C.M.O. 2.8.2010
Credit Market Overview
February 8, 2010
Correlation among asset classes has returned with a vengeance recently as stocks and commodities have moved in sync 80% of the time since January 11th of this year vs. 11% of the time between April and August of 2009.
The pundits would like to pin the tail of this donkey on the PIIGS but I would ask you to consider whether a country whose entire population is 11,238,162 means as much to the global economy as the 14,800,000 people officially unemployed in the U.S.A which doesn’t count the additional 11,200,000 that are “underemployed” bringing the total of those not contributing to the recovery to 26,000,000. Mike O’Rouke used a different yardstick in this weeks Barron’s highlighting the similarity of the GDP of Greece with that of either Michigan or Ohio in the lower 48.
The comparisons did not stop there as both Russia in 1998 and Lehman in September of 2008 were invoked as models for the Hellenic havoc. In both of these cases the market did not think the powers that be at the time would allow a default to occur, but they did, and investors suffered as a result. Quincy Krosby, a market strategist at Prudential Financial, believes it’s not a Russian Rubicon as regardless of the rhetoric, Germany and France are not going to risk the ruination of the Euro over one of their smaller brethren.
Jon Levy, an analyst at Eurasia, a political risk consultancy, believes “the currency union is ‘inviolable’ to euro-zone policy makers.” The fallout from a default, he thinks, exponentially outweighs any gains in efficiency of fiscal adjustments inside the euro.
So, if it wasn’t Greece what was the cause of the 7.57% retracement from the January 19 close in the S&P as well as its pervasiveness across almost every asset class? A possible reason could the change in course of the U.S. Dollar which closed at 74.269 as measured by the Dollar Index or DXY on 11/25/2009 and has since risen to last Friday’s closing level of 80.441.
I have written here a number of times in the last 90 days or so of the ways in which the market was taking advantage of Ben Bernanke’s vow to keep rates “extremely low” for the “foreseeable future”.
Those low rates made, for a time, for a very weak Greenback as currency traders borrowed bucks relatively cheaply and bought higher yielding currencies profiting from the difference in rates. The trade has become less and less profitable as the dollar has gained on other currencies even though the rate environment didn’t change.
News that the amount of oil stored on tankers parked at sea has been reduced by half supports this theory as the “contango” that supported storing costs of $0.90/bbl and allowed for a profit is now around the $0.40 level creating a loss for those still in the trade. Gold has suffered the same symptoms for the same reason uncharacteristically falling during a time of crisis instead of acting in accordance with its usual “safe haven” theme.
That the euro has suffered as a result of the PIIGS problems cannot be denied but it must also be noted that E1.5134 high close for the currency occurred on November 25th of last year, long before the Greek sovereign debt started to look like olive oil mixing with water.
Enjoy the week
Jim Delaney
