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Daily Market Update

All the talk is of Fannie and Freddie, and their implications on the US financial sector as a whole.  As their share prices plunge, it left me wondering again... should these Government Sponsored Companies even be publicly traded anyways?  It is evident that the government would have to step in a prevent a bankruptcy at one of these entities, should it happen.  Canada's model of a government run agency appears to be a better model.

FNM and FRE with market caps of $15 and $6.6 billion respectively, have $831.2 and $644.7 billion in debt outstanding.  So needless to say, the equity portions of these companies are relatively unimportant.  Below is the chart of the yield spread between a Fannie 9 year bond and treasuries.  We are seeing credit spreads hit all time highs on the AAA rated "safe as government" bonds.

Weekly Jobless Claims were much lower than expected @ 346k, while continuing claims remained high @ 3202k.  This data looks pretty good, but it is a weekly number that has been trending the wrong way lately.

 All this pessimism, particularly the housing mess in the US is starting to make the US 2 year bonds look attractive at 2.40% (and to a lesser extent, in Canada @ 3.15%).  While the yield is not a lot to speak of, if the market gives up its bets that the Fed will hike rates, we could see some declines in the two year yield.  While down from a month ago, the market is still anticipating rate hikes by the end of the year, with virtually NO chance of rates being cut again.  We think the downside economy pressures will increase while inflationary pressures recede.  The jobs numbers and consumer spending data just doesn't support an inflationary backdrop, even though Oil and Food prices remain high.


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