Gold has finally managed to break through its 10 month declining trendline
this morning which really confirms our sense that it is back in its longer
term uptrend that started 7 years ago. Clearly it is important that gold
hangs on to today's gains for its weekly close and that the metal goes on
to record further gains. Resistance points above include the October 2008
high at $931.78, the July 2008 high at $973.49 and, of course the big round
number at $1,000. Any pullback should be contained at strong support
between $840-$850 that includes the 50 and 200 day ma, price and
round-number support.

We are also including a chart of gold in EUR (blue), GBP (red) and AUD
(green). Gold has recorded new all time highs against all of these
currencies in the last week confirming that this is not a reaction to the
weakness of any particular currency but rather a global re-pricing of the
metal's value.



(See attached file: D-GOLDS_Comdty.gif)
(See attached file: D-GOLDS_COMDTY1.gif) - D-GOLDS_Comdty.gif -
D-GOLDS_COMDTY1.gif

The December new home sales data (shown in blue on the chart) came in at 331K
(vs consensus 397K) and November sales were revised downwards by 19K to 388K.
This makes December 2008 the weakest month on record for home sales in a data
series that goes back to 1964, a remarkable statistic given the growth of
population and home ownership trends over the last 44 years. Having said that
we are dealing with annualized data and a fall of 60K from November's data
actually means a total of only 5K homes less were sold in December than
November (for a total value of around $7.5 bln) and this needs to be
understood when considering the data. Nevertheless it is clear that the new
home market is yet to bottom in terms of activity.

We also note that the average price of homes (not shown) sold fell very sharply
in December, dropping $41.9K (14.51%) to $247K from November, the lowest
average price since October 2003. A drop of this size almost certainly
reflects a shift in the mix of the type of homes being sold rather than a
drop of 14% in the price of an equivalent home over a 1 month period, but
again this is not the sort of data that suggests that the new home market
is recovering.

The one portion of good news continues to be supplied by inventory which
fell a very sharp 40K to 357K (black line on chart). Since this is in fact
greater than the total homes sold in December (27.6K) there appears to be some
statistical inconsistency in the way the data is calculated, and this is largely
explained by the fact that the November 2008 inventory was revised upwards
by 20K. In any event it appears that a very substantial portion of home
sales are being made out of inventory (as is indicated by the housing start
and building permit data) and this continues to have an effect on housing
stock which is fast approaching the 44 year average of 330K. One day we
will be talking about an inventory shortage in a recovering new home market
but it seems that conversation will have to wait for a few months yet.


(See attached file: D-NHSLNFS.gif) - D-NHSLNFS.gif

Today's FRB statement contained only a wishy-washy commitment to purchase
Treasury securities and this has been a source of much disappointment to the
Treasury bulls, but not, we trust, to our regular readers. Frankly we're
surprised the FOMC even went this far in terms of discussing the purchase of
Treasuries but it would be hard for the FRB to outright deny their
intention to ever do so given the rush into this asset class that
has been partly fuelled by the belief that the FRB may imminently step into
this marketplace. The only member of the Board to advocate purchasing
Treasuries at the curent time was Jeffrey Lacker (President of the Richmond
Fed). Mr. Lacker is somewhat of a "serial dissenter". It may be recalled that
he was the only member of the FRB to consistently call for rates to be raised
above 5.25% in late 2006 and 2007, on the basis that the economy was in danger
of accelerating. Hopefully his (no doubt well intentioned) advice will once
more be ignored by the majority of the FOMC.

Looking at the attached chart 30 year yields are now challenging resistance
in the 3.45-3.50 range and provided this can be overcome they look likely to
extend up to our medium term target band around the 3.80% level (marked in
pink).





(See attached file: D-USGG30_Index.gif) - D-USGG30_Index.gif

The SPX index is closing in on key resistance at the 870 level. As we
discussed in last week's Speculator this combines the midpoint of the
800-940 trading range, the 50 day ma (shown in blue) and the opening gap
left on January 14th. As such this is going to represent a formidable
barrier at least in the short term, although it clearly can be breached by
a concerted effort on the part of the bulls. It is worth noting that both
the Energy and Technology sectors have already recovered above the levels
they were at when the SPX fell through 870 2 weeks ago, and this leadership
is an encouraging sign that the destruction of the financial sectors value
(even after today's rally it is still 15% below its level 2 weeks ago) can
be absorbed by gains in other sectors. A failure at 870 would presumably lead
to a retracement of the recent rally with support at 850, 820 and the key 800
level.

One important factor in deciding the outcome of a test of resistance at 870
may be the VXO, which has fallen below the key 40 level and is resting on
its 200 day ma (green). While a reading in the high 30's may seem low after
the last few months implied volatility is actually quite expensive relative
to the recent historical volatility of the market, and is approximately 5
points higher than the 30 day Historical Vol of the OEX index. Should the
VXO start to fall further this would indicate a greater degree of premium
liquidation is occurring potentially unleashing the sort of wave of
volatility compression that can take a rallying market some way further.
Clearly a failure at 870 would be accmpanied by a move back into the mid 40's
by the VXO.




(See attached file: D-SPX_INDEX.gif) - D-SPX_INDEX.gif

It's amazing how the global food shortage story has simply fallen off the radar
screen. A story such as this would have had the agricultural sector turning
cartwheels 8 months ago. As such it's a good reminder of how the attention span
of a market is not nexassarily related to the facts put in front of it.

While we normally only look at the Treasury market from a yield
perspective the sharp back-up in long term rates has had a profound impact
on the capital value of long dated Treasuries. Attached is a chart of the
"Long Bond" Future (US1<cmdty> on Bloomberg) together with its relative
performance to the SPX index. As the chart demonstrates the ultra-low level
of yields has magnified the effect of a change in yields on the future's
price and the 90 bp back-up in yields since late December has clipped
almost 14 points off the future over this period (the price of a long duration
bond gets increasingly yield sensitive as yields
drop).
Interestingly this means that although the SPX is
currently on track for its worst ever January performance, the long bond is
actually doing even worse, and since late November it really has made little
difference whether you were invested in the SPX or the long bond in terms of
returns. Since the former has labored under the weight of a collapsing
Financial sector this actually overstates the Long Bond's performance versus
non-financial equities over the last 60 days. Once more the public's perception
of risk needs to be matched to
reality of the marketplace.


(See attached file: D-US1_Comdty.gif) - D-US1_Comdty.gif

It is not just precious metals catching a bid today. Crude oil has managed
to rally through tis 50 day ma for the first time since mid July (if you
ignore the freakish trading on the day the October 2008 contract expired)
which is something we suggested to look out for in this week's Speculator.
Should the gains hold into the close we would be targeting strong "round
number" resistance at $50 (marked on the chart). By breaking through the
steeply declining 50 day crude is at the very least signalling that the very
powerful downward trend may finally be dissipating.


(See attached file: D-CL1_COMDTY.gif) - D-CL1_COMDTY.gif

30 year Treasury Bond yields have broken out in the manner we expected and
are now likely to reach our target of 3.50%. We note there has been renewed
commentary regarding such a move forcing the FRB to start purchasing long
dated Treasuries and repeat our stance that this is highly unlikely unless

1. Yield moved substantially higher (well over 4%)

2. Other Fixed Income yields followed suit.

So far while Agency yields have moved higher in recent days corporate
yields have absorbed a good portion of the rise in Treasury yields thus
bringing spreads down from their recent depression level highs. We also
believe it would make far more sense for the FRB to address any concerns in
non-Treasury yields by purchasing swathes of that particular asset class
(see our Speculator Extra January 14th 2009 for a discussion of this)

Finally it may be helpful to look at a longer term chart of 30 Treasury
yields (attached) in order to remind oneself just how low. in historical
terms, a 30 year yield of around 3.50% would be. We very much doubt that
yields at this level would be considered a crisis given the full agenda
currently confronting the FRB and new Obama administration.


(See attached file: D-USGG30_Index.gif)
(See attached file: M-USGG30_Index.gif) - D-USGG30_Index.gif -
M-USGG30_Index.gif

We have commented on a number of occasions recently that precious metals in
general and gold in particular have started to respond favorably to the
raft of new monetary initiatives, much in the way the metal behaved in the
early part of the current crisis from August 2007 until BSC's demise in
mid-March 2008. To an extent the recently strong USD has masked the recent
strength of gold for while the USD price still has to break through a
number of important resistance points over the next $40 before it can break
out of its 10 month declining trend the metal has made very strong progress
when priced in other major currencies.

Attached is a chart that shows gold priced in USD (Black). EUR (Blue) and
GBP (Red). Unsurprisingly the strongest performance has been registered in
GBP where gold has made a series of new record highs in recent weeks. The
EUR chart is now very close to challenging October's all time high and is
some distance above the level reached in March 2008 when the USD price
peaked. We continue to believe that it makes sense to allocate capital to
gold, silver and gold mining equities, and would purchase the latter if
they were affected by the current general weakness in the equity market.


(See attached file: D-GOLDS_Comdty.gif) - D-GOLDS_Comdty.gif

The Stuyvesant Town/Peter Cooper deal was one of the last huge residential CRE
sales completed this cycle. As Fitch describe the large Reserves set up to
secure debt service at the time of sale have now been largely depleted. Given
the fact that the local rental market has softened significantly over the last
90 days (something that we have direct knowledge of, together with Stuyvesant
Town's aggressive attempts to offer Tenant inducement) we suspect that this may
hit the buffers somewhat sooner than Fitch suspect.
Fitch Comments on the Stuyvesant Town/Peter Cooper Village Loan
2009-01-22 18:53:59.412 GMT

FITCH COMMENTS ON THE STUYVESANT TOWN/PETER COOPER VILLAGE LOAN

Bank Nationalizations May Not Trigger Default Swaps (Update1) Jan. ...

Clearly the avoidance of CDS triggers is a necessary component of any attempt
to "rescue" the banking system. This article makes the valid (if fairly
obvious) point that destroying equity value alone would not be considered a
default event.
<>

There are growing signs that long term Treasury yields may finally be
edging higher with yields forcing their way into a congested band of
resistance around the 3.10% level (which includes the 50 day ma at 3.11%).
We would mark the high-point of this range at the December 2008 high of
3.17%. A close above this level would suggest that yields would be
targeting a move to 3.50%, which would knock approximately 8 points off the
long bond future. Should such a move unfold it would presumably shake out a
decent portion of the recent speculative flows into long dated Treasuries.
It would then be important to watch the response of non-Treasury yields
(particularly corporate and agencies) to Treasury yields backing up. Corporate
yields remain at historically high spreads and may be able to absorb a sizeable
back up in Treasuries without suffering too much collateral damage. On balance
we suspect that a move higher in yields would be a positive for the equity
market, not least because we suspect that a good potion of "natural" equity
flows have been diverted to the Treasury market in recent weeks.




(See attached file: D-USGG30_Index.gif) - D-USGG30_Index.gif

The equity value of the US banking sector continues to evaporate with
today's opening clipping another 11% off the value of BKX index, taking its
market cap to $394 bln, just under that of XOM alone. As a result while the
news flow from this sector is likely to remain awful (particularly for the
holders of the junior equity positions) the overall influence upon equity
averages continues to diminish rapidly.



(See attached file: D-BKX_Index.gif) - D-BKX_Index.gif

We sent out a chart of the BKX at the start of this week warning that we
were set for further losses in this sector and events have clearly moved
quickly in this regard. As we have repeatedly warned in recent weeks, while
the risk of a default of a major lending institution has almost entirely
diminished in recent weeks, the massive Federal Government, FDIC and FRB
intervention that has created this "stability" has come at the cost of the
existing equity
holder.
The same story
appears to be repeating itself. A further wave of capital writedowns
nessecitates renewed Federal support. As a result "junior" equity claim is
becoming subordinated to the new "senior" capital injections (thus far made at
the level of the existing preferred securities of the banks) while future
earnings seem likely to be depressed by adverse regulatory conditions. It seems
that the market has finally woken up to this reality and the BKX index has
fallen to a new low both in terms of price (top chart, black) and relative to
the SPX (red). It seems likely that this process has further to go before a
new (lower) "fair value" is established.

Probably the most positive statement that can be made is to point out the
rapidly diminishing relevance of this sector for the overall market. The
BKX now has a market cap of just over $400 bln (about 5% of the SPX), down
from its 2007 peak of over $1.3 Trln. Even if the index were to fall a
further 50% from here this would represent $200 bln of market cap destruction,
or around 20 points in the SPX.


(See attached file: D-BKX_Index.gif) - D-BKX_Index.gif

FDIC release on BAC rescue. Note the paragraph excerpted below in which the
FDIC proposes extending the Term of the "Temporary Liquidity Guarantee Program"
(which allows banks to issue FDIC guaranteed bonds) from 3 to 10 years. This is
a major change to current policy and the language requiring banks to lend the
new guaranteed funds to consumers is quite telling (not that this will be able
to be efficiently enforced). As we have noted before very few things last as
long as "Temporary" emergency measures.

"Separately, the
FDIC board announced that it will soon propose rule changes to
its Temporary Liquidity Guarantee Program to extend the maturity of the
guarantee from three to up to 10 years where the debt is supported by
collateral and the issuance supports new consumer lending".

One of the stranger things about recent weeks has been the wide spread between
Brent and WTI Crude. It helps explain why energy producers have held their
value relatively well compared to crude itself. WTI prices (which the NYMEX
contract is based off) almost certainly downplays the true price for Crude -
particularly in the front month which trades at a discount of over $6 to next
month's contract which will become thr front month in one week's time.

The Weekly MBA Refinance Index continues to show very vigorous refinancing
activity with this week's reading taking the index back to a level unseen
since the 2003 refi-boom. Obviously this does not in any way represent an
improvement in the state of the housing market (the equivalent Mortgage
Purchase Index has fallen 35% over the last 52 weeks) and we suspect that
very few of the refinanced loans include any significant "cash-out" of
excess equity in the home. We therefore would not look for any major boost
to consumer spending from this activity unlike that experienced in 2003.

On the other hand this surge in refinancing does demonstrate that recent
drops in interest rates have been significant enough to generate marginal
reductions in mortgage rates. The subsequent drop in debt-servicing costs
will improve the service-ablitiy of the new loans and should help moderate
future delinquency levels and therefore can still be seen as an important
part of the repair mechanism. For instance the massive option-ARM
expiration "bullet" seems likely to be mostly avoided as a result of this
process (and the need to deal with ARM expiration may in fact be a major
source of refi demand at the current time).

On a separate note this surge in activity will have produced a significant
incremental demand for long dated Treasuries from remaining MBS holders
wishing to hedge their duration. This clearly is not the only cause of the
current yield levels but this source of demand has been largely ignored in
today's commentary unlike in 2003 when it was the main focus of attention.


(See attached file: D-MBAVREFI_Index.gif) - D-MBAVREFI_Index.gif

A text-book ending to a text-book folly. As we have commented before the Met
Life building (now Credit Suisse's HQ) on Madison & 23rd Street was originally
intended to be the world's tallest building when started on the eve of the 1929
crash. It remains a stub-nosed reminder of misplaced ambition to this day.

In a generally weak overall market it is notable that the large cap US
banks (shown here using the BKX Index) are behaving particularly poorly.
The index is currently right on its December 2008 low and below this level
is in danger of falling to test its November 2008 low which is approximately
15% below the current price level. The index never managed to cross its 40
day ma on the rebound and has significantly lagged the SPX during the
recovery over the last 6 weeks (as shown by the declining green "relative"
line on the lower chart). One interesting thing to note is that unlike prior
sell-offs there is currently little concern that one or more large banks are in
imminent danger of failure, instead we are witnessing the (probably justified)
realization that there may be very little value left for the current equity
holder by the time this cycle is over.


(See attached file: D-BKX_Index.gif) - D-BKX_Index.gif

We continue to monitor the changes to the FRB balance sheet since this
represents one of the primary "front lines" of the current economic cycle.
As the attached chart shows the FRB's balance sheet (upper chart) has
stopped growing and has been essentially range bound since early November
between $2 - $2.25 Trln. (an admittedly massive range). This week saw the
balance sheet fall by 3.07% to $2.18 Trln. but we would not read too much
into this move given the massive complexity of managing the balance sheet.
We would, however, conclude that the FRB is now in a "wait and see" mode
regarding the need to radically expand its balance sheet from the current
level. This seems reasonable given the likely time-lag that this process
would take to have visible effects, and the fact that credit spreads have
significantly moderated in recent weeks. Nevertheless, it is reasonable to
assume that any renewed worsening of credit conditions would see the FRB
balance sheet start to grow rapidly.

Looking at some of the components of the balance sheet (lower chart) we can
see that most have stabilized in recent weeks, with the exception of the
Discount Window which has fallen sharply and the Reserve Bank Balances
which continue to grow very rapidly. The latter is of particular interest
since it has been closely correlated with Commercial Bank cash holdings in
recent weeks. This week's 3.58% spike of Reserve Bank Balances to $878 Bln.
suggests that Commercial Banks continue to rapidly build up their cash
balances in the manner we had predicted.



(See attached file: D-FARBCRED_Index.gif) - D-FARBCRED_Index.gif

This week's reading from the CS HY Index II shows the significant
improvement in both nominal yields and spread to Treasury that has taken
place in High Yield debt since late December. Nominal yields have fallen by
approximately 350 bp over this time (to put this in perspective this is
approximately half of the index's entire nominal yield at its 2005 low)
while the spread to 5 Year T-note has fallen just below 16%. Clearly we are
still comfortably within "crisis territory" for this asset class, as we
should be given the likely ramp up of defaults in the coming months. On the
other hand it is equally clear that this marketplace has recovered from the
capital starved gridlock that it suffered from in the last 2 months of
2008. Given the magnitude of the turn (and the gains recorded by those who
stepped in at the low) we would expect to see further gains in the coming
weeks as new capital is drawn into this marketplace and our guess would be
that yields and spreads could fall a further 200-250 bp (which would take
them close to prior peaks) before this rally is exhausted.

Obviously as yields fall the risk/reward trade-off gets far less appealing.
We have no doubt that many of the fears regarding default rates will be proved
to be well grounded and we would be far less inclined to commit capital to
this area should yields continue to fall appreciably from the current
level.


(See attached file: W-.JUNK_Index.gif) - W-.JUNK_Index.gif

Bank of America, Citigroup May Face Restrictions After Crisis Jan. ...

As we have comented before the changes in regulation that will be enacted in
the coming years will ensure that the business of banking is going to be
significantly less profitable than it has been. This article is notable since
it is one of the first times the term "macroprudential" has made it into the
mainstream. This term was first used by Bill White in a speech made to the BIS
in 2004 which is well worth reading http://www.bis.org/speeches/sp041026.htm .
Our assumption is that we will be hearing this term used an awful lot in the
coming months.
<>

When we commented yesterday that US commercial paper yields had fallen
dramatically we made the point that we needed to see demand expand at the
newly lowered yields if this was going to be truly expansionary. Today's
weekly report of US commercial paper outstanding is certainly encouraging
in this regard with the total rising $63.1 bln. (4.94%) to $1,764.4 bln.
This takes the total back to precisely where it was on the eve of the LEH
meltdown, although it should be remembered that the FRB has directly
purchased $332 Bln. of Commercial Paper in order to enable this recovery to
occur. At least this heroic effort has been successful in reducing yields
(and indeed quite profitable for the FRB) and it would seem that this vital
portion of the funding mechanism for the general "industrial" economy is in
substantially better shape than it was at the depths of 2008.



(See attached file: D-FCPOTOTS_Index.gif) - D-FCPOTOTS_Index.gif

For our first chart of 2009 we are taking a look at the relationship
between the XOI Index (AMEX Oil Index) which is the black line on upper
chart and uses the right hand scale and the OSX (Philadelphia Oil Service
Sector Index) the red line on upper chart using the left hand scale. The
ratio of the XOI/OSX is shown in green on the lower chart. Note
surprisingly these 2 sectors are closely related with one another (together
with crude oil's price level) but as the attached chart shows the OSX has
substantially higher beta than the XOI and is generally considered a
significantly more speculative way to play energy prices.

Looking at the price action in recent months while both sectors suffered
steep declines in the 2nd half of 2008 the losses of the OSX were far
greater than for the XOI. As a result the ratio of these 2 indexes more
than doubled from 4.06 in early July to 8.28 in mid December. It is
interesting to note that this ratio continued to expand throughout the
first month of the XOI's recovery. However, since late December and
particularly in early January the OSX has substantially outperformed the
XOI, although both indexes have continued to gain ground. There are several
drivers behind this change in the relationship. Firstly the year end
liquidation pressures were more acute for the OSX and these have now been
removed, secondly the continued recovery of the overall equity market has
started to encourage an element of "risk migration" into higher beta
sectors in general (we'll have more to day about this in coming e-mails) and
finally the recovery in crude's price level back to nearly $50 is of greater
significance to the OSX. While we would not expect to see this ratio fall back
anywhere close to its 2008 trough we would not be surprised to see come
continued outperformance of the OSX in the coming weeks.


(See attached file: D-XOI_Index.gif) - D-XOI_Index.gif