C.M.O. 8.31.2009
Credit Market Overview
August 31, 2009
If there is one thing that has been consistent lately it is inconsistency. The reasons we hear for the market’s movement one day are the exact opposite of the reasons we heard the day before.
Friday an article in the WSJ by David Weidner reasoned that the movement in 5 stocks; C, BAC, AIG, FNM and FRE were responsible for the market’s latest move up. Saturday, Michael Santoli added some perspective to this claim by asking “how a handful of stocks with a combined market value near $200BN could ‘drive’ a stock market worth more than $10TN”.
A glance at the number of Weekly New Highs and Lows in Barron’s shows 247 vs. 2 on the NYSE, 46 vs. 4 on the AMEX and 183 vs. 16 on NASDAQ. Interesting that it is the new lows that are the number closer to a handful for each of the exchanges mentioned.
Also at odds are the recent Investor Intelligence numbers of 51% bullish vs. 19% bearish with the current hoard of $3.58TN of cash on the sidelines. It is worth 34% of the stock market’s capitalization which dwarfs the 19% number seen at the 2007 market peak according to Carmine Grigoli, chief investment strategist at Mizuho Securities.
The inconsistencies do not stop there however. Last Wednesday the Netherlands Bureau for Economic Policy Analysis, an independent research institute, said that world trade volumes increased by 2.5% in June, the single biggest monthly increase since July of 2008. At the same time, Art Wong, a spokesperson for the Port of Long Beach, which when combined with the Port of Los Angeles, is the busiest port complex in the U.S. said that July’s YoY 18.6% drop in container imports is a “really weak” number.
The strength, it appears, came mostly from Latin America with exports rising 14.3% and imports up 11.9%. The exports were mostly commodities going to China which raises the question of whether that will continue as that country’s stimulus spending begins to slow.
Burlington Northern Santa Fe Corp. (BNI) and Union Pacific Corp. (UNP) gave their thoughts on future business when they released 2Q09 earnings recently and both seemed to be of the same view as Jim Young, CEO of UNP when he said, “Things clearly have stabilized when you look at business demand and there are signs of pickup potential”. But, “I don’t see it turning around quickly”.
From boats to trains to “brown” UPS CFO, Kurt Kuehn echoed the rail head’s sentiment saying “the broad economy isn’t getting dramatically worse” but that “UPS remains cautious on its outlook because few signs of an imminent rebound are evident”.
On the positive side 2Q09 GDP data released last Thursday by the Bureau of Economic Analysis of a 1% contraction was unchanged from the earlier estimate while pretax corporate profits were said to be up 5.7% and an even higher 9.2% if adjustments for depreciation and changing inventory values were excluded.
This led Paul Ashworth, senior U.S. economist at Capital Economics Ltd. To write, “The economy should enjoy something of a rebound over the next couple of quarters, as inventories are restocked and pent-up demand is released”.
Expeditors International of Washington (EXPD) does not have a CDS contract associated with it but with $916MM in cash and no debt that is one of the few consistencies that exists today. I include them here as they are a reasonable proxy for global commerce. The stock has stayed between $40 and $25 since July of last year and closed Friday at $33.49.
BNI has seen its CDS levels fall as its stock rose since March and closed at $84.03 on Friday just $0.74 away from its high for the year reached on 8/21. The same can be said for UNP including hitting its high for the year on 8/21 before closing at $60.63 on Friday. Funny that after rising 64% and 80% respectively neither of these two was included in the handful of stocks listed as responsible for the rally.
UPS has seen its CDS levels come in since March but the stock has moved sideways since hitting its high for the year on 5/8 at $57.62. UPS closed at $53.71 on Friday.
Enjoy the week
Jim Delaney
