The cost of long-term corporate debt has declined more than 100 BPs, but is still at historic spreads to Treasuries.
MONEY CONTINUES TO GROW
The Fed's policy of adding reserves to the system continued in the past two weeks, and the monetary base is now twice it's value in September of 2008.
Here is the raw data.
2008-09-10 874.703
2008-09-24 939.395
2008-10-08 1014.655
2008-10-22 1174.106
2008-11-05 1265.015
2008-11-19 1506.539
2008-12-03 1502.872
2008-12-17 1689.661
2008-12-31 1728.184
2009-01-14 1773.924
Paterson is confident that the Fed's action to support the fixed income markets with massive purchases of securities will shorten the recession by many years.
REAL ESTATE LENDING RESUMES
Even as the economy continues to deteriorate from the collapse in wealth in the stock and property markets, the business of lending is stabilizing.
In California the number of homes sold last month increased nearly 200%.
As this trend continues, the housing market will stabilize.
However, do not expect the trend of the last 20 years to resume. Growth in the value of real estate was caused by the decline in interest rates due to the elimination of inflation. That game is over.
SUMMARY
The Fed's actions to stabilize money growth are succeeding, suggesting a resumption of economic growth in months, not years.
Residential real estate lending - at prudent underwriting standards - is safe again. It is unlikely we will see much more of a sell-off in residential real estate.
Commercial real estate is in much worse shape and should be avoided except for unique situations. The economy has much farther to go to see a bottom.
New lows in stocks. As the magnitude of the disaster grows, there is a significant probability we will see new lows in the stock markets. If this happens, it will probably present a buying opportunity. Look for record volume in shares traded as the signal we've seen the bottom.
However, do not expect a quick rebound. Paterson expects a double or triple bottom in stocks before all selling is done.
TACTICS
Continue money market arbitrage. Paterson is advising clients to take advantage of the double digit yields in high quality short term paper. These assets can be funded profitably with deposits and the book matched nearly to the day.
Do not run a mis-matched book.
Avoid commercial real estate.
Expand prudent residential real estate lending and sell all long-term assets in the secondary market.
Balance sheet lending is extremely risky.
STRATEGY
Make senior management and the Board aware of the successes of the risk management team. Suggest bonuses for continued excellent performance.
Cooperate with regulators to understand their concerns and allay their fears.
