GDP (Gross Domestic Product) took a dive in the 4th quarter, falling 6.2% with core inflation up .8%. The contraction was the largest since 1982 and well below economists expectations of down 5.4%. Domestic investment did the most damage in this report, falling over 20%. The National Association of Purchasing Managers report was also released, rising .9 to 34.2. The market was looking for a slight decline to 33. The improvement seems to be masked by the fact that some construction and other services are in the index and along with manufacturing, may have artificially bumped the numbers.
The big story of the day is Citi, which reached an agreement with Uncle Sam to substantially increase its stake in the bank. Citi will offer as much as 27.5 billion in preferred stock, upping the governments ownership to 36%. The good news is that private investors have already been lined up to participate in the Public-Private framework to inject capital. The bad news is that the short sellers in the market have targeted Citi and most other financial institutions, driving their stock into the ground. At the open, 10 million shares of Citi’s traded at $1.50. Talk about a fall from grace.
As one would expect, stocks had a rough go of it to start the day but have since bounced back, now down only 64 points on the big board. Mortgage backs looked promising in pre-market action, trading up 2 or 3/32’s. That has quickly faded as current market conditions now post MBS down 5/32’s while the 10 year note is off 10/32’s, trading at a yield of 3.02%. To us, this still looks like a range trade which is merely at the lower end of the range. For a rally to occur, we will need to see a yield on the 10 year of 2.90% or less. The pain trade will happened if we breach the 3.07% yield mark and go higher. We like the odds of a little improvement in mortgage pricing next week but at the same time, will stick with our defensive, risk adverse strategy.