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Monday, October 20, 2008

Signs of Hope: LIBOR, TED, VIX, Treasuries, Equities

“The policies put in place by authorities around the world have clearly reduced the risk of more bank defaults, and that's beginning to loosen up monetary conditions. I expect interbank rates to continue to gradually decline over the coming weeks as central banks flood the market with cash.” -Nick Stamenkovic, RIA Capital Markets

Signs of hope…

European Money-Market Rates Decline on Emergency Bank Support: Money-market rates fell in Europe and Asia, extending last week's declines, as policy makers intensified efforts to combat a collapse in bank lending.

The London interbank offered rate, or Libor, for three-month loans in U.S. dollars slid 36 basis points to 4.06 percent today, the biggest drop in nine months, according to the British Bankers' Association. The overnight-dollar rate lost 16 basis points to 1.51 percent, the lowest level in more than four years. The three- month rate for euros dropped. The Libor-OIS spread, a measure of cash availability, fell below 300 basis points for the first time in almost two weeks.

Last week, the first tentative signs of improvement became evident. This week then is off to a good start.

“The difference between what banks and the U.S. Treasury pay to borrow for three months, the so-called TED spread, was 137 basis points lower today than on Oct. 10, when it reached the highest since Bloomberg began tracking the data in 1984.”

The 3 month T-Bill yield exhibits wild panic. A most ridiculous safe haven bid actually slammed yields down to 0.01% twice.

Watch this yield. A clear sign of stabilization and flows back into 'risky assets' (equities) would occur only with this rising towards 1.50% and becoming more orderly.

For the month of October at least, the TED Spread is heading in the right direction. On Friday the TED spread really improved. This week will be critical because significant follow thru is required.

1 month LIBOR (black, red line) has clearly peaked at 4.59%. Although LIBOR is now so discredited as to be purely symbolic, continued improvement is required for equities to find a sustainable bid.

The Eurodollar front month is moving in the right direction, having moved up from a low of 96.250 to Friday's close of 97.480. The Eurodollar contract settles to LIBOR upon expiration and is therefore a good indication of where traders expect LIBOR to be going forward.

Watching the Eurodollar intraday can give you an idea of whether or not to expect an improvement in LIBOR next day.

Volatility (VIX) appears to have maxed out for now. Everything above 70.00 consists of an intraday 'selling tail' on the candles, suggesting that a move higher is less and less likely. These levels would appear to be unsustainable, 10% intraday ranges in the S&P 500 will tire even the best traders. Expect VIX to drift lower as the credit markets improve and equities catch a nice bid as some of the sidelined money looks for bargains.

On the S&P 500 (SPX) the intraday low at 865.83 was significantly better than the previous intraday low at 839.80. The closing lows were also higher. The last two days of down volume (red bars) were significantly lower than the recent 'average', despite the fact that they were large, important candles. Therefore, expect prices to move sharply higher after a brief period of consolidation.


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