So Far So Good And This Could Be A Big One

So far I’m right which feels good. DDM and SDS humming along and I have been long JPM, STT and UYG since the pre open.There are still “enough” trapped shorts in the financials to fuel this further if things get even more bullish. I scaled ourt of 25% of my overnights and am now letting the rest run.

This is from Tony Crescenzi:

his morning’s LIBOR fixing was again up significantly compared to the previous day, with 3-month LIBOR at 3.7688%, up almost 30 basis points vs. Wednesday’s fixing. The current level is therefore 1.77 percentage points above the Federal Reserve’s 2.0% target rate, the widest spread since 1987. This is, of course, problematic not only because of what it says about the credit situation, but because it has a direct impact on borrowers.

For example, more than half of subprime adjustable-rate mortgages are tied to LIBOR. Trillions of dollars of debt are tied to LIBOR, which means that the cost of debt has increased materially for a multitude of entities throughout the world.

Some relief is evident in indicators that are useful in projecting the next day’s LIBOR fixing. In particular, swap rates and eurodollar rates are lower on the day. Whether this will last in the days to come is, of course, very up in the air.

Keep in mind that there have been four distinct periods of worry shown in LIBOR and swap rates, the current period being the fourth. Each other time the Dow gained over 1,000 points when swap rates peaked (the three other times: August 2007, November 2007 and March 2008).

Sustainability of the gains is of course another issue.

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