Credit Market Overview

December 2, 2008

In the game of slides and ladders this market has become, yesterday’s ride down took away over half of the gains made from November 21^st through last Friday. CDS spreads also reversed course yesterday with the High Yield index moving from 1390.3 to 1473.1 and the Investment Grade index rising from 238.6 to 261.9, a move of 82.8bps or 5.96% and 23.3bps or 9.77% respectively.

The VIX joined in for good measure as well starting the day above the 50DMA and finishing off even higher. Everyone seemed to be using the two closes below this much watched line as an indication that the rally that strung together five winning days was something to be taken seriously.

I think the thing that needs to be taken most seriously in this market is the amount of cash on the sidelines, not as an indication of rally fuel but more of everyone hunkering down while the storm passes, combined with the unwillingness of any of the financial institutions (that are left) to commit capital on either a long term, short term or even a trade facilitation basis.

I wrote last week about moves being akin to the puck on an air hockey board and yesterday’s market action was as good an example as any. The economic indicators released yesterday were below expectations but except for ISM Prices Paid not to the extent which when other indicators were released last week with similar misses to the downside weren’t shaken off by the market on it’s 5-day 20% counter trend move.

The chorus of headline names describing the current action as a bottoming process got louder yesterday as Lazlo Birinyi of Birinyi Associates and Bob Doll of Blackrock have now begun to sing along. Neither is saying the ultimate bottom has been put in but more in line with Mr. Buffet’s etude a few weeks back that stock prices will be higher a few years from now than they are today.

While this is probably true given that we are trading well within the range established in the 2001-2002 bottom there could also be some truth in saying that at some point after that they will not be.

If this is a bottom we will have to get off the canvas at some point but with most investors feeling like Sylvester Stallone in Rocky at the moment it will take a similarly herculean effort to accomplish that.

With the Big 3 automakers on the Hill today and Nonfarm Payrolls due Friday there are still a few rounds left to this week. The question becomes, will just surviving until the final bell be enough to declare victory?

Enjoy your week.

Jim Delaney