Important Market Update

MMG Update - Thursday, April 2, 2009
Current Trend Direction: Sideways
Risks favor: Cautiously Floating
Current Price of FNMA 4.0% Bond: $100.31, -19bp

Congratulations to all of us for getting the word out... changes to Mark to Market are coming. The Financial Accounting Standards Board (FASB) voted favorably to relax mark-to-market and help financial institutions. The big change is to allow financial companies to use alternate models, like cash flow analysis, in marking assets. This enormous change will significantly reduce the writedowns banks have been taking on investments like mortgage-backed securities. You can revisit the article and videos we have put together on mark to market to better understand how destructive it has been to our financial system. This change to mark to market is effective for the second quarter, but can be applied to first quarter earnings. Rumors are swirling that this change will boost earnings of banks by 20% or more in the first quarter. It is too bad that it has taken so long for this enormous issue to be fixed, but finally Congress stepped in and common sense prevailed.

Once again, it's crazy to watch TV and see people talk adversely about removing mark to market. We and many smart people, like former FDIC Chair Bill Issac, former Treasury Secretary Robert Rubin, Steve Forbes and others just wanted to see a relaxing of mark to market like we got today - not a complete removal of mark to market, which would bring us back to the accounting standards of the Enron days.

Back on March 11th, you can see in our Daily Update, we called the bottom of the Stock market when the Dow was at 6552. A few things made us feel a bottom was in place - one, the front page of the Wall Street Journal said "Dow 5,000?" - but the other big factor was the upcoming Congressional hearing on mark to market on March 12th - the very next day. Since this time back on March 11th, Stocks, as evidenced by the Dow, have risen 23%! Be sure to share with your clients what today's FASB ruling means for our financial system and how it has affected the markets.

Also helping Stocks is optimism that the G20 meeting underway in London will agree on ways to pull global economies out of the current recession. And Bank of America's CEO Ken Lewis also said this morning that the company has a huge capital cushion even if the economic woes linger.

First-time claims for unemployment benefits were 669,000, higher than the 650,000 estimated and up 72% from the same period in the prior year. The number of people collecting state unemployment benefits reached yet another new record, jumping 161,000 to 5.73 million - a level that is 96% greater than in the prior year.

The European Central Bank cut its benchmark interest rate by .25% to a record low of 1.25%, but less than the .50% that was expected.

Jobs Report Strategy

This morning's Initial Jobless Claims were worse than expected, but the recent round of numbers suggest some stabilization in the labor market. Tomorrow's Jobs Report may not garner much of a reaction in Mortgage Bonds, so we are going to advise carefully floating into the report and here's why - If the number is a stinky one, and it is very likely to be, the pricing gains may be somewhat muted because lenders only have so much pricing to give due to capacity issues. On the other hand, should the Jobs Report come in better than expected, the reaction in Mortgage Bonds may be somewhat muted as well on the downside because of the Fed buying program. We think floating carefully with prices trading in this sideways range is prudent - but we will lean to a locking stance once this ceiling of resistance is retested.