Unfortunately what we’re seeing in credit markets is the flight to quality that is typical for bear markets (or recessionary environments), except in our current situation, that effect has been much more lagged than in previous downturns, primarily due to the fact that m uch of the volatility and uncertainty began in the credit markets, or at least the exposure can be traced to this sector. I think we can say the credit markets are coming around only when T-bills stabilize and fundamentals return to the credit markets. Either way, it will be welcomed to see credit markets stabilizing, because until bonds get under control, we can’t expect equities to trade on any sense of fundamentals.

The UST market has is loosening up a bit, especially with the Chinese largely sitting on the sidelines. Fail rates are coming way down (pick your reason) which is a good sign in terms of overall market stability. Treasuries are down almost 3% in January (biggest drop since 2004) and it looks like we are tracking to about $2.5 trillion in borrowing by end of fiscal year. Some of that is a bit disconcerting especially when viewed in the huge pork bill misnamed as stimulus coming down the Hill. That type of reckless spending may delay any potential recovery as Congress once again misses the boat on putting money and incentives in the hand of people and companies vis-à-vis tax breaks. My opinion is tax breaks alone would give the market a needed kick- but that’s just me.

On the corporate side CP borrowing is way down- I think a positive sign as companies diminish reliance on short term financing. Overall, USCP outstandings are down, new sales into the CPFF are down while market purchases are up to about $83 billion. Confidence as CP purchases transition back to the investment market? Got me.

It was nice to see a positive reaction to Conoco, GIS, GS, Hess and BAC debt offerings. That gives hope there is some appetite for select investment grade offerings.

Overall, the Congress can still screw this up. The market is trying to correct itself and find the way forward. A massive new package of government handouts to states, Democrat pork from the last few years and significant entitlement expenditures that will create red ink for years to come could put a knife in this entire process. About one year ago some economists I spoke to felt we were about 12-24 months away from sustainable growth. They didn’t calculate any of this massive spending in that formula. That is what really keep me up at night now. What about you?

of light down the tunnel a ways, but I don’t know how you can credit it to the “positive impact of the Treasury and the Fed’s heroic stabilization efforts, including the much-maligned TARP.” Back in September, Paulson told us he had to have $700 billion immediately to take the toxic assets off the books. He got $350B. He didn’t get it immediately. And he didn’t absorb the toxic assets. This is success?

If you give a reasonably intelligent person unlimited power to spend $350B it’s likely he can manage to do some good with it, but that doesn’t mean it was a good idea to begin with. Especially as it turns out he really didn’t know what to do with it until he got it. And God (and Obama) only knows what the next $350B will be used for.

fueled by improvident spending and skittish buyers.

What do you think, Francis?

(The 30 yr UST moved from 2.5% at the end of Dec to 3.5% today; it was as high as 3.6%. Some are forecasting 5% by y/e 2009- which would be something given that everyone still expects the recession to be around then.)