7000 dow. here we come.wont be long now, page-48

NY ROUNDUP – Thursday, November 13, 2008

HIGHLIGHTS

US President Bush: Defends free market system, G20 summit will lay foundations for reforms

US Budget deficit in October: Record $237.18B – much larger than expected

US weekly jobless claims jump to 516,000 back to 9/11 levels – worse than expected

US September trade deficit narrows to $56.47 bn – near expectations

GS changes forecast for UK rates: Expect an additional 100bp cut in December and a further 50bp cut to 1.5% in Q1

COMMENTS
Today’s range for the S+P was a staggering 11.6%. When we think of 11.6%, we think of long dated Mexican interest rates or 1-month USDJPY riskies but we certainly don’t think of a daily range on an index on an otherwise quiet Thursday. So what happened today to cause such a massive squeeze in stocks (S+P up 6.9%, the DOW up 6.7%, and the NASDAQ up 6.5%)? Interestingly most of the news flow today was quite negative - German GDP printed a worse than expected -0.5%, USD LIBOR fixed higher for the first time in a month, US swap spreads widened 8-10 bps in the front end, the US printed a record $237bn budget deficit, weekly jobless claims printed 7 year highs, and the US bond auction tailed an incredible 10 basis points. In addition, Soros was on the tapes saying “a deep recession is now inevitable and the possibility of a depression cannot be ruled out” while many of his contemporaries sounded comparably bearish during their testimony. However, we suspect the most important event of the day was the Stern speech where he reminded investors that the Fed still has quantitative easing in its tool kit. Perhaps not new news, but in otherwise quiet session with S+P’s hovering near their 840 lows, the Stern speech appears to be the straw the broke the camel’s back, sending the shorts running for cover. Interestingly, volume in the cash markets was up materially over their 10 day moving averages, suggesting that it was more than just the day-traders stopping themselves out. However, it is also worth bearing in mind that we are still 10 handles below where we closed Monday so it hard to chalk up today to anything more than an aggressive bear market squeeze. FX tracked equities very closely again today with charts of the EUR, EURJPY, GBP, and most EM all interchangeable with that of the S+P. We also wanted to mention the changes to our UK forecast — we are now looking for a 100 bp ease in December and another 50 bps in Feb 09. Tomorrow brings Eurozone GDP, as well as retail sales and University of Michigan data in the US before the G20 meeting this weekend.