Credit Market Overview

March 8, 2010

http://www.marketstrategiesmgmt.com

Ben Bernanke has, at almost every opportunity imaginable, made it clear that interest rates will remain at “exceptionally low levels for an extended period”.  The only issue with any of this is that Ben works in Washington and whether the Fed is independent or not, you just can’t believe anyone in D.C. 

In order to corroborate Ben’s story a review of the opinion of some of the major financial institutions view on when rates will rise was published in the WSJ recently.  The results were that Morgan Stanley and UBS think it happens this July, Citigroup this October, Bank of America in January of next year, J.P. Morgan Chase in April 2011 and Goldman Sachs in January of 2012.

The markets, for just about the entire time since the first tremors of the credit crisis were felt in July of 2007, have reacted to every event, both positive and negative, with highly correlated moves among assets within a specific class as well as the across the various asset classes themselves.  Evidence of this can be found in examining the moves of the major stock and commodity indices which rose in tandem from 2006 to mid-2008 and the fell in sync until March of 2009.  They have both since risen from the March lows and even stayed highly correlated in the latest mid-January to mid-February sell off, also recovering as if joined at the hip.

The pundits place the reason for this synchronicity as a result of the global nature of the crisis and the realization that a global recovery will ultimately be necessary to right the ship that is the super duper tanker of the planet’s economy.

With that in mind it is worth noting, Ben Bernanke’s intention for interest rates not withstanding, that rates on the short end of the curve have begun to move higher.  The yield on the 3-month T-Bill closed at 0.1359% on Friday after having bounced off of 0.0051% on 11/19/2009 and 0.0203% on Jan 11^th of this year.  3-month LIBOR has been as low as 0.24875% on four different occasions in the last four months; most recently on the 4^th of February.  That rate was set at 0.25219% on Friday.

Higher rates, in this context and coming from such low levels, can be viewed as a positive for the global economy as even with the sovereign debt problems of the PIIGS, 9.7% of the world’s largest economy officially out of work which speaks nothing of 16MM underemployed and a host of other worries the fact that 3-month Bills are no longer trading at -0.0410% as they were on 12/4/2008 shows the market’s confidence that the worst is behind us.

Given the empirical evidence stated above regarding the relationship between stocks and commodities it is also worth noting that Crude Oil closed at $81.50/bbl on Friday, the highest price seen for that contract since January 13^th of this year and 2 cents shy of $10.00 higher than its February 5^th close.  To the extent that stocks and commodities will continue to be linked this could portend well for equities.

Another member of the supporting cast for seems to be the hottest new play in town; “Bull Run” is volatility as measured by the VIX which closed at 17.42 on Friday.  That is the lowest close for that index since Mid-May of 2008 and if not for the opening level of 16.93 on 1/11 of this year the lowest level seen on even an intraday basis since the spring of ’08 I just mentioned.

Not to be left out in any of this Investment Grade CDS spreads as measured by the CDX IG Index closed at 85bps on Friday a level last seen on Jan 20^th.  As loyal readers of this space know, lower CDS spreads can be an indicator of higher equity prices both on an individual and index basis.  If there is a note of caution attached to the CDS level it is that unlike in more settled times, CDS spreads have a tendency to become more coincident during periods of high cross-correlation in asset classes.  That doesn’t take away anything from the 85bps close on Friday but only removes the tendency for CDS to be a leading indicator.

If the past 2½ years have taught us anything it is that anything can happen.  As such the only thing we can say with complete certainty is that as of the close on Friday things looked positive for Friday’s close.

Enjoy the week.

Jim Delaney

Credit Market Overview

March 5, 2010

http://www.marketstrategiesmgmt.

At at least one in our lives we have all heard or thought of the adage; “If you want something done right, you have to do it yourself”.  While many of the Bills clawing their way through Congress at the moment would seem to refute this as the government seems hell bent on legislating away the responsibility we all have  to ourselves, there are many instances where regardless of the outcome we will really only feel comfortable with the result if we are the one’s taking action.

With the “too big to fail” institutions now well along in the process of mending themselves, with much government help of course, the headlines are focused on the next attention grabbing event, wherever in the world that might be.  Back here in the good ‘ol U.S. of A. there is still a lot of mending that needs to be done and a most of that needs to occur at levels of the economy that rarely make the headlines, namely, the small and new businesses that employ many people and on whose growth the economy depends.

The Federal Reserve, Federal Deposit Insurance Corp and a host of other federal and state regulators issued a joint statement recently voicing their concern about the contraction of lending to small businesses as banks tighten lending standards in the wake of the credit crisis.  Part of that statement said that the regulators were working to, “ensure that supervisory policies and actions do not inadvertently curtail the availability of credit to sound small-business borrowers”

Sen. Jim Bunning (R., KY) believes it is those exact regulators that are the problem saying, “It’s the Fed regulators that have stopped the flow of money out of the community banks to the small-business person”.

In many cases the frustration in trying to get money from the banks has prompted the “I’ll do it myself” response and various types of lending, some formerly shunned, are rising to meet demand.

The National Small Business Association said in its semiannual survey that about 25% of business owners relied on vendor credit to meet their capital needs between August of 2008 and December of 2009.  That was up from about 18% prior to the start of the crisis.  Additionally vendors appear more open to extend interest-free pay cycles and offer discounts on promptly paid invoices.

Justin Schaldone, CFO of eFashion Solutions LLC, says he is paying more of his vendors directly giving him some negotiating power which has resulted in and extension of pay cycles to 60days and discounts of between 5%-10% for prepayments.

Weezabi LLC, a three person company, and one of the few licensed to make “Crimson Tide” merchandise for the University of Alabama, needed to fund the production of 60,000 T-shirts after the school’s football team made it to the National Championships in December.  Since no banks were willing to lend the needed funds, Seth Chapman, CEO, turned to FTRANS an Atlanta-based lender.  “If it wasn’t for that loan, we would have missed the boat on all of this hot-market stuff”, he said.

None of the companies mentioned in today’s piece are big enough to have CDS contracts traded on them.  I couldn’t even find stock symbols.  The important point here, however, is that the small companies mentioned are, in many ways, the life blood of this economy and economies around the world.

The good news is that one way or another and against some pretty tall odds the spirit of entrepreneurs has not been dented.  I started this piece with one adage and I will finish it with another, “Where there’s a will, there’s a way”.

I am confident there isn’t anyone in Washington that can legislate that away.

Enjoy the weekend.

Jim Delaney



Credit Market Overview

December 10, 2009

http://www.marketstrategiesmgmt.com

After a really a really bad fall, regardless of whether that comes while skiing, skateboarding, or in my case riding anything with two wheels (both powered and unpowered) the first reaction is an internal systems check.  Can I move everything big: legs, arms, neck; followed by an investigation of less critical things e.g. how bad are the cuts, scrapes and bruises?  If all of that checks out reasonably well it’s on to: how badly damaged is the thing I was on and can I use it to get the heck out of here?

The market and its move up this year seemed to go through a similar process with the initial shock being felt in people’s wallets vs. on their persons.  The relief of continued existence, albeit in some cases barely, has powered us from the devil’s doorstep (666.79 low on 3/6) to what are, in comparison, rather lofty heights.

The euphoria of mere continued existence morphed into a logical assessment of what needed to go on for the economy to move forward and stocks to continue their advance.  Most of this, so far, has come from the cost cutting side of things; reducing the number of workers while getting more out of those that are left and although not a viable long-term motivational strategy there is nothing that revs an employee’s productivity engine more than being the person that just didn’t getting axed.

The crisis has also pushed companies to secure not only financing, but more of what they need to get their product from the inbox to the outbox.  This is happening across a variety of industries and sectors from raw materials, ArcelorMIttal’s (MT) acquisition of mines in Brazil and Russia and Nucor’s (NUE) purchase of a scrap steel processor to durable goods manufacturers like General Motor’s (MTLQQ) new minority stake in Delphi Automotive LLP and Johnson Control’s (JCI) majority stake in Plastech Engineered Products Inc. With the primary motivation of each of these moves being an effort to secure the supply chain.   MT’s head of Strategy, Bill Scotting put it this way: “If you’re buying fully from a market, you are relying on that market’s supply chain”.

Lest you think this is only occurring in those industries where big things are produced, Oracle Corp’s (ORCL) Larry Ellison’s plan to buy Sun Microsystems (JAVA) and transform the software provider into a complete one stop shopping experience for its customer’s enterprise computing needs shows just how far this idea has spread.

The last time this strategy was employed on a large scale was the conglomerate building that went on in the 1960’s and Mr. Ellison himself invoked the title of the 1985 movie “Back to the Future” when discussing his plan with analysts.

The S&P 500 started 1960 at 59.89 and ended 1969 at 92.06.  Besides the fact that the total index value at that point is now equivalent to two or three days movement, adding another 50% to last night’s closing value of 1095.95 would put the market near the 1600 level and almost 1000 points away from the Devi’s doorstep.

MT’s CDS/equity combo has been exhibiting the empirically proven negative correlation recently closing at 254bps and $40.62 respectively last night.  The most recent low and high have been 231bps on 10/26 for the CDS and $42.00 for the stock on 9/16.

JCI’s CDS is also trading close to its lows (108bps on 9/28 vs. 122bps last night) while the stock closed at $26.49 yesterday vs. $28.30 on 11/17.

ORCL’s CDS has not moved anywhere but sideways since late July closing last night at 35bps while the stock has seen a bit more volatility moving between $22.86 on 9/11 and $20.34 on 10/2 before closing last night at $21.95.

JAVA has seen its CDS rise from the mid-20’s in the 3^rd quarter to 46bps last night while the stock touched $9.35 on 8/21 and then traded as low as $8.10 on 11/6.

Enjoy the week.

Jim Delaney



Credit Market Overview

November 27, 2009

http://www.marketstrategiesmgmt.com

Today is “Black Friday”.  In an economy where 70% of GDP is a result of consumer spending do you not think the people that name these things could have come up with a little better moniker?  Why black?  Black because this is the part of the year where retailers finally begin to turn a profit or “move into the black”?  Black because the workers in the stores that open ridiculously early and close ridiculously late are in very dark moods by the time the whole thing is over?  I am not marketing executive but I would think that if I was going to try to get someone to spend oodles of money I would describe the day on which I propose to do that with a color other than black.  Even in New York City where it reigns’s supreme as the color du jour.

For me today is “Black Friday” because I have to start thinking about all the things I have to buy for all those people and figure out exactly who gets what and why.  Talk about a dark mood!

It would appear I am not alone however as in an attempt to beat the crowds comScore, an internet sales researcher, said that the volume of online sales in the first 22 days of November beat the same period last year.  That came to $8.21BN for a YoY gain of 2%.  Additionally they expect the 2009 total to reach $28.8BN or 3% more than the 2008 total.

The National Retail Federation did a survey of its own and found that 46% of retailers were projecting online sales growth of 15% over last year.  Amazon (AMZN), the Mac Daddy of online sellers, recently reported a 69% increase in 3Q09 profit and gave an optimistic outlook for 4Q09 based on a 17% increase in media sales and a 44% increase in the sale of electronic items.

FedEx (FDX) recently projected that it would ship more than 13MM packages on the busiest day of its year, December 14^th.  That compares to an average of 7.5MM packages a day and is 8% more than 12/14/2008.  United Parcel Service (UPS) has not released any exact figures but did announce the hiring of about 50,000 temporary workers for the Holiday season.

One way around the decisions involved in gift giving is the ever popular Gift Card.  While this might be a short step above sticking 20 bucks in an envelope it does keep the actual amount of the gift a secret, at least until you’re many miles away.  Gift cards are also becoming way for retailers to reward shoppers as Neiman Marcus said it would give $50 gift cards to shoppers and Target (TGT) is handing out $10 cards to people that spend $100.

American Express (AXP) CEO, Kenneth Chenault, was one of the first to turn slightly brighter than black on consumer spending as back in late October he said, “While there is still reason to be cautious about high unemployment levels, we are seeing broad based improvements in credit quality, the trends in card member spending are encouraging and there are signs that the recession may be approaching and end”.

So as I write this it’s all becoming clear.  I’ll just buy gift cards on Amazon and have FedEx deliver them.  Guess this Friday isn’t so black after all.

The CDS/equity combo for FDX has, like many other names, seen both the price of default protection and its stock rise recently.  In the case of FDX the CDS fell for most of the year until bottoming at 60bps on 9/25 and closing Wednesday at 73bps.  The stock, like the world, bottomed in March and has risen fairly steadily since.  As this is becoming a theme in the CDS/equity world the resolution of which asset class is “right” will probably work itself out at the macro level.

The CDS/equity combo looks very similar for UPS with a slight variation in the numbers and a high of $59.29 in the stock reached on 9/15 that has yet to be eclipsed although Wednesday’s close of $58.20 is not all that far away.

TGT’s CDS equity combo has been uninspiring since “late September” when everyone “really should be back at school” according to Rod Stewart.

AXP’s CDS/equity combo is looking pretty traditional with CDS very near its low for the year and not looking like it wants to edge higher and the stock continuing to make progress to the upside.

Neiman Marcus is in the hands of the P.E. mavens and AMZN has no CDS.

Enjoy the weekend.

Jim Delaney

Credit Market Overview

August 25, 2009

http://www.marketstrategiesmgmt.com

One of the interesting things about markets is how supply is created by demand. If there is someone willing to spend money there will be someone that figures out how to sell them something.

One of the ways in which this has manifested itself during the thaw that has occurred since Lehman’s collapse froze things solid is in the lending markets. Banks, bloated with gobs of festering assets were taking the easy way out, hoping that the decay would reverse itself magically, but were unable to lend in the meantime. Cash reasserted itself as king.

Businesses that needed money could no longer go to their friendly banker and get a loan. For the parts of the economy that were still working this posed a demand without supply problem. The markets, in their infinite wisdom, came up with a solution; find investors willing to lend and channel the demand from loans to securities. Not the synthetic stuff that was part and parcel of the problem but good old senior secured debt.

Evidence of just how well this is working came as Dealogic, a compiler of deal data, said that as of July 15^th global corporate bond issuance volumes hit the $1.1TN mark in 2009, passing the previous record of $893.3BN mark set in 2007 by 22%. The morphing of supply to meet demand was most evident in Europe as bank lending has traditionally been the main source of liquidity there. This year, however, there has been $426.5BN in nonfinancial bond issuance vs. just $290.4BN in 2008.

With all of that fresh, clean paper around it would seem strange that some would prefer to buy the old stuff but its happening. The difference is that most of those buying existing debt are those buying their own debt back.

Adding to the curious nature of these transactions is that a few of those purchasing their own debt were themselves questionable survivors when the “Ice Road Truckers” drove down Wall St.

Beazer Homes USA (BZH), Hovnanian Enterprises Inc. (HOV) and Tenet Healthcare Corp (THC) are three names that have bought back debt in 2009 and lest you think this is just a move by the fringe element, S&P reported recently that below investment grade companies have repurchased a total of $1.4TN of debt with maturities out to 2014 in 2009.

“The real issue for companies is how they delever, and every little bit counts”, said Judith Fishlow Minter, a managing partner at North Sea Partners in New York.

THC bought back $68MM worth of debt in July for about $60MM while BZH did a bit better spending $58MM to get $115.5MM or about 8% worth of their debt back. Allan Merrill, BZH’s CFO said the purchase was “part of efforts to address our capital structure”. Between February and April of this year HOV, another home builder, used $223MM to buy $578MM in debt.

THC’s CDS spreads had come down from 1549bps in 1Q09 to 632bps on 6/12 before moving up to 813 on 6/24. Not much of a correction after the halving spreads took during 2Q09. From their late June blip CDS continued lower getting back down to 637bps on 8/4. On the CDS’s way down the first time the stock hit a high of $3.81 but on the CDS’s revisit to the ~630bps level the stock moved as high as $4.85. This might lead one to believe the market likes de-levered companies.

BZH’s CDS spreads more or less came down and stayed down from March of this year although the stock moved higher, corrected and then moved to a new high as various macro themes played out in the economy. The low in the stock came on March 9^th when you could have picked up a share for “two bits” and the high for 2009 was posted on 8/14 when your earlier $0.25 investment would have fetched $4.23.

HOV’s CDS/equity movement looks a lot like BZH’s (wonder why!) with the early March high in CDS of 4272bps missing by a day the $0.58 low in the stock. The low for the CDS came on 6/11 with a close of 1126bps but the stock after correcting to $1.81 on 7/8 from an earlier run up gathered itself for a summit attempt hitting $4.42 on 8/7.

Suffice to say that the credit crunch has highlighted balance sheet health and those in the equity markets seem to enjoy owning that which is most unlevered.

Enjoy the week.

Jim Delaney

Credit Market Overview

August 14, 2009

http://www.marketstrategiesmgmt.com

Charles Dow, co-founder of Dow Jones and Company, wrote a collection of 225 editorials in the Wall Street Journal between 1851-1902 that, after his death, were collected, organized and represented as the “Dow Theory”. It is, in essence, a combination of what is now known as technical analysis combined with what we call sector rotation in modern parlance.

One of the major tenets of Chuck’s conclusions is that “stock market averages must confirm each other”. Back in the day this meant that a new high (or low) in the index of the 30 stocks in the Dow Jones Industrial Average had to be followed by a similar peak or nadir in the index of transport companies. Much to the bears dismay that occurred again yesterday but that’s not the point of this piece.

Instead I wanted to delve a little deeper into the “transport” part of the story as the major form of transport when Mr. Dow was deliberating his theory were the rails and they still are an extremely important component of the U.S. economy. That most people’s initial investment in the rail companies went the way of “I have an idea.com” is a story for another day but is still proof that economically sound ideas survive bubbles all the time.

As the latest earnings front passed through Burlington Northern Santé Fe Corp (BNI) and Union Pacific Corp (UNP) both reported but like everyone else in this last batch of income avowals it wasn’t about what just happened but what is to come.

Both BNI and UNP said that the dramatic drop in volumes they had seen over the past year had begun to stabilize but that signs of a recovery in demand for freight were far from full fledged.

“Things clearly have stabilized when you look at business demand and there are signs of pickup potential. Still, I don’t see it turning around quickly.” said Jim Young, CEO of UNP.

Of the earnings themselves, BNI reported earnings of $1.18/shr vs. $1.00 for the same period last year. UNP saw their bottom line shrink to $469MM from $$531MM a year earlier.

On the CDS side of things, given both companies’ exposure to macro economic factors it is no revelation that CDS levels peaked and stock prices hit their lows on March 9^th of this year. From there, painting in broad strokes, CDS levels have fallen as the stocks rose.

What is interesting is that in both cases CDS levels hit their lows for the year on July 31^st and have since risen even as the stock continue to make new highs.

Given the empirical studies this situation is not one that usually lasts for long so at some point either the stock will fall or the stock’s rise will be confirmed by falling CDS spreads.

Just like Chuck’s theory the CDS/equity model looks for confirmation.

Enjoy the weekend.

Jim Delaney