Financials Update at the Close $GS $XLF

· The financials were some of the best performing stocks in the whole market this week, although nearly all the gains came on Fri following the completion of financial regulatory form. Early Fri morning (5:30amET), the House/Senate reconciliation conference committees reached a compromise agreement on the last big outstanding issue (Lincoln’s derivatives amendment) and passed the bill (w/o any Republican support). The measure will now head to the full Senate and House for a vote next week (the process is expected to start Tues) w/Obama on track to sign the legislation by Jul 4 (meeting his months-long deadline). The finished product will impose new restrictions and costs on the industry, although the final bill was not as bad as some feared (esp. on “Volcker” and “Lincoln”); the initial St takeaway on the legislation can be summed up by the following Bloomberg headline (“banks dodged a bullet as Congress dilutes US trading rules in overhaul”). While investors are relieved for now, a lot of the buying occurring Fri was either short-covering or quicker trader-types “renting” exposure via the XLF; not a lot of people were rushing to make purchases in “single stocks”. Some are looking back to the health care 

Global ABS/CDO Weekly Market Snapshot

Global ABS/CDO Weekly Market Snapshot
The certifying analyst(s) is indicated by AC. See last page of the report for analyst certification and important legal and regulatory disclosures.

Save the Date: April 15, 2010, J.P. Morgan Securitized Products Research Conference, 383 Madison Ave, NYC
Investment Themes: The ABS market remained solid this week. Short high quality bonds continue to trade very well. Riskier bonds
held up, although the aggressive bids that started the year have faded. We stay Overweight benchmark Consumer ABS as Treasury
surrogates. We recommend Overweight cash Subprime RMBS based on favorable loss-adjusted yields and technicals. On ABX, we
stay Neutral and would express that in a 06-1 trade to sell the PEN.AAA and buy the LCF.AAA.

This Week: US ABS. A $470mn Prime Auto Loan ABS priced this week. This brings year-to-date Auto-related ABS (Loan, Lease,
and Fleet) supply to roughly $7bn. In addition, the auto captives have been active in Dealer Floorplan ABS issuance with close to $4bn.
In total, year-to-date ABS volume stands at $14bn. Over the last two rounds (January and February), TALF loan subscriptions totaled
just $1.7bn across ABS (excluding $0.4 in Small Business), a sign of the program’s diminishing significance. The TALF program since
inception saw approximately $56bn in loan subscriptions for ABS. ABS spreads remained firm on the week with generally orderly and
stable trading across sectors. ABX prices were also unchanged on low volumes.
European ABS. It was a quiet week in primary European markets, with one structure-to-repo transaction from ING and a marketing
roadshow for a pass-through UK prime RMBS. Secondary markets saw some generic widening on the back of volatility in the
sovereign space, but more on observable prices as opposed to traded levels.

CDOs. CLOs emerged relatively unscathed from the week’s volatility. US CLO AAAs stayed at 215bp while AAs, single-As, BBBs,
and BBs were down only a few points to $82, $70, $60, and $45 as buyers stepped in. European CLOs are unchanged, though tiering
between stronger and weaker bonds is more pronounced. We note US investors are increasingly buying into the basis, and see
European single-As to AAAs as the primary beneficiaries. CLOs will not be impervious to heightened risk aversion, renewed sovereign
and policy risks, and the gradual withdrawal of monetary stimulus (e.g., China again raised its reserve requirement), but given the
relative value to comparables, we stay Overweight and point out the negative net supply which cushions against major price weakness.
Further, we recently proposed AAA CLO paper as a ‘safe haven’ trade to weather the volatility, à la Consumer ABS. So far this has
proved to be the case, with tighter AAA spreads and Super Senior bonds moving to inside 150bp, within striking distance of our
midyear 100-150bp spread target. However, the strength in US CLO equity is interesting. Strong performers are well bid by those
seeking higher yields, and in some cases investors are paying 3-4 years of cashflows for performing US CLO equity, implying prices as
high as the $50s-60s (lower for non-performers). At these levels, pricing takes the view of incremental improvement in O/C and excess
spread, particularly as existing CLOs reinvest in primary loans issued with historically wider spread margins. We broadly agree, but
point out the transaction-specific risks of this strategy.

In the News: Fitch upgraded three subordinate classes of FORDO 2007-A by one category and affirmed the seniors at AAA. Moody’s
upgraded various tranches of AMCAR 2005-2006 transactions. S&P upgraded 2008-1 subordinates and affirmed 2009-1 classes of
Huntington Auto Trust ABS. FULL REPORT HERE

Equity Derivatives Dynamics

Equity Derivatives Dynamics

The real medium/longer term issue for the markets is not whether troubled sovereigns get the needed aid/liquidity, but rather, whether the aid and the accompanying necessary fiscal retrenchment leads to an unexpectedly soft mid-cycle economic slowdown—or, worse, a double dip—for the developed world.


• Risk differentiation
• The euro will continue to weaken regardless of how the Greece situation evolves

•The significant economic growth differential of the emerging world (6.9% vs. 2.3%) will reassert itself, and thus its outperformance relative to developed markets

•If and when markets settle down, we expect the 10-year to meaningfully underperform as the flight-to-quality subsides

•The trade in global equities is still high-quality stocks that can handle uncertainty-induced swings. We are tactically bearish for 1H10, but become strategically more positive afterwards as recovery takes hold and equities are the risk trade to own

FULL REPORT HERE

FX Markets Weekly [JP Morgan]

• FX Outlook: Policy remains too murky – stay long USD
In markets which have become almost entirely policy-driven, this
week’s developments have injected more doubt than confidence. Europe
needs a liquidity fund with conditionality, but EcoFin is unlikely to
deliver one next week. China’s tightening despite weak CPI suggests
that housing remains an unresolved issue. Positions have moved quickly
from short USD to small long, but the policy environment is too murky
to reverse dollar strength. Stay long vs commodity FX and Europe, but
neutral vs JPY.

• FX Derivatives
During the past month, European and JPY cross vols have rallied, while
USD/JPY implieds have declined. Continue to sell longer-dated
USD/JPY vol. AUD/JPY vol curves are at historically steep levels: buy
longer-dated AUD/USD rather than AUD/JPY vol. NZD/USD implied
vol appears as a good buy among shorter-dated tenors, both outright and
on a relative basis versus USD/NOK vol.

• Trade Recommendations
Keep a moderately anti-cyclical portfolio: risks persist but news flow is
random. Stay long USD vs AUD, NZD, NOK (all cash) and SEK (cash
and options). Stay short AUD/CAD (cash). Stay short GBP vs EUR
(cash) and CHF (cash and options), as the sovereign risk spotlight rotates
around the G-4. Stay short EUR vs PLN and SEK, and long NOK vs
NZD. Keep CAD/JPY as a long-term valuation trade.

• Technical Strategy
Despite the hold of key levels, European currencies remain vulnerable to
new lows amid the broader deleveraging process. EUR/USD targets 1.31
and GBP/USD seeks the 1.53 area. The commodity currencies staged a
short term bullish shift over the past week led by AUD and CAD while
suggesting additional outperformance on the crosses. Latam FX finally
shifts into a consolidation phase following the test of critical resistance
levels for USD/BRL and USD/CLP. Stay short EUR/USD, GBP/USD,
NZD/NOK and EUR/MXN. Use corrective retracements in AUD and
CAD to establish long positions on the crosses.

• FX Alpha Strategies

Rate momentum strategies (forward carry) remain long USD across the
board. The strategy is down 0.5% on the week but up 1% YTD.

FULL REPORT HERE