C.M.O. 6.17.2009
Credit Market Overview
June 17, 2009
Last Wednesday I wrote about the overall tendency for stocks to move in unison with correlation running near 80% between a given stock and the S&P index. I don’t have any exact figures for you this morning as to how much that has changed, if any, from a purely quantitative standpoint but from executing the most trades that I have in the CEC Portfolio in quite sometime I can tell you it sure feels different.
In Monday’s comment I wrote that CDS spreads had made new lows for the move the previous Friday. This was corroborated by the number of longs vs. shorts in the portfolio as well as the distribution of those longs across many sectors; all giving credence to 80% correlation figure.
Spreads since have definitely changed direction and it has been painful to watch positions, only recently established and seeming to have such potential late last week, get cut as the as the horse hair broke and the sword came down on Damocles (played in this episode by the S&P).
Getting caught in the downdraft has not been fun but the emergence of the variation in movement among the sectors has been encouraging as it is in an environment where multiple forces are at play that the CEC Strategy does well.
Knowing that the driver of all decision in the Strategy is CDS movement I thought it might be interesting to see what longs still exist after two full days of pruning and in what sectors the shorts are accumulating. No recommendations here, just giving you a look over the shoulder. To put this in some perspective for you the number of longs at the end of last week was 146 vs. 40 short positions for a total exposure to the market of 44%. You can see last night’s numbers at the top of the page.
Before you get to the actual numbers a quick explanation, the first number is a percentage as it shows the net of the longs and shorts in a sector divided by the number of names I track in that sector, the second number (on the other side of the “/”) is the total number of names I track in that sector which should give you a better idea of its representation in the entire Portfolio.
For example, out of 16 names I track in Finance there is a 19% net positive delta out of 21 names tracked. Insurance -4% out of 25 names; Homebuilders -45%/14 names; Healthcare -15%/13; Drilling 67%/6; Electric-Integrated 48%/27; Power 50%/4; Refining & Marketing -67%/3; Oil Service 100%/4; Oil-Composite 35%/17; Pipeline 64%/11; REITs -5%/21; Transportation -8%/12; Cruiselines -100%/2; Metals 57%/7; Industrials 11%/18; Consumer 30%/37; Pharma -14%/14; Retail -8%/26; Communication 6%/17; Technology 43%/21; Defense 43%/7.
The take away here is that, for now, it appears the commodity names (energy, metals) along with technology and are still holding up fairly well while those things housing related and the discretionary side of the consumer space are not.
Most importantly, if this portends a move away from 80% correlation, that would be very good news indeed.
Enjoy the week.
Jim Delaney
