This data continues the recent trend of poor headline data that nevertheless
beats consensus and shows a slowdown of the deterioration since February. Note
the line item for expected overall business conditions in 6 months time which
came in at -7.9 compared to -31.6 in February (0 is a neutral reading for this
data series), while a number of individual categories are now expected to be
moderately improved over that time period.

This auction will provide another important data point for the state of the CRE
market.

One of the more effective ways to mitigate losses in a declining market
(other than outright liquidation) is to write calls against positions. This
can certainly be seen by the performance of the CBOE Buy-Write Index (BXM)
which measures the performance of a continuous buy-write strategy using the
SPX Index. Since the market's troubles commenced in August 2007 this index
fallen from approximately 800 to 580 but has outperformed the SPX index by
just under 32%. The extremely high level of implied volatility experienced
since last September has no doubt added to the popularity of this strategy,
and certainly has contributed to its relative performance. However, if the
current rally proves to be more than a "flash in the pan" an overindulgence
in call writing may come at a substantial opportunity cost as favored
positions are rapidly called away. Monitoring the relative performance of
the BXM versus the SPX will give a useful indication of whether pressure to
close out written calls is building. Clearly a BXM index that underperforms
a rising SPX would have bullish implications for the broad equity market.


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

While the massive rally in Treasury notes took the plaudits in the
immediate aftermath of yesterday's FRB statement perhaps the more
significant response in longer term will be that of the commodity complex.
We had already noted that industrial metals and energy (outside of natural
gas) were showing signs of stirring, while the strength of precious metals
has been well documented. Yesterday's news has caused a number of breakouts
in individual commodities with crude oil breaking above $50 for the first
time since last November while copper is within touching distance of the
key $4,000 level. Looking at the overall S&P GSCI index (which has a heavy
energy bias) we can see that we have moved strongly off key support at the
300 level and are now challenging key resisitance at 375. What started as a
very narrow advance in a couple of monetarily sensitive commodities is now
threatening to develop into a meaningful recovery rally for the entire
commdity complex. This clearly has important ramifications for a number of
commodity sensitive equity sectors and emerging markets, which we continue
to expect to outperform in the weeks ahead.



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

In the aftermath of the FRB's surprise statement that it intends to
purchase $300 bln. of Treasuries over the next 6 months it is interesting
to note the differing response of the 10 year Note to the 30 year bond. The
former has seen its yield drop by 47 bp to 2.54, which constitutes a
breakdown of its recent rising trend. The 30 year bond on the other hand
has only seen its yield drop by 30 bp to 3.62% and therefore remains very
much in its rising trend. As a result of these differing responses the
spread between these 2 yields has widened dramatically to 106 bp, the
widest it has been since June 2003. The record spread we can find on record
is 112.7 bp recorded in October 1992. We would not be surprised to see this
comfortably beaten during this initial response to the FRB's statement.


(See attached file: D-.30-10SP_Index.gif) - D-.30-10SP_Index.gif

Gold's short term technical position continues to weaken with the metal
finally violating its rising trend line support this morning and falling
below the $900 level. There is still the potential for price support around
the $890 level but a failure to hold this "last ditch" support could seem some
rapid liquidation of trading postions, together with sharply lower prices.
Although we are still positive about gold's longer term prosects, its short
term prognosis seems to have worsened considerably.




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

Since exploding higher in early September 2008 the VXO index has remained
above its 200 day ma (which itself has risen from approximately 25 to 42.50
over this 6 month period). This indicator has proved to be technically
significant in recent months since each recovery rally in the equity market
has been combined with a compression of volatility (and hence a falling VXO
index) without managing to force the index below its 200 day ma. At the time
of writing the VXO has finally slipped below this important support, which
gives us one of the first tangible senses that something more interesting
that a brief bear market rally may be unfolding. As we have written many
times in the Speculator we need to see the VXO fall comfortably below 40
before we can start to talk about the market's psyche healing, but if
today's gains can be held then an important threshold will have been
crossed.


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

Today's Housing Start Data came in considerably stronger than expected
which has raised questions as to whether the long awaited turn in New Home
construction may have commenced. Our answer would be that it is still too
early to tell. Looking at the chart of Building Permits issued (which we
have always preferred to Housing Starts as a real time barometer of
activity) we see that the February data came in at 547K, versus a (very
weak) survey of 500K. This is basically a continuation of the January
activity level which was revised slightly higher to 531K. If housing
activity has in fact bottomed we should see a sharp improvement in the data
going forward. As the attached 50 year chart demonstrates, bottoms in
housing activity have always been very obvious "V" shaped affairs that
extend for several months. If we smooth the data by using a medium term
moving average (in this case 6 months) we can see that the monthly data
extends beyond this indicator within 2-3 months of the low and the average
itself starts turning higher at the same time. We think it is reasonable to
assume that the same pattern will also occur this time whenever a true
recovery commences. The March and April data will almost certainly be the
key months to watch in this regard.




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

The Long Bond yield is currently testing key resistance at 3.80%, a level
which has been threatened since early February without giving way. Whenever
a prolonged period comes before a breakout (or breakdown) the likelihood
grows that substantial follow-through will occur. In the case of the 30
year bond yield we have used a target of 4.00% since yields collapsed at
the end of 2008. In what is still a very crowded trade it is quite possible
that yields could overshoot this target if speculative longs are hurriedly
liquidated. Between now and then we have the FRB statement on Wednesday,
with many still hoping that the FRB will signal a change in policy from
"credit easing" (the direct intervention in credit markets) to
"quantitative easing" (the purchase of Treasury securities). We see no sign
of such a shift in policy being signalled in any of the public
pronouncements made since the last meeting. In fact with finessing the TALF
scheme currently taking a tremendous amount of time and energy in order to
create a successful program a shift towards QE on Wednesday would strike us as
perverse. Nevertheless, as we have learned many times in recent months
anything is possible.


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

One of the pieces of data we have been waiting for from the FRB Flow of
Funds report was the Mortgage Debt outstanding since this allows us to
update our long term chart which compares this sum to M2. Remember Mortgage
Debt had never exceeded M2 until 2002 but by late 2007 was some $3 Trillion
higher. Our assumption at that time was that these two measure would have
to return to their historical norm (ie M2 would be greater than Mortgage Debt)
but that this process would most likely be achieved by a combination of
shrinking debt and rapidly growing M2 over a period of several years. As
the attached chart shows the 4th quarter of 2008 saw some substantial
progress made in this regard. Mortgage debt outstanding (black line, top
chart) fell $40.7 (0.39%) during the quarter while M2 (red line, top chart)
grew by $358 bln (4.59%) over the same period. This means that the gap has
closed to $2,174 Trln. at the end of 2008.

One other point we would make is that the flow of Funds data is not "marked
to market". Since much of the household debt issued in recent years has
been securitized and now is written down substantially on the debt holders
balance sheet the FRB data really gives a lagging sense of the required
correction in the months ahead. This problem is of course not unique to
household or mortgage credit, but should be borne in mind when considering
the myriad of commentaries that will no doubt be written as this data is
considered in further detail.


(See attached file: M-DOUTMORT_INDEX.gif) - M-DOUTMORT_INDEX.gif

The 4th quarter FRB Flow of funds report as just been released. Summary text is
attached - there will be plenty to dig into over the next couple of days on
this data and we note that both Mortgage debt and Household debt contracted
last quarter.

One of our central premises in recent months has been that the dramatic
collapse in US retail activity that took place in the immediate aftermath
of last September's multiple crises had the characteristic of a mass
psychological trauma rather than a permanent shift in consumption patterns.
Put simply we believe that consumption patterns are the result of several
decades of social development and these do not tend to get permanently
reversed overnight in the absence of physical or legal restraint (and even
then are subject to resistance). We are therefore less surprised than most
to see February's data come in somewhat better than had been anticipated by
the consensus, with overall sales (upper chart, black) basically flat and
sales ex-autos (bottom chart, red) a comfortably positive 0.7%. January
data was also revised significantly higher, making it one of the few recent
data series to be improved on revision.

While this remains a difficult retail environment we believe it is less
dire than most imagine. This in part explains the fact that most retail
stocks have managed to stay above their 2008 lows during the current
decline. The problems that certain retailers currently suffer from would
seem to have far more to do with poor decisions regarding capital structure
(ie too much debt) rather than a historic collapse of their actual top line
revenue.



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

We should correct the title of Hoenig's speech to "Too Big Has Failed" which is
even more appropriate.

Titled "Too Big Has Failed" (see link) this speech outlines some of the current
thinking within the FRB about the options facing regulators for dealing with
the current crisis. It is notable since it does explicily criticize the
Treasury for its "piecemeal" approach thus far - signaling clear tensions
between the FRB and the Treasury. Of course this would be more telling if it
was issued by Chairman Bernanke rather than a non-voting regional FRB committee
member but it may be a key indicator that pressures are building for a more
holistic (and we would hope effective) attempt to deal with the landscape
increasingly littered with "zombie"
franchises.

http://www.kansascityfed.org/speechbio/hoenigPDF/Omaha.03.06.09.pdf

There was a key NY appellate court ruling (see link attached) on the ability to
de-regulate rent stabilized apartments in properties over 100 units that
receive J-51 tax abatements (these are basically incentives to conduct capital
improvements and are very widely used by NYC landlords). The decision was to
deny deregulation - which is a major blow to the appellate (Stuyvesant Town)
but also has major negative ramifications for large NYC residential landlords
and their lenders. If this ruling cannot be overturned I would say this is
potentially a killer blow to an already deeply troubled
industry.

http://www.crainsnewyork.com/article/20090305/FREE/903059976

This transaction marks one of the first pieces of secondary market data
regarding the drop in peak CRE values. The original sale made out of the EOP
sale in early 2007 was valued at $967mm. The current sale was apparently made
at $355mm - a drop of approximately 60% from peak value. This is clearly far
lower than the average "mark" for CRE built into current valuation models. It
is also unlikely to be an abberation, or close to the trough valuations for
this cycle. In our experience when a parabolic, debt driven, speculative market
collapses the rule of thumb is an 80% drop of value from peak to trough. We see
absolutely no reason why CRE's 2007 values should prove any different from the
historical norm.

We are finally starting to see the sort of sentiment readings that
typically indicate capitulation on behalf of investors. This week's AAII
data showed the highest ever recorded percentage of Bears (70.27%) since
this weekly poll was started in mid 1987. Bulls came in at 18.92% and
Neutrals at 10.81%. Even though we recognize that this is the worst ever
equity market experienced over this time period a 70% bearish reading is
still remarkable. If we look at the difference between Bulls and Bears (see
attached chart) then today's reading is the lowest since October 1990 (a
notable low for the SPX that was followed by a prolonged rally) and the 2nd
lowest reading ever recorded.

As ever one data series does not conclusively prove anything, but for those
who believe that sentiment is an important input into investment decisions
this week presents a powerful case that we are at or near the climax of
this prolonged sell off (though no doubt some would argue that almost 19%
of the polled population were simply delusional).



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

The BOE becomes the first major central bank to announce a program to purchase
its own Treasury instruments (together with other debt instruments). Initial
tranche is to be $75 Bln. Stage 2 of the great monetary easing (and associated
currency debasement) has begun. ECB due to announce its own monetary decision
later this morning.

We have felt for several weeks that the most likely portion of the global
economy to respond to monetary stimulus would be the industrial portion and
associated "primary" industries and the February Chinese PMI data which was
published last night came in considerably better than had been anticipated
for the second month running. The overall index came in at 49 (50 being a
neutral reading) while the Output Index actually recorded a marginally
positive reading of 51.2. We always caution against reading too much into a
couple of months data but it does seem that the Chinese industrial economy
is holding up rather better than many commentators had expected. News that
an additional stimulus package will be announced tomorrow has further added
to the more bullish tone surrounding this key industrial economy.

As ever we would look for confirmation in market prices and outside of the
Chinese equity market, which rallied strongly last night and is the world's
best performing index YTD (up 20.72%) no single price is more linked to
China than that of copper. We have commented before that this metal has
been extremely quiet in recent weeks, but this is an impressive performance
given the backdrop of extreme economic pessimism. As the attached chart
shows copper is challenging its 2009 high and resistance line that comes in
at $3,800. It has also comfortably outperformed other commodities in recent
weeks (see green line on lower chart which compares copper to CRB Index). Given
the importance of this situation we would look for some leeway above this level
(say $4,000) before fully believing the message of the chart.



(See attached file: D-CPMINDX_Index.gif)
(See attached file: D-LMCADS03_COMDTY.gif) - D-CPMINDX_Index.gif -
D-LMCADS03_COMDTY.gif

This morning's release on the TALF contains the following paragraph right at
the end. Given the fact that the FRB already has tremendous powers to expand
its balance sheet (a subject we have written extensively on in recent months)
the question is why the FRB should require additional legislation at this time.
There are no obvious constraints in terms of the QUANTITY of assets that the
FRB may seek to purchase (although it is possible that Chairman Bernanke was
unnerved by some of the more pointed comments made during his testimony to
Congress and the Senate last week) but there are severe constraints in the
QUALITY of assets that can be purchased. One possibility could be that the FRB
could seek the right to intervene in debt markets below the AAA threshold -
although this may prove too much given the extremely dubious quality of ratings
that still remain in place. One assumption we would make is that the policy of
"Credit Easing" is about to move into a faster gear - and that direct
intervention into credit markets is going to be expanded considerably in both
depth and scope in the months ahead. (see below for FRB text)

Increased TALF lending and other actions to stabilize the financial system have
the potential to greatly expand the Federal Reserve's balance sheet. In order
for the Federal Reserve to conduct monetary policy over time in a way
consistent with maximum sustainable employment and price stability, it must be
able to manage its balance sheet, and in particular, to control the amount of
reserves that the Federal Reserve provides to the banking system. The amount
of reserves is the key determinant of the interest rate that the Federal
Reserve uses to pursue its monetary policy objectives. Treasury and the
Federal Reserve will seek legislation to give the Federal Reserve the
additional tools it will need to enable it to manage the level of reserves
while providing the funding necessary for the TALF and for other key
credit-easing programs.

Hardly surprising but clearly more bad news for CRE.

One notable aspect of the current protracted sell off has been the
relatively low level of implied volatility compared to that of the
September-November decline. During the current sell off the VXO has
remained in a 40-55 range (which still historically indicates fairly awful
market conditions) but has not extended beyond 55 with the exception of 1
single session in late January. This may be about to change; the VXO has risen
to 53.05 while the broad SPX index seems likely to trade with a 6 handle in the
near future. As ugly as a VXO reading in the high 50's or low 60's would be to
experience (particularly if it extends for more than a session or two) it could
signal the sort of terminal purge that will be required to exhaust the current
decline.



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