Monday, November 19, 2007

. Federal Reserve: "Factors Affecting Reserve Balances", November 14

- Fed's Treasuries holdings: $787.7bn (+$2.6bn)
- Other central banks' Treasuries holdings: $1,234.5bn (-$2.7bn) (*)
- Other central banks' agency securities: $794.3 (-$1.1bn) (*)
- Global Dollar Liquidity Measure: $2,8164n (-$1.3bn)

(*) Off-balance-sheet items

[1] Looking better. Is Goldilocks fighting back? That's certainly the message from our market-based Goldilocks-Stagflation indicator (which seems to yield interesting signals in times of financial stress). The recent sell-off in the gold and oil markets has created a better tone for risky assets. The platinum-gold ratio is back at 1.85, a two-week high, and ten-year inflation breakevens also trade at around two-week lows (236 bps). All in all, and provided that the dollar keeps its composure, a 1525 print for the S&P500 now looks like a distinct possibility.

[2] Weekly Fed balance sheet watch. The second weekly Fed balance sheet for the month of November is out — with very little in the way of news. Our Global Dollar Liquidity measure sheds $1.3bn as foreign CBs sales narrowly outweight the Fed's own repo operations. The annual rate of growth stands unchanged at 14.1%, thus portraying a solid, if not booming, state of affairs in the global economy.

[3] Liquidity puts? Peter Cohan defines liquidity puts as "the right of Collateralized Debt Obligation (CDO) holders to sell back the CDO to its issuer at the original price". And he adds: "The liquidity put is responsible for the $25 billion worth of CDOs on Citi's balance sheet" [HT:].

[4] Liquidity & Business turnrounds [Liquidity @ Financial Times]. Fascinating article on the interplay between global liquidity conditions and the market for corporate restructuring. On the one hand, easy access to liquidity and innovative debt instruments have encouraged greater flexibility in restructuring. On the other hand, balance sheets have become much more complicated. Credit Default Swaps holders have introduced a set of new players to the game. Overall, restructuring experts are cautiously optimistic here: the lack of "big international failures" appears to support the view that credit risk is indeed widely dispersed. [John Willman: "Challenges ahead as funding dries up", Financial Times]

[5] U.S. Deflation ahead? Don't rule out the possibility, says Canadian consultants Bank Credit Analyst. Not surprisingly, they expect more rate cuts from the Federal Reserve. [BCA Research: "U.S. Inflation …. Or Deflation?"]

[6] Synthetic CDO market alive & well. Newspapers are awash with news on the liquidity crisis and the credit crunch. Now take a look at this: "ING Investment Management is marketing a synthetic collateralized debt obligation with UBS. ING will manage the USD1.3 billion dollar corporate-backed CDO, which is a big step up from the manager’s previous synthetic offerings issued this year that were USD140 million and USD280 million respectively ... The latest deal, called ING Managed Synthetic 2007-3, is a plan vanilla structure, according to an investor who has seen the deal. The investor added that the structured credit group at UBS has made strides in the past year in winning mandates from strong managers making early forays into synthetic". [Daily Institutional Investor: "ING Markets Big Managed Synthetic"]

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