Market Jigsaw Puzzle

China's GDP And Infrastructure Spending Supports Construction Equipment And Raw Materials

noreply@blogger.com (M. Terry) — Tue, 17 Jan 2012 22:12:00 +0000

From the Chinese National Bureau of Statistics (www.china.org.cn/business/2012-01/17/content_24426253.htm)

Chinese economy grew by 9.2 percent in 2011 from a year earlier, the National Bureau of Statistics (NBS) announced Tuesday.

GDP growth for the fourth quarter last year stood at 8.9 percent year on year, said the NBS. The quarterly growth was the slowest in 10 quarters. China has set the full-year growth target at 8 percent in early 2011, after its economy grew 10.3 percent in 2010.

The country's economy expanded 2 percent in the fourth quarter on a quarterly basis, NBS chief Ma Jiantang said at a press conference.

According to preliminary statistics, the country's GDP reached 47.16 trillion yuan (7.26 trillion U.S. dollars) in 2011, Ma said.

Impressive numbers given the situation in the rest of the world. Q4 growth managed to beat estimates of 8.7%. The release goes on to say:

NBS data showed China's industrial value-added output growth decelerated in 2011 from a year earlier to 13.9 percent year-on-year. The country's fixed-asset investment, a measure of government spending on infrastructure, rose 23.8 percent year-on-year. Retail sales, a key indicator of consumer spending, rose 18.1 percent year-on-year in December 2011, up from the 17.3-percent growth seen in November.

The infrastructure spending continues on a torrid pace and should continue to support construction equipment and raw materials/mining. I would expect metal/mining and equipment stocks to perform well today as participants focus on this news (as well as German investor sentiment) rather than the looming default of Greece.
On Monday, China's top statistical official Ma Jiantang stated that price increase pressures continue to pose a threat despite the lower 4.1% CPI in December.

In the short run, fixed-asset investment, which remains a major engine driving economic growth in China, is expected to maintain rapid growth in 2012, while residential consumption, another growth engine, will keep stable growth this year, he said.

www.china.org.cn/business/2012-01/17/content_24425203.htm
This continues to support the prospects of both resource economies and companies.

Greece should just default

noreply@blogger.com (M. Terry) — Mon, 16 Jan 2012 15:44:00 +0000

From the WSJ (article here: WSJ Greece 1-16:

Deadlocked Greek debt-rescheduling negotiations threaten to delay key talks for a critical bailout package set for early next week, with officials warning of a rising risk of default unless a breakthrough comes soon.

A senior delegation from the International Monetary Fund, the European Union and the European Central Bank are to arrive in Athens Friday to discuss Greece's second rescue program. Equally important is a meeting of European finance ministers in Brussels next Monday to formulate their portion of the next Greek bailout, set in October at €130 billion ($164.8 billion).

Both sets of talks hinge on Greece and its private-sector creditors reaching an initial agreement this week to reduce the country's debt to them by half. Talks were suspended Friday after disagreement over the rates of interest Athens would pay on Greek debt holdings. Attention is now focused on overtures to resume negotiations as early as Wednesday, according to Greek officials.

Talks between the Greek government and the Institute of International Finance, which represents the private creditors, broke down on Friday over the coupon on longer-term new bonds that Greece will issue in exchange for the old bonds held by the banks. The private sector wouldn't accept a coupon of 4% on the new bonds, much lower than expected.

The goal of the talks with the private sector is to slice €103 billion from the Greek government's €350 billion in debt without any signs of coercion. An agreement in principle would set up a formal debt offer during the week of Feb. 6-10, with the final debt exchange expected to be completed by the end of February.

The sticking point remains the interest rate stitched to the bond swap. Greece says it can't afford to pay more than a 4.5% average coupon on the new bonds, while sovereign creditors such as Germany and the IMF want below 4% to make sure Greece can afford it and to avoid future shortfalls. The IIF, however, wants more than 5%.

Greece should just default. Yes, it will be painful, yes the ramifications will ripple globally, but this dog and pony show is not working. The whole notion of gaming the CDS system by a "voluntary" swap ultimately will not work. Add to this the notion that austerity will help and what you have is a recipe for ultimate failure.

More Bad News for Sears

noreply@blogger.com (M. Terry) — Thu, 12 Jan 2012 14:41:00 +0000

More negative news for Sears today:

(Chicago Tribune) CIT Group Inc. will no longer provide loans to Sears Holdings Corp. suppliers to finance their shipments to the retailer, a Bloomberg report said, citing two people familiar with the matter.

Sears shares fell 9.7 percent to $29.71 in premarket trading on the New York Stock Exchange. The shares dropped 56 percent last year.

CIT Group, the business lender run by Wall Street executive John Thain, will no longer approve credit for those waiting to be paid for orders delivered to Sears after today, the report said, citing unnamed sources.

At the end of December, Sears had about $4.2 billion of liquidity, including cash balances of about $900 million, Sears spokeswoman Kimberly Freely said in an email to Reuters.

"We disagree with their action, in fact we'd point out that other factors are approving shipments to Sears Holdings and CIT's payables represented less than 5 percent of inventories," Freely said.

The news comes within days of Hoffman Estates-based Sears posting disappointing holiday sales numbers, and announcing the closure of as many as 120 stores.

This is just the latest in a string of bad news for the struggling retailer. Shares down 5.7% pre-market.

Claims Above Expectations

noreply@blogger.com (M. Terry) — Thu, 12 Jan 2012 13:47:00 +0000

From the US Dept. of Labor

In the week ending January 7, the advance figure for seasonally adjusted initial claims was 399,000, an increase of 24,000 from the previous week's revised figure of 375,000 (up 3k from the previous release). The 4-week moving average was 381,750, an increase of 7,750 from the previous week's revised average of 374,000 (marginally increased from 373k).

The advance number of actual initial claims under state programs, unadjusted, totaled 642,381 in the week ending January 7, an increase of 102,314 from the previous week. There were 773,499 initial claims in the comparable week in 2011.

full release here:Jan 12, 2012 Claims

EUC and extended benefits both fell (-5.8k and -42.5k, respectively).

While somewhat higher than expected, the general trend is still intact and positive (weakly positive in my opinion, but positive nonetheless). Market will trade the number lower until we get some other data point or Euro-whisper.

Regions Sells Morgan Keegan

noreply@blogger.com (M. Terry) — Thu, 12 Jan 2012 04:57:00 +0000

Regions Financial released the following on Wednesday:

Regions Financial Corp. announced today that it has entered into a stock purchase agreement to sell Morgan Keegan & Company, Inc. and related affiliates to Raymond James Financial Inc., for $930 million. As part of the transaction, Morgan Keegan will also pay Regions a dividend of $250 million before closing, pending regulatory approval, resulting in total proceeds of $1.18 billion to Regions, subject to adjustment as described below. The transaction is anticipated to close during the first quarter, subject to regulatory approvals and customary closing conditions. Morgan Asset Management and Regions Morgan Keegan Trust are not included in the sale and will remain part of Regions’ Wealth Management organization.

As a result of the process of selling Morgan Keegan, Regions expects to record an impairment charge in a range of $575 million to $745 million (primarily non-deductible) in the fourth quarter of 2011 related to the $745 million of goodwill included in its Investment Banking/Brokerage/Trust segment.

The transaction increases RF's capital ratios and the company believes it will lead to low cost deposits due to a working relationship with Raymond James. This is all well and fine, but as to the use of proceeds all we get is:

Total consideration of $1.180 billion creates significant additional liquidity at the holding company

Here's a thought: you are being hammered due to your inability to repay TARP, use the proceeds to at least pay down some of your $3.5B TARP preferreds. I understand that the 5% dividend is cheap money, but it has cost shareholders dearly.

China's Inflation Eases in December

noreply@blogger.com (M. Terry) — Thu, 12 Jan 2012 03:19:00 +0000

Via Reuters:

China's annual inflation eased to 4.1 percent December, the lowest level in 15 months, giving the government more room to tilt economic policy away from restraining prices and towards supporting sagging growth.

The annual rate of headline consumer price inflation was slightly ahead of expectations of 4.0 in the benchmark Reuters poll of economists, but below November's 4.2 percent, reinforcing the view of many that the central bank is poised to ease monetary policy.

The December figures was the closest that inflation came in 2011 to hitting the official target of 4 percent for the year, leaving the average rate above 5 percent.

The country's customs agency said on Tuesday that China's exports and imports grew at their slowest pace in more than two years in December, fresh evidence of cooling domestic and global economic conditions that could push Beijing towards a more pro-growth policy stance.

Full article: Reuters China Inflation

If inflation is viewed as under control (a bit premature, perhaps) then the administration can ease policy in order to help revive "sluggish" growth. Should this happen, we could see natural resource companies do well as raw material prices would increase with increased demand. Not saying jump the gun here, just saying to keep your eye on the ball.

Realty Income Capital Structure Analysis

noreply@blogger.com (M. Terry) — Wed, 11 Jan 2012 15:54:00 +0000

Just an FYI - I published and analysis of Realty Income's capital structure on SeekingAlpha last night. In full disclosure, it is not reproduced here because it is a "premium article" on the SA website, which means I get paid per page view.

Analysis here: Realty Income Analysis

The Safety Dance and Negative Yields

noreply@blogger.com (M. Terry) — Wed, 11 Jan 2012 15:49:00 +0000

How scared are investors today when dealing with bonds? Take a look at the following excerpt from the Bundesbank's 1/9 6 month bill release:

Full release here (http://www.bundesbank.de/download/presse/pressenotizen/2012/20120109.tenderergebnis.en.pdf).

Well, fear is great enough to justify paying Germany for the safety of your money for six months. This is the first time that Germany has auctioned discount paper at a premium (not the first time discount paper has traded at a premium). But everything is getting better in Europe, right?

Twinkies May Have Unlimited Shelf Life but Hostess Does Not

noreply@blogger.com (M. Terry) — Wed, 11 Jan 2012 15:22:00 +0000

Hostess Brands entered into Chapter 22 (meaning their second chapter 11) bankruptcy saying they were not competitive in the marketplace - primarily blaming their unionized workforce.

The company has about 19,000 full-time and part-time employees, including 10,413 hourly workers and 8,436 salaried workers, according to a court filing. About 83% of the employees are union members.

The Irving, Texas-based baker intends to withdraw from pension plans and modify collective-bargaining agreements with unions, according to court documents.

The company listed the Bakery & Confectionery Union & Industry International Pension Fund, to which it owes $944.2 million, as its largest unsecured creditor.

Hostess said it has secured $75 million in debtor-in-possession financing from its existing lenders led by Silver Point Capital LP.

Sell the brand names, close the rest.

Hungary - Old School Fitch Smackdown

noreply@blogger.com (M. Terry) — Fri, 06 Jan 2012 13:58:00 +0000

Fitch cracked Hungary's ratings this morning, which should come as no surprise as the country continues to fall deeper into the muck and mire of external financing weakness. Watch Austria, which has a large exposure to the country. Here is the Fitch release:

Fitch Ratings has downgraded Hungary's Long-term foreign and local currency Issuer Default Ratings (IDR) by one notch to 'BB+' and 'BBB-', from 'BBB-' and 'BBB' respectively. The Outlook on the long-term IDRs is Negative. The agency has also downgraded Hungary's Short-term IDR to 'B' from 'F3', and its Country Ceiling by two notches, to 'BBB' from 'A-'.

"The downgrade of Hungary's ratings reflects further deterioration in the country's fiscal and external financing environment and growth outlook, caused in part by further unorthodox economic policies which are undermining investor confidence and complicating the agreement of a new IMF/EU deal," says Matteo Napolitano, Director in Fitch's Sovereign Group.

When Fitch put Hungary's ratings on Negative Outlook on 11 November 2011, it cited negative rating drivers as a worse than anticipated economic slowdown, and a rise in the risk premium and fiscal financing pressure. In the agency's view these risks have materialised.

The Hungarian growth outlook is continuing to deteriorate. In December, Fitch halved its forecast for 2012 eurozone GDP growth to 0.4%. Given Hungary's high degree of trade openness and strong economic and financial linkages to the eurozone, as well as tightening domestic financial conditions, the agency in January cut its forecast for Hungary's GDP growth to -0.5% from 0.5% previously.

Fiscal and external financing risks have increased significantly since early November, owing to a deterioration in investor sentiment. Hungary's high stock of government, external and private sector foreign currency debt and large associated financing requirements leave it vulnerable to adverse swings in investor confidence. The government faces external debt repayments of EUR4.6bn in 2012 (and larger ones in 2013-14), as well as large non-resident holdings of domestic debt to roll-over.

An auction for three-year, five-year and 10-year bonds on December 29 failed partially after investors demanded higher yields than the government was prepared to pay (although the holiday period may have been a partial mitigating factor). On January 5 the government sold less than its targeted amount of 12-month bills, and only at a yield of nearly 10%. Yields on 10-year government securities are currently near 11%, up from 8% in early November. The Hungarian forint (HUF) lost another 2% against the euro (EUR) over the same period, reaching an all-time low of nearly 320 in early January. Adverse moves in market sentiment towards Hungary have been greater than in central European peers such as Poland and Romania, highlighting its domestic problems as well as contagion from the eurozone debt crisis.

Additional unorthodox policy measures have further undermined confidence in policy making. In mid-December, preliminary official talks with a view to securing a new deal with the IMF and EU broke down after the government failed to provide assurances that it would alter legislation (including a new Central Bank Act) viewed as contravening EU law. During the parliamentary passage the ruling majority incorporated most suggestions from the European Central Bank (ECB), but left in place provisions that Fitch perceives to reduce the independence of the National Bank of Hungary (NBH). Furthermore, the new constitution, which went into force on January 1 2012, subordinates changes to key tenets of economic policy (such as taxation) to a two-thirds parliamentary majority, thus reducing the scope for fiscal adjustment of future governments.

As a result, the importance of securing a timely new IMF agreement has increased, while the prospects of reaching it have become more uncertain. Fitch expects that a Stand-By Arrangement is the only type of deal that Hungary can realistically expect. Furthermore, even if an agreement were to be reached, doubts would remain over whether the Hungarian government could submit to its strict conditionality, given its track record of policy unpredictability and the premature end in July 2010 of the previous IMF programme.

Hungary remains self-financing on a flow basis: Fitch estimates that in the year to Q311 the sum of the current and capital account surpluses was 3% of GDP. However, the current-account surplus is as much a reflection of domestic demand weakness as of export resilience. Also, the surplus on the financial balance (around 4% of GDP in Q3, Q4 rolling basis) was driven exclusively by portfolio inflows, whereas the foreign direct investment (FDI) and 'other investment' balances recorded net outflows.

The two notch downgrade of Hungary's country ceiling to 'BBB', thus reducing the uplift of the Country Ceiling above the Foreign-Currency IDR to two from three notches, reflects Fitch's concerns about the government's track record of unorthodox policies, including with respect to the banking sector. The country ceiling uplift is two or three notches in the case of non-eurozone EU member states, depending on governance and policy records. Nevertheless, the agency believes the imposition of capital controls (which is not permitted under the EU treaty except under exceptional circumstances) is a low risk.

The Outlook on Hungary's ratings remains negative, indicating a probability greater than 50% of another downgrade within the next two years. A further increase in fiscal and external financing risks and the failure to secure a timely and appropriate IMF agreement could lead to a downgrade. A deeper contraction in economic activity than currently expected; evidence of an increase in private sector capital outflows; a material weakening in the government's commitment to fiscal consolidation or destabilising unorthodox policy measures could also lead to a downgrade.

Conversely, an easing in fiscal and external financing pressures, the government meeting its budget deficit targets and a return to healthy growth, particularly in the context of significant structural reforms and declining external debt ratios, could stabilise Hungary's ratings.

Picture This

noreply@blogger.com (M. Terry) — Thu, 05 Jan 2012 05:53:00 +0000

WSJ:

Eastman Kodak Co. is preparing to seek bankruptcy protection in the coming weeks, people familiar with the matter said, a move that would cap a stunning comedown for a company that once ranked among America's corporate titans.

The 131-year-old company is still making last-ditch efforts to sell off some of its patent portfolio and could avoid Chapter 11 if it succeeds, one of the people said. But the company has started making preparations for a filing in case those efforts fail, including talking to banks about some $1 billion in financing to keep it afloat during bankruptcy proceedings, the people said.

A filing could come as soon as this month or early February, one of the people familiar with the matter said. Kodak would continue to pay its bills and operate normally while under bankruptcy protection, the people said. But the company's focus would then be the sale of some 1,100 patents through a court-supervised auction, the people said.

The company and its board have weighed a potential bankruptcy filing for months. Advisers told Kodak a filing would make its patent sale easier and likely allow the company to command a higher price, people familiar with the matter have said. The obligation to cover pension and health-care costs for retirees could also be purged through bankruptcy proceedings, the people said.

Those obligations—which run to hundreds of millions of dollars a year—as well as the unprofitable state of Kodak's new businesses, have made the company undesirable as a takeover target, people familiar with the matter said.

Kodak's founder, Mr. Eastman, took his life at the age of 77 in what is now a museum celebrating the founder and Kodak's impact on photography. His suicide note read: "To my friends, my work is done. Why wait?"

Full Article: http://online.wsj.com/article/SB10001424052970203471004577140841495542810.html#ixzz1iYmysA7T

Beware disruptive technologies, take your eye off the ball and you will be photographs and memories. As for the last line of the article, eerily ironic, isn't it?

Spain Thinking Bailout?

noreply@blogger.com (M. Terry) — Wed, 04 Jan 2012 14:41:00 +0000

Marketwatch:

The losses come as Spanish newspaper Expansion reported that the Spanish government was mulling whether to apply for loans from the European Union's bailout fund and the International Monetary Fund to help restructure the nation's banks. The unconfirmed Expansion report cited unnamed sources, according to Bloomberg. "Unidentified officials were quoted in the piece, but there is no smoke without fire when it comes to the euro-zone sovereign debt crisis, and surely this suggests that the highest echelons of the Spanish government are toying with the idea that a bailout might be the best route forward," said Kathleen Brooks, research director at Forex.com, in a note.

Sigh, broken record...broken record...broken record.

OH NO! More of the Same

noreply@blogger.com (M. Terry) — Wed, 04 Jan 2012 14:06:00 +0000

Via Reuters:

Worries over the euro zone debt crisis and the region's banks hit global stocks and boosted the dollar on Wednesday after Italian lender UniCredit priced a rights issue at a huge discount and a German bond auction failed to impress.

The U.S. dollar index, which tracks the greenback against a basket of currencies, gained 0.6 percent to 80.10 points.

Banking sector fears were ignited by news UniCredit (CRDI.MI) had launched a 7.5 billion euro ($9.8 billion) two-for-one rights issue at a discount of 69 percent to its closing share price on Tuesday. The capital increase, meant to shore up its ravaged balance sheet, sent shares in Italy's largest bank by assets down 8.5 percent.

Germany sold 4.057 billion euros ($5.30 billion) of 10-year government bonds in its first auction of the benchmark maturity since one last November that raised fears Europe's debt crisis had begun to threaten its biggest economy. Bids for the Bunds amounted to 1.3 times the amount offered and were improvement over the previous sale - one the country's least successful debt since the introduction of the euro. The debt sold at an average yield of 1.93 percent, lower than the 1.98 percent from November.

In another sign of stress among euro zone banks, commercial lenders' overnight deposits at the European Central Bank hit a record high of 453 billion euros, data showed on Wednesday. However, key euro zone bank-to-bank lending rates continued to drop, pulled down by the ECB's recent record injection of almost half a trillion euros of ultra-long and ultra-cheap three-year liquidity. Euro zone banks received 489 billion euros late last month in the first of two opportunities to access the long-term loans.

Reuters article

Anyone who has read anything I have written here or on Seeking Alpha knows my opinion on this: the situation is a train wreck. Austerity is necessary (not just in Europe either), but it is a mid to long term solution. The ECB can QE all it wants, the banks are keeping the cash (or arbing vs sovereign debt) and not lending it out. The banks have thin capital (especially if you adjust their risk/market models) and need a ton more.

While some European banks look cheap, I am not a buyer (LT2 will get interesting though), preferring instead to but European corporates in USD or hedging the currency risk.

November 28, 2011 Credit Markets

noreply@blogger.com (M. Terry) — Tue, 29 Nov 2011 03:13:00 +0000

Risk on readers, risk on. Decent initial estimates of US holiday sales and more European "solution pablum" lead the market down the "hakuna matata let's add some risk" path. Too early my friends, don't buy the hype. There has been no viable solution presented as there is no viable solution. There is no "periphery" issue, only a European issue.

Decent new issue calendar today:

Issuer                    Rating            Size             Mat      Pricing
Scripps Networks               Baa1/A-      $500mm        5y          T+180
National Fuel Gas               Baa1/BBB    $350mm       10y          T+295
Pacific Gas & Electric        A3/BBB+     $250mm       30y          T+160
AGCO Corp-CoC,144a       Ba1/BBB-    $300mm       10y           5.875%
Tesco-CoC,144a                 A3/A-          Bench            3y          T+165-170
Tesco-CoC,144a                 A3/A-           $                   5y          T+180-185
Canadian Pac Railway        Baa3/BBB-   $500mm      10y           T+275
Canadian Pac Railway        Baa3/BBB-   $                 30y           T+300
DTE Energy-$25                Baa3/BBB-   $150mm       50NC5      6.50%

The DTE's are junior subordinated debt ($25 par)where interest can be deferred for up to 20 quarters and callable at par in 2016.

You look at the spreads on the two energy companies and you realize that there is risk beyond their regulated subs (NFG does own timberlands).

Breadth wasn't all that impressive in the credit markets today as Ig was decidedly negative, HY was almost flat and converts positive on small volume:

bottom line - don't like risk here. The deals brought today are interesting and have decent risk premiums, but I don't see out-performance here.

Bond Market Monday - We Have Learned NOTHING!

noreply@blogger.com (M. Terry) — Tue, 22 Nov 2011 03:10:00 +0000

As today's tile might suggest, I am thoroughly dismayed at the complete ineptitude our (yes, I am obviously from the states) elected officials are displaying.

(NY Times) Leaders of the Congressional committee charged with finding at least $1.2 trillion in deficit reductions conceded on Monday that panel members had failed, setting up what is likely to be a yearlong political fight over the automatic cuts to a broad range of military and domestic programs that would go into effect starting in 2013 as a result of their inability to reach a deal. In a statement, the panel’s leaders, Representative Jeb Hensarling, Republican of Texas, and Senator Patty Murray, Democrat of Washington, said, “After months of hard work and intense deliberations, we have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline.”

Really? Imagine if you will a world in which these same officials could read the paper:

(WSJ) A selloff in euro-zone bonds continued on Monday, as investors shrugged off the election of a fiscally conservative government in Spain and continued to clamor for bold action by European policy makers. A day after Spain's Popular Party won a sweeping victory over the ruling Socialists in the general election, Spanish borrowing costs approached their highest levels since the European debt crisis began. Italy's 10-year yield continued to rise, as did yields for Portugal, Ireland and Greece. The yields on the highest-rated European bonds also pushed upward, with the Netherlands, Austria, Finland and France all rising. The German government repeated its view on Monday that the euro-zone crisis was caused by a lack of fiscal discipline and economic competitiveness in some nations on the euro periphery—and that the solution therefore lies in overhauls in those countries, not in ECB bond buying or collective European debt issuance.

Sound familiar? The US government seems focused on going down the same failed road as pressured European countries. I guess its a good thing our GDP is much bigger and our printing presses are even bigger than that! The US is rapidly going from the "last best hope" to the "least worst refuge". Its only a hop, skip and stumble away from "Treasuries, yeah they used to be safe". Imagine what the rating agencies might rate US debt if they weren't under scrutiny from the government - do you really want to downgrade the country that regulates you and is investigating you? No sir, not me.

Standard & Poor's Ratings Services said its ratings on U.S. sovereign debt wouldn't change because of federal lawmakers' latest failure to reach a budget deal--as long as Congress continues to follow the rules it set in August.The short statement came after a congressional deficit-reduction committee tasked with slashing the U.S. budget gap failed to reach an agreement, a move that triggers mandatory cuts to military spending and some social programs starting in 2013.S&P still rates the U.S. at double-A-plus, the second-highest possible rating, and has a negative outlook on the debt. The credit-ratings service shook markets in August when it downgraded the country's then-sterling credit status, citing political gridlock that was hindering lawmakers' ability to significantly reduce deficits

Moody's Investors Service confirmed Monday its triple-A rating on the U.S., saying that the failure of the congressional supercommittee to reach a deficit-reduction agreement isn't decisive, according to a company representative."The rating for the U.S. government is Aaa with a negative outlook," the rating company said."As Moody's stated on Nov. 1, the deliberations of the Joint Select Committee would be informative for the rating analysis but not decisive, and failure to reach an agreement would not by itself lead to a rating change for the U.S. government," Moody's said Monday.

It's almost laughable.

In any event, here we are. "Risk free" had a good day being the global safe haven. Curve flattened a bit as buyers bid the long end.

Credit markets were somewhat silent as the holiday shortened week is not known for issuance - even at these lower absolute rates. CDX IG was out 3bps, cash was weaker and thin. CDX HY down a buck change to $88.75. Financials continued to take it on the chin - out 5-30bps in the 5yr. BAC and Goldie taking it the hardest - out around 30bps. We are starting to see some interesting trading/swap opportunities in some of the financial names as you can shorten and pick (at the same level in the cap structure to boot). MS is just one example here. If you are going to own financials, optimize your positions (well, you should always be doing this, but.....)!

Volume in credit was lower and negative, reflected in today's Trace data:

Morgan Stanley printing all over the most actives with Jefferies absent (was one of the most active in convert space). Compiling data and details on the Jefferies complex, not sure whether to post here or to my SeekingAlpha slot. Got thoughts - hit me with them.

Sorry for the brief commentary, this guy is tired. Lets see what happens tomorrow. Reading that S&P futures are stronger overseas.

Later.

Europe - Nighttime in the Switching Yard

noreply@blogger.com (M. Terry) — Fri, 18 Nov 2011 15:50:00 +0000

Once again (or better yet, still) all eyes are focused on Europe. My take:

Europe's financial situation (sovereign and banks) is a trainwreck. There is no solution for the situation. It is too big, resources are too thin and political/economic idealogies are to far apart.

This morning the Daily Telegraph released a document sourced from the German government with suggestions for an EU treaty change. Contained within it:

The establishment of a procedure for an orderly default as part of the ESM:

For member states that are covered by an ESM programme, but despite complying with it are unable to achieve debt sustainability, the possibility of budgetary interventions is not sufficient. Therefore, there must also be the option of an orderly default in order to reduce the burden on taxpayers ( in the other eurozone states), and also to provide the affected country with an opportunity for a fresh start. In the present ESM Treaty the possible participation by private creditors through socalled "collective action clauses” (CACs) is not sufficient.

The ESM should consider the request made by a member state for relief loans against the criteria of debt sustainability. If this is negative, the affected member state would instead receive loans for a limited time only, during which the procedure for an orderly default would be prepared.

In order to make sovereign defaults possible where they are unavoidable, the threat of instability in the financial system resulting from such a default must be able to be credibly excluded. A plan to maintain the stability of the financial system in the event of an orderly default needs to be developed in close co-operation with European banking regulators. This would determine which banks would be restructured and/or recapitalised, which will necessitate the drawing up of Europewide rules on bank restructuring.

Document here: s3.documentcloud.org/documents/267781/brusselsembed.pdf

Germany sees the writing on the wall - sovereign defaults and the recapitalization of the banks. Prepare for the worst and hope for the best. It is not time to enter the fray with value eyes for there is only a value trap waiting. Liquidity is non-existant, buyers are gone and there is no plan. Continue to avoid European issues.

November 17, 2011 Credit Market Recap

noreply@blogger.com (M. Terry) — Fri, 18 Nov 2011 03:34:00 +0000

The tone in the fixed income markets today was one of de-risking as Spanish yields on the auction blew out. Eurozone concerns continue to weigh heavy on the markets and the financial sector has been bearing the brunt of the smackdown.

The general tone in the credit market was somewhat negative as CDX NA IG/HY 17 were off a tad more than 1% with the indices adding 1.7 and 12.6 bps respectively. European CDX fared slightly better with the series 16 shaving 5bps off the index.

Source: Markit

Breadth in the market was negative (as one would expect given the magnitude of financial issues)

FIG issuers have been body slammed by the turmoil with JEF (and brokers) leading the way:

The above chart is JEF 6.875% '21. Closed out at $78 for a 10.6% yield (the 5.125 '18 are $78.25 9.8% and the 8.50 '19s are $86.25 11.2%). I find this to be somewhat interesting. Obviously these maturities are further out and should they come out of this situation, the bonds will perform well. With this in mind, we buy the lowest cost exposure - the '21s. Ahhhhh, but what do some of us who got kicked in the teeth in '08 remember? FINANCIALS ARE BINARY! They are good or not. The equity continues to trade down after hours hitting fresh two year lows. That said, this is a situation that warrants further investigation for value players (like myself).

And Morgan Stanley....well MS has never fully recovered from "the crisis" and gets taken to the woodshed faster than the rest. See MS '21s closing +525 (remember a scant month ago the re-opened this baby at +335) out 50bps. Ouch. Goldie fared little better with GS '21s 425/15 out 35bps.

The new issue market was somewhat robust with approximately $5B in deals announced.

Personally, I have liked LLL in the defense space and think it warrants consideration in the 5yr.

Yield Pain in Spain

noreply@blogger.com (M. Terry) — Thu, 17 Nov 2011 15:47:00 +0000

Ay, que es un alto rendimiento

The Spanish Treasury Thursday paid the highest yield on a 10-year government bond at auction since the inception of the euro but garnered enough demand to sell EUR3.563 billion of the bonds (the plan was EUR4 bil). The maximum yield paid for the 10-year bond, which matures January 2022, was 7.088%, a euro-era high.

Initial Claims 11-17 - My 2 Cents

noreply@blogger.com (M. Terry) — Thu, 17 Nov 2011 15:21:00 +0000

From the initial claims release this morning:

In the week ending November 12, the advance figure for seasonally adjusted initial claims was 388,000, a decrease of 5,000 from the previous week's revised figure of 393,000. The 4-week moving average was 396,750, a decrease of 4,000 from the previous week's revised average of 400,750.

The advance number of actual initial claims under state programs, unadjusted, totaled 360,139 in the week ending November 12, a decrease of 42,355 from the previous week. There were 409,548 initial claims in the comparable week in 2010.

States reported 2,935,466 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending October 29, a decrease of 18,358 from the prior week. There were 3,961,485 claimants in the comparable week in 2010. EUC weekly claims include first, second, third, and fourth tier activity.

We seem to be getting some traction in reducing the number of initial claims, which should begin to help prop up employment figures. While not an out of the park number, it is a decent sign - especially when combined with the reduction in EUC and EB.

Now we have to make a more meaningful impact on the continuing claims series.

All in all, I think this should be taken as a modestly positive sign for the US economy. Absent the problems in Europe, Treasuriy prices should drift lower (higher yields) given the firming employment picture. Unfortunately, we can't invest "absent the turmoil in Europe" so it is still too early to set a short in UST. This may, however, reinforce the premise that corporate America is solid credit iis still a decent play (the equity market is dictated by the European whack-a-mole).

November 16, 2011 Corporate Bond Issuance

noreply@blogger.com (M. Terry) — Thu, 17 Nov 2011 05:22:00 +0000

Corporate issuance slowed today from its breakneck pace.

I personally think there is some value remaining in corporates as the credit risk premium is still attractive (not fat and juicy attractive, but attractive nonetheless).

November 16 Market Review

noreply@blogger.com (M. Terry) — Thu, 17 Nov 2011 03:38:00 +0000

Another day of the "de-risking" trade. Anyone else getting tired of the "Europe has a plan!", "Europe has no plan" volatility. Lets cut straight to the point - there is no possible plan! Brushing aside for the moment the constitutional crisis enveloping the continent, what we have is a downward spiraling ecosystem. Debt piled on when times were good (and a haughty wink-wink, nod-nod by the EU regarding debt levels) turned to lead as the system slowed. In order to tame the beast, austerity measures are bantered about which are growth killers (not to mention they get in the way of the mountain of entitlements the populace is used to) and result in higher relative debt/GDP ratios for the foreseeable future. The populace chokes, governments collapse and the sovereign crisis continues. Then comes the good part - the crisis spreads (probably a poor choice of words, I will admit) to the banking sector (poor choice because it has always been in the banking sector as well) which compounds the problem, further retards growth and ushers in a "new 2008" crisis. Good stuff, no? Yeah, just wait until we address the capital shenanigans the Eurobanks like to play with risk, risk models and risk management (recall what AIGFP was used for - removing capital hogs from Eurobank balance sheets).

In any event, enough of my discourse, what the hell did we see out there today:

Equities:

After grinding back up from an out of the gate drop, Fitch come out with a report on US banks and their exposure to Europe. Some snippets:

Contagion Effects Potentially Large: U.S. banks could be greatly affected if contagion continues to spread beyond the stressed European markets (Greece, Ireland, Italy, Portugal, and Spain). Exposures to large European countries and banks are sizable. The ongoing economic and market effects are additional concerns. The crisis has been negatively affecting European credit profiles and has resulted in numerous rating actions recently.

Report here: 11-16 Fitch

Net exposure. Gotta love it. Ummmm, what happens when exchanges are voluntary and 50% of your holding is wiped out without triggering your insurance policy.... Yup, net is gross. Honestly, is this news?

Gundlach on Corporates

noreply@blogger.com (M. Terry) — Thu, 29 Sep 2011 03:15:00 +0000

Interesting article on Bloomberg:

Gundlach Has No Europe Bets, Likes Corporates

Excerpts:

Jeffrey Gundlach’s DoubleLine Capital LP is invested only in U.S. dollar-denominated assets in a bid to avoid losses stemming from Europe’s debt crisis.

“All of our international exposure is in dollars,” Gundlach, the founder and head of Los Angeles-based DoubleLine, said at a panel sponsored by the firm in New York today. “There’s a big loss in Europe and all we want to do as investors is make sure as best we can that we’re not the ones taking the loss. How do you do it? No investments in Europe.”

DoubleLine is also avoiding U.S. banks because of possible exposure to the crisis and favors investment-grade corporate debt because defaults may rise in lower-rated bonds next year. Gundlach, who managed the top-rated intermediate-term U.S. bond mutual fund for 15 years, began cutting exposure to junk bonds in the fourth quarter of 2010, even as Bank of America Corp. and Goldman Sachs Group Inc. strategists forecast the riskiest debt to return as much as 10 percent this year.

“Investment-grade corporate bonds have done very well,” said Gundlach, who has attracted $17 billion in assets since founding DoubleLine in December 2009. “The investment-grade bonds DoubleLine holds had a bad August with all risk assets, but prices are nearing their highs. It’s a totally different story in below investment-grade, where we see the market really has collapsed.”

“I like junk bonds a lot better than I did six months ago, but I am not ready to buy them yet,” he said. “The high yield bond market is going to have a default problem in late 2012 or 2013.”

Moody’s Investors Service forecast the speculative-grade default rate will “remain low” at 2.2 percent a year from now, compared with 2.1 percent in August, according to a Sept. 22 statement. That compares with a peak of 14.5 percent amid the credit crisis in November 2009.

“We’re not going to be ready to jump back in to high yield basically until Greece is solved,” said Bonnie Baha, head of DoubleLine’s global developed credit group.

Full article can be found here: Gundlach - Bonds

While I believe that the economy isn't as rosy as statistics might show, I do not expect defaults (ex-sovereign) to increase significantly and corporate balance sheets are in decent shape (although they could begin to erode should equity prices remain at current levels or go lower as the WACC will be reduced be the issuance of debt) which should help protect against a spike in defaults.

I also believe that the European issues (no, not just Greece which is the tip of the iceberg) present investors with some opportunities as the babies are going out with the bathwater.

In my opinion, 6B and 5B corporate debt is still attractive at these levels (relative spreads as they are the indication of a risk premium relative to the risk-free rate) and continues to warrant an overweight position. There has also been some interesting preferred stock and "baby bond" issues lately that offer attractive yields.

Happy Wednesday.

Mike

Corporate Issuance Update

noreply@blogger.com (M. Terry) — Thu, 08 Sep 2011 13:26:00 +0000

Busy couple of days on the new issue front as issuers look to take advantage of lower benchmark yields. Yesterdays issuance consisted of:

Time Warner Cable (Baa2/BBB) - $1B 10yr, $1.25B 30yr. +210/232 respectively
Heinz (baa2/BBB+) - $300MM 5yr, $400MM 10yr. +110/125 respectively
Schlumberger Norge (A1/A+) $500MM 5yr +108
Schlumberger Lux (A1/A+) $600MM 5yr, $1.6B 10yr. +108/130 respectively
Wisc Elec (A2/A) $300MM 10yr +105
Daimler Finance (A3/BBB+) $800MM 3y, $1.5B 5y, $750MM 10y. +165/185/195 respectively
Xcel Energy (Baa1/BBB+) $250MM 30yr +150
France Telecom (A3/A) $1B 5yr, $1B 10yr. +195/220 respectively
Pac Gas (A3/BBB+) $250MM 10yr +130

Would expect issuers to continue to step in at these levels. While absolute yields are low, corporate spreads are still attractive relative to alternatives - especially given the current strength of corporate balance sheets and the risk premium relative to absolute yields.

WTO to China - They're not THAT Rare!

noreply@blogger.com (M. Terry) — Tue, 05 Jul 2011 19:06:00 +0000

On the wire (NYT):

BRUSSELS — In a dispute that highlights growing tension between China and its Western trading partners, the World Trade Organization ruled Tuesday that Beijing violated global rules by restricting exports of nine raw materials used in the manufacturing of high technology products.

The case, lodged by the United States, the European Union and Mexico, dates from 2009 and underlines the anxiety in the West about the way China is consolidating its trading dominance.

Significantly, the ruling strengthens other European arguments against Chinese restrictions on another category of exports — rare earths, 17 minerals also used in the high-tech industry. However the case also demonstrates how dependent technology industries have become on some exports from China.

The W.T.O. panel rejected China’s argument that its restrictions were motivated by a desire to protect the environment and prevent a critical shortage of the materials.

The decision on Tuesday concluded that Chinese quotas, export duties and license requirements put in place a discriminatory system for the sale overseas of industrial raw materials widely used in the steel, aluminum and chemicals industries, including coke, zinc and bauxite.

“This is a clear verdict for open trade and fair access to raw material,” Karel De Gucht, the European trade commissioner, said in a statement. “ Furthermore, in the light of this result, China should ensure free and fair access to rare earth supplies,” he added.

The E.U. quota of Chinese raw earth elements declined to 30,000 tons in 2010 from around 50,000 tons in 2009, according to an E.U. official who was not authorized to speak publicly.

The U.S. trade representative, Ron Kirk, called the W.T.O. decision on the raw materials “a significant victory for manufacturers and workers in the United States and the rest of the world.”

“China’s extensive use of export restraints for protectionist economic gain is deeply troubling,” Mr. Kirk added in a statement. “China’s policies provide substantial competitive advantages for downstream Chinese industries at the expense of non-Chinese users of these materials. They have also caused massive distortions and harmful disruptions in supply chains throughout the global marketplace”

Americans and Europeans had challenged China’s environmental protection argument by pointing out that the raw material consumption was not being controlled domestically.

China must now either appeal the ruling or comply with it. If it fails to do so the United States, Europe and Mexico could eventually be allowed to respond with equivalent trade sanctions.

In a statement issued by its mission to the W.T.O. in Geneva, China said “that although these measures have certain impact on domestic and international users, they are in line with the objective of sustainable development promoted by the W.T.O. and they help to induce the resource industry toward healthy development.”

The nine raw materials covered by the ruling on Tuesday are used in medicines, CDs, electronics, the automotive industry, ceramics, refrigerators and batteries among other products.

Of all the E.U. imports of some categories of magnesium, 95 percent are sourced in China, as is 91 percent of imports of some categories of manganese while almost 30 percent of E.U. phosphorous imports are Chinese.

European officials say the export restrictions increased the global price for the raw materials, and gave Chinese companies a clear commercial advantage which, in effect, constitutes a hidden subsidy. They also made it harder for non-Chinese companies to source the raw materials by making them less readily available on the global market.

The impact can be to increase the price of some products by as much as 100 percent, according to E.U. officials.

The ruling was welcomed by BusinessEurope, the lobbying group. “The W.T.O. panel decision clearly stipulates that almost all export duties and restrictions imposed by China are incompatible with W.T.O. rules,” it said in a statement. “If confirmed, this decision will require China to remove all unjustified restrictive measures on raw materials.”

Certainly won't help the price of rare earth (not raw earth as stated in the article) companies which have been getting whacked over the last few sessions. That said, I will believe it when I see it.

The EU - Part Problem Part Solution - Or Just FUBAR?

noreply@blogger.com (M. Terry) — Tue, 05 Jul 2011 18:49:00 +0000

And you seriously thought it was getting better?

Moody's Investors Service has today downgraded Portugal's long-term government bond ratings to Ba2 from Baa1 and assigned a negative outlook. Concurrently, Moody's has also downgraded the government's short-term debt rating to (P) Not-Prime from (P) Prime-2. Today's rating action concludes the review of Portugal's ratings initiated on 5 April 2011.

The following drivers prompted Moody's decision to downgrade and assign a negative outlook:

1. The growing risk that Portugal will require a second round of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a pre-condition.

2. Heightened concerns that Portugal will not be able to fully achieve the deficit reduction and debt stabilisation targets set out in its loan agreement with the European Union (EU) and International Monetary Fund (IMF) due to the formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system.

RATINGS RATIONALE

The first driver informing today's downgrade of Portugal's sovereign rating is the increasing probability that Portugal will not be able to borrow at sustainable rates in the capital markets in the second half of 2013 and for some time thereafter. Such a scenario would necessitate further rounds of official financing, and this may require the participation of existing investors in proportion to the size of their holdings of debt that will become due.

Moody's notes that European policymakers have grown increasingly concerned about the shifting of Greek debt held by private investors onto the balance sheets of the official sector. Should a Greek restructuring become necessary at some future date, a shift from private to public financing would imply that an increasingly large share of the cost would need to be borne by public sector creditors. To offset this risk, some policymakers have proposed that private sector participation should be a precondition for additional rounds of official lending to Greece.

Although Portugal's Ba2 rating indicates a much lower risk of restructuring than Greece's Caa1 rating, the EU's evolving approach to providing official support is an important factor for Portugal because it implies a rising risk that private sector participation could become a precondition for additional rounds of official lending to Portugal in the future as well. This development is significant not only because it increases the economic risks facing current investors, but also because it may discourage new private sector lending going forward and reduce the likelihood that Portugal will soon be able to regain market access on sustainable terms.

The second driver of today's rating action is Moody's concern that Portugal will not achieve the deficit reduction target -- to 3% by 2013 from 9.1% last year as projected in the EU-IMF programme -- due to the formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system. As a result, the country may be unable to stabilise its debt/GDP ratio by 2013.

In other words, as the EU is increasingly looking for the private sector to share in the pain, we are going to help make sure it happens. Over? Not by a long shot. Better? No, but the direction is becoming clearer.