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Daily Market Commentary

To continue on with the commentary on ML, their bonds this morning are actually trading a little tighter to treasuries.  Contrary? Perhaps, but the bond market had taken their ten year bonds from 140 bps over treasuries last week to a whopping 180 bps over Monday.  Needless to say, as this was a bond problem (of the $7.9B write-down, $6.9 billion was from CDO's and $1.0B from subprime), the bond traders knew in advance.  This is why we've been harping on the theme of "one of the markets is wrong".  The bond traders smelled this coming, and it was reflected in the bonds (40 bps is equivalent to about $3 dollars in price on the 10 year issue).  Taken into a longer context, before the CDO/ABS/Subprime problems were on the radar screen, the spread on ML bonds has almost doubled since June.



  Mortgage applications were 0% for the week, a predictable drop, although we'd like to see a statistic of mortgage applications vs. mortgages granted.  That would show a more realistic story.  Now that the bad news of loan securitizations is starting to hit the big guys, it will be interesting to see how much credit granting standards really get tightened up.  As Citi and the other banks were planning on creating pools of liquidity to bail out some of this paper, we doubt they will be keen to issue even more of it.  This will cause lenders like WM and CFC to be unable to offload their lending risk, and subsequently just stop lending when there is any risk involved.


Existing home sales are out at 10am.  These numbers should stay terrible for a while longer.  Inventories are still growing and foreclosures are rising.


Bonds, predictably, are trading higher this morning - most of the news is having people run for cover.  This seems to spell more rate cuts on the way.


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