News You Can Use from Gary Moore

Weekend Market Update

May 8-9, 2010

U.S. Treasury issues and mortgage-backed securities often benefit when stocks are being sold, and this week was a classic example as equity markets plunged and Treasuries were being bought as a safe place to park money. Mortgage rates softened from the move, but not to the same magnitude as Treasuries, as the spread---the difference between Treasury pricing and the Fannie Mae mortgage contract---widened with Treasuries outpacing mortgage buying. This was accompanied by the Euro plunging vs. the USD.

Not even a positive employment report could stem the tide of selling as the Dow Jones average dropped 5.7% for the week and closed at 10,380, more than 900 points below its 52-week closing high of 11,205, which was just set April 23. The VIX, or volatility index, spiked to above 40 at Friday’s close. Trending high volatility has been a precursor to massive selloffs and bear markets in the past. If the VIX crosses 50, it’s Katie bar the door.

Rioting in Greece amid that country being on the brink of financial collapse---and fears that Portugal will be next and that other European countries, and even Great Britain, may follow with sovereign debt issues---drove panicked sellers to dominate the markets. Money flowed into the perceived safety of U.S. Treasuries with such demand that yields fell, with the government being able to sell debt and pay out less interest. The 10-year Treasury closed at a yield of 3.43%, and the Fannie Mae mortgage contract gained 74 basis points for the week, which roughly translates to an improvement of between .125 and .25 in rate.

After stocks dropped by more than 1,000 points intra-day on Thursday, rumors circulated that a trader at Citigroup had entered an order that mistakenly added three zeroes---in other words, a billion units vs. a mere million. I am not sure what the trade consisted of, beyond a basket of stocks that triggered a sell signal, but Proctor and Gamble stock was cut in half at one point and Accenture PLC dropped from $41 a shares to one penny. While the three zeroes entry makes a good story, it was more likely a computerized program trade of “intermarket sweep orders” which skewed trading radically and temporarily.

Private employers stepped up job creation in April, expanding payrolls by 231,000, the strongest surge since March 2006. With another 66,000 temporary government jobs created to conduct the census, the total for April settled at 290,000. However, with more jobs available, 805,000 job-seekers returned to their search for work, causing the unemployment rate to rise 0.2% to 9.9% overall.

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...by Gary Moore

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(0% points, 1% origination. Market Update informs consumers and Realtors on market trends, offers subjective opinions and is not a quote for a unique borrower.)