C.M.O. 7.24.2009
Credit Market Overview
July 24, 2009
“Deeply oversold, worsening sentiment and positive internal divergences almost always provide the foundation to stock market recovery.” That was Doug Kass, GP of Seabreeze Partners, a gentleman whose entire career has been focused on short selling and that was him before this week even started as it was from a quote in last weekend’s Barron’s. Among the “internals” Doug cited were a drying up of volume (tell me about it!) and a smaller number of stock making new lows.
I guess when you sell short for a living you get pretty good at detecting those things that can make your life miserable and given his performance over time DK has proven a bit more watchful than the rest.
Mr. Kass probably doesn’t watch CDS spreads as closely as I do but the results, for this past week at least, have been the same. Investment grade spreads collapsed from a triple print of 131bps last Wednesday, Thursday and Friday to close last night at 118bps. The significance here is that back on the last day of June and the first day of July there was a double print at the 131bps level. The interim high of 145 matched almost exactly to another double print at the 146bps level on June 22nd and 23rd after getting as low as 121 on June 5th.
All of that, if you put it in your mind’s eye, looks like the letter “M” which on Wednesday of this week had the same ability to disappoint as the failed head and shoulders in the S&P that ignited this whole rally a week ago.
Fortunately, given the upward bias of the CEC Strategy’s long/short ratio, last night’s close broke through the previous bottom in IG CDS spreads and formed what most technical analysis textbooks would use as an example of a “double top”. This is bearish for the price stream in question but since in this case that price stream is CDS spreads, it turns out to support the upward movement in stocks.
High yield CDS spreads are the lowest they’ve been since September of 2008 and while they did not form the perfectly symmetrical double top seen in IG spreads the 4 days that have passed so far this week also took out the low that was established in June. (896bps 6/12/2009).
The stock market is not alone with regard to having the “internals” it is just that they are more easily monitored in exchange traded products. Thanks, however, to the near implosion of the world’s financial system there are a lot of people slicing and dicing every bit of data from every market and a whole new breed of “Fed Watchers”.
For the young’ins out there; Fed Watching was a cottage industry within the financial colossus when Paul Volcker and then a newly appointed Alan Greenspan (before he blew his first bubble) took obfuscation to new levels when describing their view of the economy and what they planned to do about it.
Now stats on the Fed’s balance sheet are more easily available than those of companies in the S&P 500, just kidding, and the latest look shows that the demand for the wide array of short-term emergency lending programs is subsiding.
A few quick numbers and then you can start your weekend. The Fed’s program to support the commercial paper market is seeing about 1/3rd of the volume seen at the height of the crisis and the borrowing program set up right after Bear Stearns took a dirt nap hasn’t been used in 10 weeks. The swap market set up between the world’s central banks to trade dollars has only about 1/5th of the $583BN peak outstanding volume at present and the collateralized lending facility set up by Dr. Bernanke had volumes of $235BN last October but just over $4BN according to the most recent reading.
The problems: unemployment, delinquencies and defaults are still out there and could well get worse before they get better, an almost foregone conclusion in the case of unemployment. What is important to note is that more and more the “internals” are improving.
Enjoy the weekend.
Jim Delaney
