The Week Ahead in the Capital Markets

May 12, 2008

“We are closer to the end of this problem than we are to the beginning.” – Treasury Secretary Paulson

I also made some optimistic comments several weeks ago, and paid the price. “You’re crazy – the worst part of the storm is yet to come,” said one friend. “Premature extrapolation!” said another. “Just wait until the baby boomers start to sell their homes. Then we’ll really feel the pain,” said one more.

AN INSIDER’S VIEW FROM THE CAPITAL MARKETS COOPERATIVE TRADING DESK:

“If some say we’re headed for better times, and others fear the worst is yet to come, where can we find an accurate measure of the market? I believe in the wisdom of the market crowd, and the crowd is telling us that while the peak of the crisis may be behind us, the level of risk is still very high and has increased in the past two months.

Evidence of this market sentiment abounds: swap spreads (the difference between LIBOR and Treasury yields) remain at twice the level they were a year ago; daily fed funds volatility is three times its level of a year ago (thanks to Dr. Giles at Columbia Univ for this tidbit); fed funds futures still show a bias towards easing; and the spread between mortgage and Treasury yields, while much narrower than two months ago, is historically wide at 2.45%.

Specifically regarding fed funds, the futures market does not expect any movement from the Fed in the near term. Futures contracts are essentially flat at 2.00% until early 2009. During the first half of 2009, however, the market expects the Fed to begin tightening, taking funds to 2.75% by early fall. Inflation is still a concern. Crude oil jumped 8.3% last week to $126 per barrel, and Barron’s reports that foreclosed houses “sport signs declaring ‘PVC Pipes Only’ to discourage the looting of copper fixtures.”

Certainly the recovery will take a while, and test everyone’s patience along the way. It reminds me of the old Marine Corps command: ‘You, you, and you … Panic. The rest of you, come with me.’

Fannie Mae showed courage in the face of increased credit turmoil last week. They announced broad initiatives titled ‘Keys to Recovery.’ The package is a basket of reforms, including aggressive jumbo pricing and relaxed restrictions on refinance activity. We look forward to the positive effects of these initiatives.” (CMC traders price, hedge, and sell $billions of mortgages for their clients, and offer a front-line perspective on the markets.)

Yeah, not looking good for Hillary. Today, even Yogi Berra said, “It’s over.” – Jay Leno

Thanks for your business and have a good week. – Tom Millon

About Capital Markets Cooperative
Capital Markets Cooperative (CMC) provides mortgage bankers with the economies of scale and the expertise to reduce risk and maximize profit in the secondary market. Regarded as the premiere secondary marketing specialist in the industry, CMC has worked with financial institutions nationwide to break traditional barriers in capital markets and take performance and profits to the next level. To date, CMC executives have managed more than $500 billion of mortgage volume. CMC board members are Tom Millon, Jeff Harry, and Harold Koegler.

For more information about Capital Markets Cooperative, visit www.capmkts.org or call 904.543.0052 or e-mail info@capmkts.org. This e-mail is not a solicitation or investment advice of any kind. You may change your e-mail address, or if this e-mail has reached you in error, or you do not wish to continue receiving it, please let us know by replying to tmillon@capmkts.org.