C.M.O. 7.15.2009
Credit Market Overview
July 15, 2009
Meredith Whitney’s appearance on CNBC recently has done much for those that have hoped, since the bubble first burst, that all of the problems would simply go away. Issuing the first “buy” rating her eponymously named advisory group has issued since its inception (albeit a short time ago).
The herd has taken what was actually a very nuanced call regarding Goldman Sachs and the role it will play in the disaster being played out in California as well as the other debt markets as an “all clear” signal. The market reacted to the sound bite about GS and disregarded, it would appear, all else she said including that she sees the unemployment rate hitting 13% before it’s all over. The need for “green shoots” seems so intense that investors have taken to spray painting the brown straw in front of them.
Oil could use a Whitney, or two, as $60 seems like the new $70 and if the part of Meredith’s call that people chose to ignore (13% unemployment) occurs with the same accuracy as some of her previous prognostications it might take a mob of Meredith’s to move the fossil fuel markets higher.
The combination of economics and regulation has teamed up to tamp down price movement. “What really underpinned the financial flows into the oil market were expectations of an economic recovery. Those expectations were scaled back and the timing of the recovery was pushed back to the end of the year”, Antoine Halff, an analyst with New-edge group said recently. Harry Tchilinguirian, senior oil market analyst with BNP Paribas in London noted that, “if it’s the height of the driving season and we still have inventories increasing, it should say something about the underlying weakness in demand”.
With the apparent lack of real demand it is usually up to the “speculators” to push prices higher but the recent proposal by the CFTC to impose federal limits on speculative energy trading has “speculators all running for the exits at the same time”, according to Matt Zeman who heads trading for LaSalle Futures Group in Chicago. “The path of least resistance still remains lower” he said.
“Big Oil”, which for many means companies like Exxon Mobil Corp (XOM) and Chevron (CVX) have seen their stock prices track pretty closely to the price of “Texas Tea” but what has not tracked in traditional fashion is the CSD/equity link.
XOM and CVX both saw declining CDS spreads earlier this year but that did not produce the rising stock price usually seen when this occurs. Instead, XOM’s CDS level and stock price peaked on December 16th of last year at 115bps and $83.14 respectively after rising in tandem during most of the 4th quarter. From there it was all down hill as XOM’s stock bottomed on March 5th of this year at $62.22 and has since been range bound with the aforementioned low and $74.05 (6/11/2009) defining the limits. The movement of XOM’s CDS spreads has been much less volatile moseying on down from the December highs to a recent low of 36bps on June 3rd; right around the time the “green shoots” were in full bloom. CDS levels have since moved a bit higher closing at 42bps last night with the stock at $72.81.
CVX played along with the positive correlation theme although the highs were not as perfectly in synch as XOM’s. CVX stock price hit its top on September 19th of last year ($87.80) when the CDS was at its low (50bps). The stock fell to $57.83 by October 10th and then climbed, along with the CDS market, until November 26th ($79.93) at which point negative correlation took over again. The on again, off again correlation made interpreting CVX’s stock moves a tricky proposition when considering only CDS movement.
After staying within a range bounded by ~$64-$70 for most of the 2nd quarter the stock recently broke down to a low of $61.40 and closed last night at $63 even. CDS levels in CVX have stayed between 58bps and 65bps since the beginning of May which could be interpreted as the market thinking it is unlikely the CVX will have any trouble paying its interest and principal while the stock acts as a proxy for people not predisposed to trading commodities.
For those in the pits, however, channeling Meredith might be their best option.
Enjoy the week.
Jim Delaney
