Credit Market Overview

September 17, 2008

CEC Portfolio Composition

Dr. Spock, the child rearing guru who tutored the Mom’s and Dad’s of the boomer generation (not Leonard Nimoy of Star Trek fame) provided advice for every stage of a child’s development. A common theme through them all was “to keep the child on the right track by means of firmness and consistency.”

To the extent that the markets this year have been acting somewhat childlike it would appear that the two individuals that are supposed to be parenting us through this crisis could take a bit of advice from the good Doctor. Lehman, no; AIG, yes, the Auto industry maybe. Repeat after me: firmness and consistency, firmness and consistency.

For those keeping score the write downs so far have totaled around $500BN. The IMF estimate for total write downs is about $1TN and Nouriel Roubini, the NYU professor says it’s going to be $2TN before it’s all over. Good numbers to keep in mind every time one of the Politicos and/or Jim Cramer tells you its closer to the end than the beginning. Also worth noting is the amount of ammunition the Government has used so far. If we’re at the halfway point there’s a good chance Hank & Ben are going to run out of bullets, if we’re only a quarter of the way, it’s a lock.

Yesterday I talked about how after covering the myriad of shorts and selling longs on Monday I added positions by the end of the day. Of the 100+ plus shorts on the books going into Monday morning about half were in the energy sector. By Monday’s close there were only about 1/5^th the number of shorts in the CEC Portfolio but as Oil and the associated energy names were big movers to the downside 11 of the 22 shorts initiated were back in the energy sector.

Over the weekend I also explained that besides the approaching hurricane, one of my reasons for putting a hedge on the energy portion of the Portfolio was a widening disparity between the movement in crude oil, the commodity, and the names in the energy sector of the CEC Portfolio. This showed up again yesterday as stocks rallied late in the day on the increasing likelihood of an AIG bailout, energy names included, while Crude fell to levels not seen since February of this year.

In the markets this year all things seem to be temporary but keeping an eye on the two energy ETF’s, XLE and OIH, it was interesting to see them rise 4.23% and 3.99% respectively when the market as a whole was up 1.75% and Crude was off 4.76%.

One of the explanations going around was that the energy related stocks were up because of a decreased probability of an extended slowdown in the economy. If this is the case two questions come to mind. If the slowdown will be less protracted than why did the retail sector only rise 0.77% as measured by the RTH and as it is becoming increasingly evident aren’t the U.K., Europe and parts of Asia showing signs of being worse shape than we are? Much is made of the 25% of the world’s oil the U.S. consumes. That might be the case but if the other 75% of oil consumers are slowing quicker than we are is that a reason to get optimistic about energy stocks?

Enjoy the day.

Jim Delaney