Market Buzz

November 16, 2007

December 1, 2011 Portfolio Advice & Investment Research

Key Rates * wholesale bid, prior day closes

Rate CANADIAN 3-month T-Bill Overnight Target Prime USA 3 month T-Bill Fed Funds Prime DOLLAR US$ / CAD CAD / US$ 0.78% 1.00% 3.00% -0.01% 0.0-0.25% 3.25% .9863 1.0139

U.S. & Global Markets

Longer maturity U.S. Treasury prices fell moderately again on Thursday due to re-risking of capital flows overseas mainly from Asia this session due to timing differences. Following Wednesdays coordinated central bank action to cut foreign exchange swap line rates, the cost of interbank lending fell for the first time since July 22, with the London interbank offered rates for three-month U.S. dollars edging down to 0.52722% from 0.52889% the day before. The U.S. ISM Manufacturing Index increased to 52.7 in November from a reading o 50.8 in October, exceeding market consensus of 51.5 and maintaining the recent trend of slightly better than expected U.S. economic data releases. While improved, the index doesn't indicate a particularly strong pace of growth, and remains well shy of the 61.4 peak reached in February this year. Employment fell, but new orders and production were their strongest in seven months. Except for the U.S., Novembers PMI readings across the leading advanced and developing economies cast a rather dim picture for the global economy going forward. The eurozone, the U.K., Japan, China, and Brazil all showed PMI readings below the 50 threshold that indicates contraction. St. Louis Federal Reserve President James Bullard (a non-voter and regarded to be a policy hawk) said that deterioration in the European situation could prompt the Fed to resurrect some of its 2008-2009 crisis response tools, and that he supports yesterday's dollar swap move in heading off a potential liquidity crunch. He argued that inflation would not be a solution to Europes problems, and that markets are wrong to think that the European Central Bank can solve the crisis alone. The Federal Reserve established a target range of zero to 0.25% for the Fed Funds rate on December 16, 2008 and anticipated that weak economic conditions are likely to warrant exceptionally low levels of the rate for an extended period. The FOMC, on November 2, 2011, reaffirmed its commitment to keeping the Fed Funds rate at exceptionally low levels for at least through mid-2013. The Committee said that it continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee decided to continue its program to extend the average maturity of its holdings of securities (Operation Twist) and is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The next FOMC meeting is on December 13, 2011. There were no major European political developments, but European Central Bank head Mario Draghi hinted the bank is prepared to play a bigger, yet limited role in the resolution of Europe's debt crisis but only after the 17 countries that use the euro agree to a tighter fiscal union, emphasizing that the sequencing matters. A summit of EU leaders on December 9th is expected to focus on how to make the eurozone more unified. The ECB has already committed over 200 bln to buying European sovereign debt in secondary markets to help keep borrowing rates from spiking up even higher, but it has recently resisted going further because it believes that would take the pressure off politicians to address the underlying fiscal problem. Reuters reported that unsecured bondholders of troubled banks could be forced to take losses from 2015, according to a draft European Commission proposal that would break the unwritten rule that debt is fully repaid unless the borrower goes bust. The draft law outlines a framework to save a bank from collapse, giving supervisors extensive powers to temporarily take control and get the bank back on its feet, for example by ordering asset sales or restructuring its debt. But the rules are controversial, chiefly because they raise the possibility of losses for investors in bank bonds. Secured bondholders are not subject to the rules. The draft was due to be published in September but was kept under wraps for fear it

Benchmark Bonds *
Price CANADIAN 1-year T-Bill 1.50%/13 2.75%/16 3.25%/21 4.00%/41 USA 0.875%/16 2.00%/21 3.125%/41 Change Yield
0.89% 0.93% 1.41% 2.14% 2.69% 0.97% 2.09% 3.09%

101.07 106.12 109.46 126.45 99-17 99-06 100-21

+0.14 +0.24 +0.08 -0.10 -0.02 -5 -21

TD Economics Forecast (as of Nov. 15/11)

Q4 2011 Q1 2012 1.00 1.00 1.55 2.40 3.25 0.920 0.25 2.00 3.25 Q4 2012 1.00 1.40 2.20 3.30 3.75 1.05 0.25 2.75 4.00 Q4 2013 2.50 3.10 3.40 3.90 4.10 1.03

CANADIAN Overnight 2-year 5-year 10-year 30-year US$ per C$ USA Fed Funds 10-year 30-year

(%) 1.00 0.95 1.40 2.25 3.00 .960 (%) 0.25 1.90 3.00 1.00 3.25 4.30

Canadian Yield Curve

4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 0 5 10 15 20 Term to Maturity 25 30 35 Current 1 month ago 1 year ago

*All charts and tables are sources from Bloomberg Finance L.P., and
used with permission.

This newsletter is for distribution to Canadian clients only. Please see the final page of this report for important disclosures.

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would further rattle markets and compound the difficulties of EU banks already struggling to borrow. Spain, Hungary and France all had decent demand at their bond auctions today with France borrowing 4 bps cheaper than their last auction. Spain sold the maximum amount (3.75 bln) targeted, and its cost of borrowing held well below highs reached on bond markets last week, helping ease immediate nerves over its ability to fund public finances. The yields (ranging from around 5.19% to 5.54% on the 4-, 5- and 6-year paper) were euroera lifetime highs, but remained far below yields around 7% widely held as unaffordable. The average yield on the 2015 bond was 5.187%, up from 3.639% when it was last sold on October 6th. Brazils central bank reduced its benchmark interest rate by 50 bps for a third straight meeting to 11.0% and signaled it will keep cutting interest rates at its current half-point pace as it tries to prevent Europes spreading debt crisis from stunting economic growth in the nation. Since September, the emerging markets nations of Brazil, Turkey, Israel, China, and Indonesia have ease credit conditions. China's official Purchasing Managers Index fell into contractionary territory in November at 49.0, compared to 50.4% in October and market consensus for a 49.7% reading. This was the first contractionary reading for the index since February 2009 (32 months), when the Chinese economy was still reeling from the effects of the global financial crisis. Elsewhere, the Markit Eurozone Manufacturing Purchasing Managers' Index (PMI) fell to 46.4 in November, its lowest level since July 2009, and down from October's 47.1. November PMI releases for Germany (47.9), France (47.3), the UK (47.6), Ireland (48.5), Italy (44.0), Switzerland (44.8), Sweden (47.6), Norway (48.6), Poland (49.5) and Hungary (47.8) were all in contraction territory. Nations that stilled showed manufacturing expansion included Russia (52.6), India (51.0) and Turkey (52.3). Global equity markets were mixed Thursday, with Europe and the Americas running out of steam after three strong sessions. This appeared to be attributable to the loss of month-end buying support and to short-term profit taking ahead of Fridays employment releases. For the session, the S&P 500 was down 0.19%, the Dow Industrial Average fell 0.21% and the Nasdaq gained 0.22%. Overseas, Europes DJ Stoxx 600 fell 0.7%, Japans Nikkei 225 was up 1.9% and the MSCI Asia-Pacific Index rose 3.2%. Chinas CSI 300 Index gained 2.5%. Companies today with negative developments include o Target / J.C. Penney / Kohls (major retailers delivered mixed sales reports for November, suggesting an uneven start to the holiday season. The data included sales through Saturday, but the Sunday after Thanksgiving and Cyber Monday results were not included. The month is a key one for retailers, which kick off their promotions in November and see their biggest sales around the holidays. Same-store sales growth for Target (+1.8% y/y), J.C. Penney (-2.0%) and Kohls (-6.2%) missed analysts expectations); o General Motors (said its Chevrolet Volt will miss its sales target of 10,000 cars this year, revealing that it was more than 3,800 shy of that goal at the end of November. The Volt is being investigated by the National Highway Traffic Safety Administration because its batteries caught on fire in the weeks following three government crash tests. CEO Dan Akerson on Thursday said GM will buy the vehicle back from any owner who is afraid the electric cars will catch fire); o Finmeccanica SpA (the companys chairman resigned in the wake of a growing corruption probe involving accusations of false invoices and slush funds to bribe politicians); o Other companies with negative developments, quarterly results, or guidance that failed to meet analysts expectations include Barnes & Noble, Finisar, H&R Block, Hanesbrands, Sigma Designs, Talbots, Ulta Salon and UTi Worldwide. Companies today with positive developments include: o Boeing (reached a tentative contract agreement with the Machinists union to keep building the 737 jet in Washington state, which may also help resolve a U.S. labour
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International Yield Curves

4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 0 5 10 15 20 Term to Maturity 25 Canada U.S. Germany UK Japan 30 35

o o o o
10-year

Benchmark Canada Yield History

6.0% 5.0%

4.0%

complaint against the company over the relocation of some of the work for the 787 Dreamliner. The Machinists deal assures nearly a decade of labor peace by extending the agreement four more years. The labour board accused the company in April of illegal retaliation after Machinists complained about Boeings 2009 establishment of a production line in South Carolina, which forbids requiring union membership as a condition of employment. The potential for this deal could enable Boeing to improve its competitiveness); Clearwire (said it has signed agreements with Sprint Nextel potentially worth up to $1.6 bln over the next four years); Plains All American Pipeline LP (agreed to purchase BP Plcs Canadian naturalgas liquids business for $1.67 bln); Williams Co. (announced that it will spin off its oil exploration and production unit, WPX Energy, in a tax-free distribution); Other companies with positive developments, quarterly results, or guidance include Charming Shoppes, La-Z-Boy, Magma Design Automation, Movado Group, Nordstrom, OpenTable, Pier 1 Imports, PVH Corp., Texas Industries, Transcept Pharmaceuticals and Zumiez.

3.0% 2-year
5-year

2.0%

1.0%

Analyst upgrades include Hewlett-Packard (Pacific Crest); Proctor & Gamble, USG Corp. (RBC); Allergan, Seagate Technology (Argus); Green Mountain Coffee Roasters (William Blair); Barnes & Noble (Stifel Nicolaus); Semtech (Caris); U.S. Airways (Barclays); Software AG (Commerzbank) and Renault (Morgan Stanley). Analyst downgrades include Teva Pharmaceuticals, Spectrum Brands, Tupperware, Unum Group (SunTrust); Western Union (Piper Jaffray); DreamWorks Animation (Caris); JA Solar (Raymond James) and Ranbaxy Labs (HSBC). From a technical perspective, the Treasury market (long maturities) appears to have a neutral bias over the shorter term (1-2 weeks). Longer-term trends remain positive. The intermediate-term trading range for the 10-yr note appears to be 1.70% to 2.40%. The long Treasury was down 21/32 in the session to 3.09%, with our intermediate-term trading target at 2.75% to 3.50%.

0.0%
Jan-03 Jan-05 Jan-07 Jan-09 Jan-11

Benchmark Spreads
5yr Ontario Quebec British Columbia Royal Bank (sub.)
+46 +57 +20 +130

10yr
+92 +108 +94 180

Long
+95 +108 +91 -----

Corporate Spread Levels

Bid
Citigroup Fin. Cda. 5.50% - 2013 TD Bank Tier 2A 4.779% - 2016 Bank of Nova Scotia 5.04% - 2013 DN Encana 4.30% - 2012 Wells Fargo Cda. 4.38% - 2015 General Electric 5.10% - 2016 TransCanada 5.05% 2013 Hydro One 5.00% - 2013 RBC F/F 4.58% - 2012/17 Bell Aliant 6.29% - 2015 Rogers Comm. 5.80% -2016 Bell Canada 5.00% - 2017 John Deere Credit 4.80% - 2012 Manulife Financial 5.161% 2015 TELUS 4.95% 2017 +235 +208 +60 +70 +160 +200 +80 +75 +90 +203 +165 +178 60 +242 +180

Ask
+215 +193 +45 +55 +145 +150 +65 +60 +80 +188 +155 +163 +50 +227 +175

Chg

Canadian Markets
Canadian government bond prices were up across most of the yield curve on Thursday, outperforming against U.S. Treasuries, as the December 1 coupon reinvestment flows and month-end index extensions were again the main drivers. On October 25, 2011, the Bank of Canada (BoC) kept its overnight target rate unchanged at 1.00% for a ninth consecutive meeting following a string of three consecutive rate hikes in early 2010. The Bank rate was correspondingly kept at 1.25% and the deposit rate at 0.75%. The BoC statement was clearly dovish, reiterating its view that the global economy has slowed markedly and that the combination of ongoing deleveraging by banks and households, increased fiscal austerity and declining business and consumer confidence is expected to restrain growth across the advanced economies. The Banks base-case scenario assumes that the euro-area crisis will be contained, although this assumption is clearly subject to downside risks. The BoC now expects the euro area to experience a brief recession, the U.S. to have weak real GDP growth in through the first half of 2012, and for growth in China and other emerging markets economies to moderate. Domestically, the BoC said the outlook for the Canadian economy has weakened due the significantly less favourable external environment, with underlying economic momentum expected to remain modest through the middle of next year. The Bank projects that the Canadian economy will expand by 2.1% in 2011, 1.9% in 2012, 2.9% cent in 2013, and not returning to full capacity until the end of 2013. As a result, core inflation is expected to be slightly softer than previously expected, declining through 2012 before returning to 2% by the end of 2013. The BoCs forward-looking statement suggests monetary policy is still biased towards tightening (noting that there is considerable monetary policy stimulus in Canada), but will remain neutral indefinitely.
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The next fixed announcement date is on December 6, 2011. TD Economics expects tightening of monetary policy to begin in March 2013, and the overnight rate is only expected to increase to 2.00% by the end of 2013. BAX Sentiment currently shows a 3% implied probability of a 25 bps Bank of Canada rate cut on December 6, and a 35% implied probability further out to January 17. The Province of Quebec (Aa2/AH/A+) priced a C$500 mln 3.50% December 1, 2022 reopening at 101.029 (3.387%), providing a spread of +109 bps over Canada 2.75% June 1, 2022. National Bank Financial led. Total outstanding for the issue is now C$1.0 bln. The original issue was just two days ago on November 29, 2011 at +115 bps (3.434%) and has yet to settle (December 2). The Province of Manitoba (Aa1/AH/AA) priced a C$300 mln 2.05% December 1, 2016 re-opening at 100.316 (1.983%), providing a spread of +52.5 bps over Canada 2.75% September 1, 2016. Total outstanding for the issue is now C$600 mln. TD led. The original tranche of this issue was done on Oct 7, 2011, with C$300 mln at +54 bps (2.068%). The S&P/TSX Composite Index on Thursday fell by 90.82 points (-0.74%) to 12,113.29, following three strong sessions, led by the Consumer Goods (-3.99%, mostly on the back of Gildan Activewear) and the Health Care (-1.63%) sectors. Declining issues in the session exceeded advancing issues by 901 to 729 on the TSX. Among the sessions notable declines were Gildan Activewear (-32.5%), SouthGobi Resources (-6.8%), NovaGold Resources (-5.1%), Nexen (-4.8%); Labrador Iron Ore Royalty (-4.4%), CAE (-3.4%), Pacific Rubiales Energy (-3.2%), First Quantum Minerals (-3.1%); and Bank of Nova Scotia (-2.5%). Among the sessions notable advances were Legacy Oil + Gas (+7.4%), ShawCor (+6.1%), Bombardier (+5.3%), Thompson Creek Metals (+4.6%), Trican Well Service (+4.1%), CGI Group (+3.2%), Canadian Western Bank (+3.1%), Gabriel Resources (+2.9%), Provident Energy (+2.8%), Metro (+2.7%) Viterra (+2.5%) and Research In Motion (+2.3%). January West Texas Intermediate crude oil futures lost $0.20 (-0.2%) to settle at $100.20. The nearby oil futures contract established a record inter-session high at $147.27 on July 11, 2007 and has since fallen by 32%. January Brent oil fell $1.53 (-1.4%) to $108.99. February gold futures fell $10.50 (-0.6%) to settle at $1,739.80. The nearby futures contract established an intra-day record high of $1923.70 on September 6, 2011. March silver futures lost $0.05 (-0.1%) to $32.76 an ounce. The record intra-day price for the nearby contract is $50.36 on January 18, 1980, and climbed to a recent high of $49.845 on April 25, 2011. March copper futures dropped 4 cents (-1.2%) to close at $3.53 a pound. The nearby Comex futures contract reached a record high of $4.6775/lb intra-day on February 7, 2011. The weekly spot price for uranium was down $1.00/lb to $51.75/lb for Ux Consulting (as of Nov. 28) and was down $0.50/lb to $52.25/lb for TradeTech (as of Nov. 25). Companies with positive developments include: o Toronto-Dominion Bank (Q4/11 core cash EPS of C$1.77 beat consensus by 23 cents. The better-than-expected results were driven by securities gains, which added an estimated $0.14 to Q4/11 results. These were merchant banking gains that flowed through the wholesale segment and accounted for roughly half of the $288 mln in earnings from TD Securities. Excluding the securities gains, TDs adjusted EPS of $1.62 still exceeded consensus of $1.54, based on better credit and continued good results from domestic and U.S. Personal & Commercial banking. Revenue of C$5.67 bln (+12.9% y/y) and also bettered consensus of C$5.42 bln. Provisions for credit losses of C$334 mln (-10.7% q/q) were better than consensus of C$371 mln. Gross formations of C$827 mln were up marginally from C$814 mln in Q3/11. By segment, Canadian Personal & Commercial Banking net income of$905 mln was down 5% q/q, but better than consensus of C$897 mln, as good volume and revenue growth helped to earn through some of the expected expense pressure. Net interest
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o o

margin dropped 6 bps sequentially to 271 bps and was down 20 bps from 291 bps in Q4/10. U.S. Personal & Commercial Banking net income C$328 mln was down 5% sequentially as a result of the implementation of Regulation E and Durbin amendments. Margins of 351 bps were down 6 bps from the previous quarter and up a basis point from a year earlier. Wholesales net income of C$288 mln was up 167% from Q3/11, well above consensus of C$115 mln and managements targeted range of C$175mln to C$225 mln, largely due to the securities gains. Wealth Managements net income of C$139 mln was down 5% sequentially, but was in line with analyst expectations, reflecting challenging market conditions. Current pro forma Basel III Common Equity Tier 1 ratio is approximately 6.7%, with the ratio expected to be comfortably above the 7% Basel III requirement on a fully phased-in basis by Q2/12); Canadian Imperial Bank of Commerce (Q4/11 core cash EPS of C$1.87 beat consensus by 6 cents, with net income in all divisions ahead of expectations except for the Corporate segment. Good results in the domestic retail bank and relative high securities gains were offset by slightly weaker credit (provisions for credit losses of C$243 mln (+62% y/y and +24.6% q/q) were higher than consensus of C$216 mln) and some domestic margin pressure (net interest margin declined 6 bps sequentially to 2.65%). Total revenues of C$3.18 bln were in line with consensus of C$3.1 bln. By segment, Retail & Business Banking net income was C$580 mln (+13.7% y/y and +7.6% q/q), World Markets net income was C$172 mln (+18.6% q/q) and Wealth Management net income was C$65 mln (+20.4% y/y and -4.4% q/q). CIBC remains very well capitalized with a Tier 1 common ratio of 8.1% under Basel III, roughly 110 bps over the informal OSFI guideline for the start of FY 2013 of 7.0%. European exposure (C$248 mln to PIIGS and $15 bln to all of Europe before collateral) appears very manageable. Management suggested today that its first priority for excess capital was preferred share redemptions .The bank has contractual opportunities to redeem three series (C$1.05 bln) of preferred shares in FY 2012: Series 18 (at par), Series 31 (at a 4% premium to par), and Series 32 (also at a 4% premium to par)); Bombardier (Q3/12 net EPS of US$0.11 (+38% y/y) topped consensus by a penny, with EBITDA of US$383 mln (+9%) also exceeding consensus of US$364 mln. Revenue increased 15.7% to US$4.62 bln, slightly ahead of the US$4.53 bln average analyst estimate. The earnings outperformance was mainly attributable to stronger aircraft deliveries and margins in Aerospace, offset by weaker results in Transportation. On a disappointing note, consolidated free cash flow of negative US$346 mln was weaker than expected due mainly to continued inventory growth in Transportation); Descartes Systems (Q3/11 adjusted EPS of US$0.13 was 2 cents better than consensus, with EBITDA of US$8.5 mln also slightly better than the US$8.4 mln average analyst estimate. Revenue rose 10% to US$28.5 mln, slightly short of consensus of US$29 mln. Gross margins of 67% were in line); B2Gold (released positive drill results that indicated continuity of gold mineralization from the Jabali and Mojon zones at La Libertad); Chorus Entertainment (management gave annual guidance that was generally above consensus at the companys investor day and provided many new insights on how it intends to grow its business) CGI Group (announced two contracts Thursday, including a U.S. government deal worth up to US$94 mln to build a health-insurance exchange and a US$13 mln contract in Colorado for Medicaid Recovery Audit Contractor program services).

Companies with negative developments include: o Gildan Activewear (Q4/11 adjusted EPS of US$0.42 topped consensus and management guidance by 2 cents, as higher selling prices and an income tax recovery were offset by lower unit volumes in the quarter, which were down 7.6% y/y. Margins continued to be pressured by higher cotton costs. However, FY 2012 EPS guidance of US$1.30 was very disappointing well below consensus of
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o o

US$2.25. Revenue guidance of US$1.9 bln was also below consensus of US$2.1 bln. Gildan announced yesterday that it is reducing gross selling prices in the wholesale distributor channel effective December 5th and applying the benefit to existing distributor inventories, contributing to a Q1/12 projected EPS loss of US$0.40. The consensus first quarter EPS estimate is positive US$0.30); lululemon athletica (Q3/11 EPS of US$0.27 (+51% y/y) beat consensus by 2 cents. However revenue of US$230.2 mln (+31%) missed consensus of US$235.7 mln. Same-stores sales growth of 16% was in line with managements own forecast of the low to mid-teens in percentage terms, but a sharp deceleration from 20% in the prior quarter) Redknee Solutions (Q4/11 EPS of C$0.00 missed consensus by 2 cents, with revenue of C$14.6 mln also below the C$16.3 mln average analyst estimate. The underperformance was attributed to weaker software, services and other revenue. Gross margin of 65% was below managements guidance of 67%-70%); EXFO (launched a treasury offering of 3.7 mln trust units at C$27.05 each to raise approximately C$100.1 mln); Suncor Energy (long-serving CEO Rick George announced plans to retire in may 2012, to be replaced by COO Steve Williams).

Analyst upgrades include Shaw Communications, Descartes Systems Group*, SXC Health Solutions* (TD * denotes price target change. Please note that TD Newcrest Research is available from your Investment Advisor); Viterra (BMO); IAMGOLD (Credit Suisse); TransAlta (Desjardins); AuRico Gold (Bank of America/Merrill Lynch); lululemon athletica (Janney Capital). Analyst downgrades include Imperial Metals*, Redknee Solutions* (TD * denotes price target change. Please note that TD Newcrest Research is available from your Investment Advisor). Long bonds are currently down $0.10, 10-years are up $0.08, 5-years are up $0.24 and 2years are up $0.14. The longer end of bond market appears to have a neutral bias over the shorter term. Monthly technical indicators continue to show positive underlying bond market trend for longer maturities. The intermediate-term technical targets are suggested at 1.75%-2.50% for the 10-year maturity and 2.50%-3.25% for the 30-year.

FX Markets
The USD is firmer today against the yen at 77.70 and weaker versus the euro at 1.3462. The shorter-term technical profile for the US$ appears to be neutral against the yen and positive versus the euro. The suggested shorter-term ranges are 1.3000 to 1.3900 for the euro and 75.00 to 79.0 for the yen. The C$ is stronger today at 0.9863 (1.0139 per US$). The shorter-term technical profile appears neutral/positive. Our shorter-term trading range is suggested at 0.9400 to 1.0200 (1.0634 to 0.9804 per US$).

TD Waterhouse - Portfolio Advice & Investment Research

Sheldon Dong, CFA, Fixed Income Strategy, sheldon.dong@td.com

December 1, 2011

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Key Events
Date Fri. Dec. 2 Event Cda. Employment Change (Nov.) Unemployment Rate U.S. Non-Farm Payrolls (Nov.) Unemployment Rate Consensus 17,500 7.3% 125,000 9.0% Last -54,000 7.3% 80,000 9.0%

U.S. bank exposure to PIIGS (Portugal, Italy, Ireland, Greece and Spain) sovereign debt: Global banks have been rushing to reduce their
exposure to PIIGS debt, increasingly selling to the buyer of last resort the European Central Bank as authorities have undermined the usefulness of using sovereign credit default swaps as an effective hedging tool with the second bailout proposal for Greece. Banks around the world are releasing more information than they previously did on their PIIGS exposures to help allay investor fears. Even so, the flow of new data has so far failed to put worries to rest, partly because of investor doubts about how well banks' hedging strategies might work in the event of a euro-zone financial shock. For some banks, there is a large gap between their gross exposures and their net exposures (offset by cash and securities held as collateral and credit protection purchased). Some analysts and investors believe that the net figure alone does not give a full picture of the risk imbedded in portfolios due to a large counterparty risk (the possibility that a trading partner might fail to make good on obligations).

Charts and data sourced from the Wall Street Journal http://online.wsj.com/article/SB10001424052970203503204577036210042998788.h tml?mod=WSJ_markets_liveupdate

I know more now about repos and derivatives than I ever wanted to know. I hope Ill some day be able to forget it. Barney Frank

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Private Investment Advice

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