Message-ID: <4577658.1075861397334.JavaMail.evans@thyme> Date: Tue, 27 Nov 2001 00:41:30 -0800 (PST) From: joseph.macaione@gs.com To: macaione@enron.com, joseph.macaione@gs.com Subject: GS Daily RV Comment - Tue Nov 27 Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: 7bit X-From: Macaione, Joseph X-To: Macaione, Joseph X-cc: X-bcc: X-Folder: \HARORA (Non-Privileged)\Arora, Harry\Deleted Items X-Origin: Arora-H X-FileName: HARORA (Non-Privileged).pst COMMENTS DANISH INSURERS As expected yday, Danish regulators reduced the discount rate used to value insurance liabilities from 4.00% to 3.75% despite the fact that the formula called for them to reduce the rate to as low as 3.5%. This marks yet another meeting where the Council reduced the rate by less than what was dictated by the formula and this likely reflects the lobbying pressure being applied by the Danish insurance industry. The attached graph plots the discount rate required by the formula (not the rate chosen by regulators) vs 5y5y EUR vol. It's interesting to note that vol reached it's peak EXACTLY when the discount rate reached its trough. It's also interesting to note how quickly vol sold off when the discount rate rebounded from the 3.50% low (as equities rebounded). Overall, while we suspect there will be some smaller funds feeling some pain with this latest reduction, it's likely much less than the forced buying that we probably would have seen if the rate was reduced by the amount required by the formula. Going forward, it seems the best guide to the performance of long dated vol and cash in Euroland is the overall level of the index. Happy to provide more information on this if you want more clarification. <> EUR SWAPS One of the quietest days of the year yday as the market rallied and the Tresor was nowhere to be seen. Will be interesting if today's weakness brings them back into the market. Tresor aside, the focus now shifts to an increasing corporate pipeline that will see a 750mm 5y deal from Alcatel, and 500mm 7yr deal from Tomkins, a 5y or 7y deal from Metro, and a 500mm 10y deal from Royal Ahold coming to the market over the next several days. With swap spreads very close to their tightest levels of the year, we've seen little interest in swap spread widening positions & with the Tresor looming and issuance increasing, we suspect spreads will continue on their tightening path for at least the balance of the week. Overall, it seems this week will provide a very good barometer of how the rest of the year will be from a flow perspective as there appears to be little incentive to jeopardize yearly performance (good or bad) by committing large amounts of capital to a market that's been particularly vicious over the past two weeks. EUROPE TRADING VIEW Our overall trading view is to buy on weakness and sell on strength this week. Due to illiqudity and lack of risk capital commitment before year end, and no major economic data to turn the market around, our trading strategy this will likely be BUY AND TRADE, wait until new year, and then BUY AND HOLD. A few other points: * Note that Europe and US have began to sell off at the same time. Based on empirical studies, the simultaneous sell off usually signals a correction, not a prolonged bear market. * 5s in Europe have under performed very sharply relative to the beginning of all previous bear markets. Note that supply in that sector is now behind us, and supply will concentrate in 10 year sector in next two weeks. * Stocks, Bonds and commodities market have all thrown in the towel for a V shape recovery. What's the probability that all three markets are wrong? * MSCI reweightings this week. Our research estimated 4.7 billion out of Eurozone and about 4.2 billion into UK. However, this news is priced in the market in our opinion. If European fixed income sold off because of the reweightings this week, we would fade that trade and go long European fixed income. LEVELS (close to close, ex basis) SWAP CURVE GBP/EUR(EUR convention) today t-1 5y5y -20 -20 15y15y -139 -141 10/30? -36.0 -38.0 10/30E +43.5 +43.5 GBP SWAP SPREADS EUR SWAP SPREADS 5y: Bobl 138 23.5 0.5 narrower 10y: Jan 11 bund 31.9 0.7 narrower 30y: Jan 31 bund 20.2 0.5 narrower EUR SWAP VOLATILITY 3m into 10yr 14.9 0.1 higher 1y into 10yr 13.5 0.1 higher 2y into 10y 12.9 unch 5y into 5y 13.1 0.1 higher 5y into 25y 11.0 0.1 higher 10y into 20y 10.4 0.1 higher 5y5y swaption/5x10 cap spread 2.3 This material is for your private information, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. 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