Wednesday, November 30, 2011

November Ends with a Bang

Isn't it amazing what a little perceived bank liquidity will do to the stock markets? Central banks all over the world agreed to lower the cost of funds by 50 basis points and that concerted effort was recognized as a strong positive. The Dow closed on November 30 at slightly over 12,000 for a 4.23% return on the day, with some of the biggest gains being made in the financial sector.

This week, Standard & Poor's announced downgrades on 37 global banks, including Bank of America, Citigroup, Credit Suisse, JP Morgan Chase, RBS, and UBS. In true market fashion, the combination of Central Bank action and the fact that most banks were downgraded only half a notch (from "A" to "A-" for example) led to a strong rally.

Less bad news (the downgrades COULD have been worse) is interpreted these days as extremely GOOD news...and the markets reacted accordingly.

On the bond side, the US Treasury 30 year bond was all over the place today, ending the day down around 2 points for a yield of 3.06. The 10 year was down 3/4 of a point and ended at 2.08%, a 10 basis point change in yield.

Other numbers out this week look good, but we are a long way from being out of the woods. In the bond markets, credit risk rather than interest rate risk is still the thing to watch out for. The street is pumping out floating rate to fixed rate paper along with a fair amount of absurdly low coupon step-coupon bonds. We continue to monitor credit situations, buy premium coupon callable paper, and try not to get overly enthusiastic on the big up-days in stocks.

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