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Daily Market Commentary

The Fed delivered relief appears to have been short lived.  This morning's news from the hedge fund industry is absolutely destroying credit.  The Carlyle Capital fund, which was leveraged as much as 37 times to take advantage of playing the spread between borrowing and lending in sub-prime and other higher yielding debt issues.

 

  The threat comes not in Carlyle and its investors losing $16 to 17 billion, it actually comes in the panic that ensues.  Nobody really knows how far the dominos of derivatives spread from this particular mess.  One default on one side of a derivatives transaction, a Credit Default Swap, for example, can spread amongst many institutions, depending on how many times down the line the risk has been "offset" with another similar and opposite derivative.  The fall of one counterparty, as witnessed in the 1998 collapse of Long Term Capital Management, can cause worldwide ripples throughout the markets.  Carlyle may be the first big failure we are hearing about, but it certainly will not be the last.

 

 

  As if this wasn't bad enough, this morning's economic data has added fuel to the fire.  US advanced retail sales was a terrible -0.6% month-over-month, and -0.2% ex autos.  The US consumer finally appears to be rolling over and saying mercy.  Government, AND ONLY government bonds are sharply higher on this news. 

 

  Corporate issues are suffering once again and not participating in the rally.  For some reason, provincials and Canada government guaranteed Agencies like Canada Housing Trust, are also getting hurt by credit woes.  While it may still be a touch early to be diving headfirst into the corporate bond market, we just can't see the case for a provincial (or federal) government default, and would encourage investors to look at this market.  While yields are low already, the issues offer value over the pure safety of short Canada bonds, and will work to protect some of your capital.

 

 



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