - since in theory, the Fed can just ignore the market and do whatever they want (similar to what happened with the Bank of Japan earlier last week).

[HenryTo]

Essentially, a Eurodollar futures purchase is a bet on what the Fed will do in the future (since the Fed funds rate and the 3-month T-bill tracks each other very closely) - with the "when" depending on what futures contract you buy or sell. This, in turn, is also a reflection of primary and bank liquidity as well as current and future inflationary expectations.

Here is a link to the latest quotes on the various Eurodollar futures contracts:

http://www.futuresource.com/quotes/quotes.jsp?s=ED

A link to the latest Treasury yield curve:

http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml

Note that with the intended Fed Funds rate at 5.25%, there's a dip in the 1-month Treasury rate to below 5% - and then a bump to over 5.1% in the 3-month T-bill rate).

Fed Funds rate probabilities, as calculated by the Cleveland Fed:

http://www.clevelandfed.org/research/policy/fedfunds/Index.cfm

[HenryTo]

A refresher of Eurodollar futures, courtesy of John Hull:
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The most popular interest rate futures contract in the United States is the 3-month Eurodollar futures contract traded on the CME. A Eurodollar is a dollar deposited in a US or foreign bank outside the United States. The Eurodollar interest rate is the rate of interest earned on Eurodollars deposited by one bank with another bank. It is essentially the same as the London Interbank Offer Rate (LIBOR).

Three-month Eurodollar futures contracts are futures contracts on the 3-month (90-day) Eurodollar interest rate. They allow an investor to lock in an interest rate on $1 million for a future 3-month period. The 3-month period to which the interest rate applies starts on the third Wednesday of the delivery month. The contracts have delivery months of March, June, September, and December for up to 10 years into the future. This means that in 2004 an investor can use Eurodollar futures to lock in an interest rate for 3-month periods that are as far as into the future as 2014.

To understand how Eurodollar futures contracts work, consider the March 2005 contracts in Table 6.1 (the table in the book shows the price as of February 5, 2004, per the WSJ). This has a settlement price of 97.63. The contract ends on the third Wednesday of the delivery month. In the case of this contract, the third Wednesday of the delivery month is March 16, 2005. The contract is marked to market in the usual way until that date. However, on March 16, 2005, the settlement price is set equal to 100 - R, where R is the actual 3-month Eurodollar interest rate on that day. For example, if the 3-month Eurodollar interest rate on March 16, 2005, turned out to be 2%, the final settlement price would be 98.

The contract is designed so that a 1 basis point (=0.01) move in the futures quote corresponds to a gain or loss of $25 per contract. This is consistent with the point made earlier: that the contract locks in an interest rate on $1 million for 3 months.

[HenryTo]

Thanks rffrydr, for the link. Time to check in with Mr. Fleck:

http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/HomeLoanHouseOfCardsReadyToFall.aspx

At some point, we will get our >10% correction in the DJIA and the S&P 500 - but we're not there yet, I don't think.

And at some point, Eurodollars will be a huge buy.

Henry

[rffrydr]

A new kind of news:

http://ml-implode.com/
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Homebanc dissolves REIT status:

[rffrydr]

Five standard-deviation move while bankers were handing out bonuses.

http://www.ft.com/cms/s/a17895c8-8eb7-11db-a7b2-0000779e2340,dwp_uuid=d8e9ac2a-30dc-11da-ac1b-00000e2511c8.html

[rffrydr]

A timely post I must say.

Who likes yield? 25% dividend for next year already in the bank. If only the company stays around long enough:

http://messages.finance.yahoo.com/Stocks_(A_to_Z)/Stocks_N/threadview?m=tm&bn=12547&tid=458431&mid=458431&tof=13&frt=2

The PMI consequences are an interesting topic.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

ABX index of subprime bonds gives housing no quarter:

http://www.bloomberg.com/apps/news?pid=20601103&sid=adbsVAhN68TM&refer=us
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Today is the Tomorrow you worried about Yesterday!