August 6, 2009

Bull markets, they say, climb a wall of worry.  Bear market rallies . . . I don’t know what they say about them, but if this is the former there most certainly seems as if there is enough to worry about and if it is the latter, my vote would be to something along the lines of: “are like walking on eggshells”.

Unemployment and its effect on the much mentioned U.S. consumer, headlines tomorrow’s market activity.  Will “cash for clunkers” be the Cinderella story of this recovery and revive Joe Sixpack’s desire to lever and spend or will the stimulus, which is still having a more potential than kinetic effect burn off like starter fluid on a brick?

One area of the economy that seems poised to feel the effects of what ever the current rally turns out to be is commercial real estate.  The major banks, we’ll call them the TALF 10, had a majority of the exposure to residential mortgages due to all of the securitization that was going on.  Commercial mortgages on the other hand are usually originated and held on the books of the same institution and as such are naturally diversified across many, albeit smaller, banks.

The Moody’s Investor Service Commercial Property Index fell 7.6% in May (the latest month for which data is available) putting it 28.5% below year ago levels and 34.8%% below the October 2007 peak.  The real world effect of this is that as of July 31^st 69 banks had failed in 2009 alone and even Sheila Bair would be hard pressed to recite every name on that list from memory.  Ever heard of the First State Bank of Altus?  Me neither but before it went bust it had assets of $103.4 million.  That should frame things for you.

Developers Diversified Realty Corp., is said to be issuing two bonds totaling ~$600MM which are expected to become the first TALF eligible securities.  The commercial mortgage portion of the TALF program does not seem to be meeting the same success as the residentially focused initiative as various regulatory wrinkles and rating agency downgrades continue to hinder the effort.

If following the “smart money” is any indication it is interesting that Mort Zuckerman is selling shares in Boston Properties Inc. to buy new printing presses for his other venture, The Daily News.   I guess nobody told Mort about Web 2.0.

A recent analysis by the WSJ showed that “U.S. banks have been charging off soured commercial mortgages at the fastest pace in nearly 20 years”, and “could reach about $30BN by the end of 2009”.

From all of this one would expect the CDS spreads on REITs to be widening and their equity prices falling but that’s where the worried walk on the eggshells starts.  There are 21 REITs in the CEC universe and at present the CEC Portfolio is long 14 of them.  Keep in mind that CDS level movement is the main driver of the buy/sell decision in the CEC Strategy but also that the negative correlation that is empirically evident must also exist in real life for positions to be initiated.  In other words CDS levels and equity prices must be moving in opposite directions before a stock is bought or sold.

Since the CEC Portfolio is long that means that the CDS’s was falling and equity prices rising when the positions were initiated.  Risk management takes care of existing positions but the important point here is that the CDS market does not seem to agree with the media regarding the major REITs at the moment.

This should not be too hard to comprehend because the media, for the most part, does not agree the S&P should be at 1,000 right now either.

A wall of worry or walking on eggshells . . . . tune in tomorrow!

Enjoy the week.

Jim Delaney

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 16^th of last year at 115bps and $83.14 respectively after rising in tandem during most of the 4^th quarter.  From there it was all down hill as XOM’s stock bottomed on March 5^th 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 3^rd; 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 19^th of last year ($87.80) when the CDS was at its low (50bps).  The stock fell to $57.83 by October 10^th and then climbed, along with the CDS market, until November 26^th ($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 2^nd 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

July 13, 2009

The Massive Ordnance Air Blast bomb known technically as GBU-43/B and affectionately as the Mother Of All Bombs is a 30 foot, 22,600lb honey that actually explodes about 3 feet above the ground and clears a 900 foot circle around wherever it strikes.

Since it first blasted on to the scene in 2003 its colloquial moniker has been used repeatedly to describe things never before seen and unlikely to be duplicated in the near future.  It seems fitting then that after the release of June’s employment figures on July 2^nd that Alan Sinai of Decision Economics used the phrase in describing this country’s economic future when he said, “the mother of all jobless recoveries is coming down the pike”.

Nouriel Roubini, never one to miss an opportunity to spread the gloom wrote on the RGE Monitor website that, “the June employment report suggests that the alleged ‘green shoots’ are mostly yellow weeds that may eventually turn into brown manure”.

Janet Yellen, president of the San Francisco Federal Reserve Bank used slightly less hyperbole, describing the economy thusly: “Right now, we’re like a patient whose condition has stabilized and whose fever is just starting to come down”.

Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University have examined 14 of the largest global financial crisis and concluded that “the aftermath of banking crises is associated with profound declines in output and employment”.  Through their research they found that GDP usually bottoms after about 2 years but that unemployment remains high for an additional 3 years climbing by 7% on average.  We have experienced about 5% of that 7% ascent so far but that still means double digit unemployment into 2011.

The key is when the U.S. economy can hit what Fed Chairman Ben Bernanke calls “escape velocity’ which is the point where there is enough momentum from consumers and businesses to increase employment and go from slump to bump.

The real question all of this raises is whether another round of stimulus is needed and on this front it appears the feeling by most economists is that it is not, at least not yet.  A recent poll by the WSJ showed that only 8 of the 51 practitioners of the “Dismal Science” they polled think “more is better”.

Even Mr. Sinai believes “lags in monetary and fiscal policy actions” should be given some time to “work through the system”.

Speaking for those who think another round of stimulus punch is in order, Nicholas Perna of Perna Associates said, “The most obvious reason is the need to offset the large fiscal drag just getting under way as state and local governments raise taxes and cut spending as they attempt to balance their budgets”.

Part of the problem is the structure of the American Recovery and Reinvestment Act of 2009 passed on February 17^th.  As of June 26^th only $56BN of the $787BN had been spent and a majority of that were transfer payments from the federal government to state governments.  The CBO estimates that the largest share of the spending will occur in 2010 with the amount scheduled for 2011 larger than what is expected to be spent in the current fiscal year.  So much for timely, temporary and targeted.

Investment Grade and High Yield CDS indexes were at 131bps and 941bps respectively on July 1^st.  They closed last Friday at 145bps and 982bps after topping out at 145bps and 1019 on Wednesday of last week and then backing off for a day.  Interestingly the High Yield index continued to fall on Friday from 999bps on Thursday while the Investment Grade index went back up to its Wednesday high after falling 3bps on Thursday.

With all of the experts weighing in it will be interesting to see how long the repercussions from the July 2 bomb of an employment report reverberate through the market place.

Enjoy the week.

Jim Delaney

July 10, 2009

On March 9^th of this year investment grade spreads on the CDX index peaked at 262bs and the high yield index peaked at 1925bps.  The S&P had its lowest close on this very same day at 676.53.

For all intents and purposes that still holds as the closest thing we know as a true peek over the ledge into the abyss.  That both credit spreads and equity prices hit their “ultimates” on the exact same date would, hopefully, dispel for many the anticipatory nature of CDS spread movement.  It is, at its correlative high, a coincident indicator at best. But, as a coincident indicator, with a slight flair for anticipation, it has held its own through the thick and the thin on the roller coaster ride we have been on since August of 2007.

Since the days when the last market was called the “Wild West” and the participants, “Cowboys” it wasn’t because they were sitting around an “X” shaped trading desk with Michael Milken at its nexus on the western shore of these United States but more for the lawlessness with which it appeared that market conducted itself with.

The CDS market is still under that cloud but, given the true economic benefits it provides it will survive and prosper.  Regardless of whatever Congress throws at it.

With all that said and knowing that the highest correlation between spreads and equity prices exists on the high yield end of the spectrum, and given that spreads; both high yield and investment grade have literally collapsed since the Ides of March, it is worth noting that some who are paid well to watch all things “Junk” have turned a bit cautious.

“There has been a huge rally in high yield [prices], with everyone repricing out of the depression scenario” Fred Hoff, manager of Fidelity’s High Income fund recently said.  But “anyone with outsized expectations is likely to be disappointed “Jeff Tjornehoj countered when asked about the outlook from here.  “There have been some fantastic returns, but those were historical high marks.  It’s unlikely we’ll see those again.”

If then, we refer to Isaac Newton’s third law, which states: for every action there is an equal and opposite reaction; and take into account the wisdom of Mssrs. Hoff and Tjornehoj what can we expect from here?

If we refer to another noted scholar; a Leonardo, but not da Vinci, Fibonacci, high yield spreads could go back to 1269 or even 1433 without ruining the downtrend they began in March.  Were this the case what would that imply for equity price you ask?  Replete with the requisite admonitions; the 1/3^rd and ½ retracements from the rally off of the March lows would put the S& P at 843 and 811 respectively.

Enjoy the weekend.

Jim Delaney

July 9, 2009

They say it’s not what you have but how you use it.

Alcoa (AA) has the aluminum, and reported 2Q09 results last night and Boeing (BA) uses aluminum to make planes and they’ve been plagued by a litany of problems in trying to get their new Dreamliner off the ground, literally, so I thought it would be worth a look at how things are going in getting from bauxite to business class.

AA reported a 2Q09 loss of 26 cents per share vs. an estimate of 38 cents.  We’ve heard a lot instruction from the media on how to react to this earnings season and it mostly points towards ignoring the current numbers and focusing on what management says about the future.

Given that the second most uttered phrase for the talking heads is “green shoots”, which ranks just under some form of “and now a word from our sponsor”, it doesn’t seem like besting estimates by 31% is something you’d want to ignore.  But hey, with all that time on the air, they’ve got to say something.

The real issue here could be that much of the recent demand for Aluminum has come from the China’s restocking effort and there are those that believe this is coming to an end.  We will only know the answer to that question in hindsight.  What we do know is that UBS recently cut its price forecast for the light but strong metal at the same time they were raising their price targets on a wide range of other things ferrous, non-ferrous and precious.

Deutsche Bank also follows the physical commodity space and their analysts expect production of 36.7MM metric tons, while demand is supposed to tally to somewhere around 35MM metric tons.  Aluminum inventories were up 165% YoY as of May and BoAML reported that there are currently 17 weeks of supply currently available vs. a long term average of 7.

AA’s stock hit its low on March 6^th closing at $5.22.  The CDS peaked the next business day 3/9 at 1156bps, which means that it would have cost you 11.56% of principal to insure AA’s debt against default back in March.  In true inverse fashion the stock has risen and the CDS level has fallen to $12.22 and 387bps respectively, recently.  Last night’s numbers: 449bps and $9.46.

And now for a trip on the Dreamliner, or in Boeing’s case, the nightmare in Everett.  Boeing recently announced that they delivered four more aircraft in 2Q09 than they did in the previous 90 days.  4 is not a big number by itself but if you do a little back of the envelope calculation 4x$150MM=$600 it gets a little more significant.  That’s the good news.  The bad news has been all over the news and its all about delays connected to getting their new plane in the air.  Manufacturing snafus have made delays in delivering the 787 about as frequent as fliers experience at your choice of airport around the world.

The most recent remedy has been the purchase of Vought Aircraft Industries which makes parts for the 787’s composite rear fuselage.  This is the second time BA has had to buy a 787 part’s supplier in its effort to build a commercial aircraft from mostly composite materials.

Moody’s Investor Service said there would be no negative effect on BA’s A2 rating although they did mention the purchase would diminish BA’s “financial flexibility”.

After the global explosion in spreads and falloff in equity prices in February of this year BA’s stock climbed from $29.36 on 3/3 to $52.83 on 6/8.  Ipso facto the CDS peaked at 295bps on the early March date and retreated until 6/5 reaching a nadir of 93bp.  The delay issues have since taken their toll with last night’s close showing a CDS level of 132bps and a stock price of $39.55.

Not to be lost in all of this is that as the need for greater fuel efficiency continues to grow the use of composite materials will probably also grow.  This leads to the obvious question of what that does for AL’s prospects and AA’s as a result.

Enjoy the week.

Jim Delaney

July 8, 2009

A list of the ironies that have associated economic events for the last two years and the market place’s reaction to them could fill an encyclopedia no less this humble page.  Not the least of which is that after the 10^th wettest June since records began being kept in 1872 the “green shoots” withered vs. grew.

Or maybe it was that June 2009 was also logged as the 2^nd gloomiest month at the Blue Hills Observatory outside of Boston where records have been kept since 1885.  “Gloom” is calculated based on amount of sunshine, precipitation and temperature.

The real culprit for the withering shoots it seems is not the weather at all but the employment picture or, really, the unemployment picture.  The number of unemployed and underemployed continue to weigh on consumption which, for the umpteenth time, is 70% of our GDP.

The chain of events that starts with a lot of people out of work always seems to link back to the housing market and more specifically the number of people walking away from their homes which results in an increased number of foreclosures, which results in lower home prices in the surrounding neighborhood, which results in lower levels of equity for the other homes in the ‘hood, which results in even more owners walking away.  Lots of gloom to be sure.

There are a few other factors helping to keep the foreclosure momentum going.  The first is that “the Obama foreclosure-prevention plan was ‘built around the subprime crisis model, not the unemployment model’” according to Michael van Zalingen, director of homeownership services for the nonprofit Neighborhood Housing Services of Chicago.

The plan Michael speaks of was designed to incent mortgage servicing companies and investors to reduce mortgage-related payments to 31% of monthly income.  The problem comes from the fact that many borrowers don’t have sufficient income to qualify for a loan modification.  At a recent gathering 45% of the 900 attendees fell into the “non-qualified” category according to Mr. van Zalingen.

Deputy Assistant Treasury Secretary Seth Wheeler has said “We recognize the unemployment is a significant complicating factor.  We are studying what more we can do”.

To the extent that focusing on foreclosures vs. employment is similar to trying to cure the symptom and not the disease it is also worth taking a look at where the majority of foreclosures are emanating from.

Here too it would appear tilting at the subprime windmill was as Quixotian as the phrase suggests as it appears, based on a study from McDash Analytics, a component of Lender Processing Services, a loan-level data source covering over 30MM mortgages, that equity and not loan type is the biggest factor in determining foreclosure probability.

The simplest way to present this is to say that while only 12% of the homes in the McDash database had negative equity they comprised 47% of the foreclosures.  Some other data that support the McDash claim come from the Mortgage Bankers Association: 51% of all foreclosed homes had prime loans, not subprime and the foreclosure rate for prime loans grew by 488% vs. 200% for subprime loans since the 3^rd quarter of 2006.

The home builder ETF, XHB, closed last night at 10.86, very close to the 10.93 price seen on April 7^th of this year and about halfway up the “green shoots” shot.

Names the CEC Strategy is short in this sector include: BDK, HD, KBH, MDC, RYL, SHW, SWK, TOL and USG.  At the risk of redundancy these shorts exist because of widening CDS spreads, first and foremost, being complimented by a falling stock price.  These positions were put on at various times during May and have been in place since.

To the extent that we hear over and over again that the recovery won’t begin until housing recovers it appears that since the real culprit in the house price decline is employment we now have the dreaded “second derivative” situation.

Enjoy the week.

Jim Delaney

July 7, 2009

Humpty Dumpty, which we all now know as an egg, was a poem originally written as a riddle 1810 for which “an egg” was the answer.  Egg shells crack when you drop them from a wall or even a few inches and the size of the mess is fully dependent on whether or not the egg itself has been cooked and if so, to what degree.

All this talk of eggs and walls and cracks does have a purpose as there could be evidence mounting that the nation we think of when we here the term “Great Wall” as opposed to HD’s “great fall” might be developing some cracks of its own in its efforts to stimulate its economy.

The controlled capitalism that China practices made it easier for the powers that be to insure that government stimulus programs were carried out as designed and have been a major factor in the GDP growth experienced in the “Middle Kingdom” while that same statistic was shrinking in just about every other economy across the globe.

At a time when loan volume is up about around 30% in China it appears bank earnings are down and because the new loans have been made as corporate profits were falling, the riskiness of those loans is something people are taking notice of.  “Everyone agrees that China’s stimulus lending is damaging future bank balance sheets” Daniel Rosen, a partner at Rhodium Group and a visiting fellow at the Peterson Institute for International Economics said.

It has been a trying time for the world as a whole and the deficits being piled up have caused consternation here in the U.S. as well as a downgrade of Ireland by S&P and the placement of Britain on negative credit watch.  Mr. Rosen understands the need to act but cautions that “pillaging bank balance sheets is not a strategy for recovery”.  Isn’t that a lesson we have all learned by now!

Wang Zhenning, spokesperson for the Industrial & Commercial Bank of China Ltd. counters Daniel’s warnings by saying, “We have never loosened our risk control assessment, not even for government-stimulus projects and infrastructure lending”.

Given that the government in China has, now, has only slightly more say as to whether Wang gets to keep his job than the CEO of GM in this country, it would be hard to imagine a different response.

Problems are also starting to appear at the sovereign level as China’s plans to hold its budget deficit to 3% of GDP are being scrutinized.  The questions arise because it is not certain that all of the debt being issued within the country’s borders is being properly recorded.

The push to get China’s economy moving has left local authorities with a requirement to get projects under way but has not provided the funding for those projects, resulting in exponential growth of local government liabilities.  Stephen Green, an economist with Standard & Chartered in Shanghai puts a spin on the adage about a “free lunch” when he stated, “There is no such thing as a free stimulus package”.  He goes on to say he believes, “There is a huge amount of unreported government debt, and we’re adding to it now clearly.”

Ma Guoxian, a specialist on public finance at the Shanghai University of Finance and Economics, concurs saying, “Giving local governments some freedom to stimulate the economy is necessary, but the problem is that we don’t know what they’re doing.  This could become a big fiscal burden in the future”.

At the sovereign level benchmark default protection for China peaked at 220bps on March 2^nd and moved down to 70bps 3 months later, almost to the day.  As of last night close that number was 77bps.

There are no CDS quoted on the local government debt that appears to be the crux of the issue here but with the country’s CDS trading near its lows the market appears to be ignoring the cracks at the moment.

Hopefully “All the King’s horses and all the King’s men” won’t be needed to put China back together again once the crisis has passed.

Enjoy the week.

Jim Delaney

July 6, 2009

Since August of 2007, when BNP Paribas froze withdrawals in three investment funds because of losses on CDO’s constructed with subprime mortgages and the world realized that if an institution with no clear link to U.S. housing could be thusly affected, than the everyone was pretty much fair game, there has been constant banter as to whether the U.S. or the U.K. and Europe would be more affected by the crisis and which side of the Atlantic would emerge first.  Leaving out of course, all the across-the-pond schadenfreudian hopes of big bad America finally getting what it deserves.

Throughout the crisis the pundits have kept score and also kept everyone up on the latest prognostications on who would cross the recovery finish line first.

With so much attention being paid to something that should only matter to the extent that if any region on either side of either ocean gets through this mess it would be the clearest sign yet that a true global recovery has begun I thought it interesting that the U.S.A and the E.U. posted exactly the same rate of unemployment for the latest reporting period last week; which for all intent and purposes makes it a dead heat at this point in the race.

As a recap and to help you handicap here are the numbers: U.S. Nonfarm payrolls fell 467K in June, May was revised up 8K, average hourly earnings were flat, U6 unemployed (which includes discouraged workers) 16.5%, average hours worked equaled 33 hours (an all time low) with revisions for earnings and hours worked being revised down for April.

Just in case you can find anything hopeful in those numbers here are some more: the mean duration of unemployment rose to 24.5 weeks and the median was up to 17.9 weeks.  Additionally, 53.5% of those unemployed in June were considered to have lost there jobs permanently which is the highest number in that category since the number has been kept.

In the Eurozone the 9.5% unemployment rate was the highest in 10 years.  Spain led the parade with a 18.7% banner rate, twice that of the E.U. but (do I see a green shoot?) down 1.5% from the previous month.  For a little perspective it should be noted that Spain’s claims were 49% higher than June of 2008.

The ECB, like our Fed recently, decided to keep rates at current levels but the difference here is that our shortest term rate is effectively zero while the ECB’s is 1%.

It should also be noted that non-Obama-administration economists believe that unemployment will peak at around 10%-10.5% some time in 2010 while economists watching Europe think the number on their side will be 11%, also topping out early next year.  Given how well these peak rates have been publicized it makes the market’s reaction to the numbers that much sillier.

ECB President Jean-Claude Trichet said he expected euro-zone “economic activity over the remainder of the year to be weak” and that “further deterioration in labor markets” should be expected.  When asked if the ECB was considering any further steps to arrest the decline he replied “we consider that what we are doing now is appropriate”.

CDS quotes exist for countries within the Eurozone but not the region as a whole.  Given this I thought it would help to look at Germany as they are the largest economy in the group and Spain because they currently have the highest unemployment rate as well as a peak at how Uncle Sam is doing in the sovereign market.

Germany’s CDS peaked at 92bps in February of this year and has since traded down to 23bps for rising to its current level of 32bps.  Spain also hit its high in February but the level was 169bps, a tad higher than Germany.  Spain’s CDS closed at 863bps on Friday.

As for the U.S of A., the high for default protection on the most widely held debt in the world was 100bps (priced in Euro’s because if we go the Dollar goes too!) on 2/24/2009.  For all of the issuance we are currently trading just 9bps off the lows hit in mid-May of this year at 35bps as of Friday’s close.

Enjoy the week.

Jim Delaney

July 2, 2009

It took me a while to figure out why the market did not react negatively to the additional 79,000 job cuts the ADP Employment Change report revealed yesterday, missing the forecast by a full 20% and then it struck me; with one of the largest redistribution of wealth programs in progress, it doesn’t matter, nobody will need a job anymore.  Healthcare will be free, unemployment benefits will continue to be extended and the top 2% of the residents in the new UUAS (Union of United American States) will pay for everything else through a system of taxation that will make being successful about as much fun as Bernie Madoff is going to have for the next 150 years.

California Governor, Arnold Schwarzenegger declared a fiscal state of emergency yesterday to try to break the budget impasse in that state resulting from years of monetary mismanagement.  As CA is finding out; “when the outflow exceeds the inflow the upkeep becomes the downfall”.  Even having a co-cigar smoking chief of staff (D., Susan Kennedy) hasn’t seemed to help.

California is not in distress alone as it was recently reported in the WSJ that unemployment rose in all but two states last month and reached its highest level in 33 years in eight of the 50.  Michigan has at least 14.1% of its population out of work, a level not seen since the early 80’s.  Oregon’s percentage of unemployed came in at 12.4% and Rhode Island and South Carolina posted rates of 12.1%.

The problems in the auto industry have Michigan in the spotlight for another reason as well; a dramatic increase in welfare applications is expected in January as one in seven of the 680,000 residents now receiving jobless benefits see those expire.  “We’re expecting a huge influx of applications in the next few months”, Barbara Anders, Dir. Michigan Dept. of Human Services.

States are looking at a number of options to increase revenues with CA and PA in particular proposing what is known as a “severance tax” on oil and natural gas properties.  Arkansas instituted a similar tax in January of this year and Alaska raised its severance tax last year.  “Given the economy, any source of revenue is significant”, a spokesman for Pennsylvania Governor, Ed Rendell said recently.

CDS levels for CA have actually come down recently closing at 290bps last night after peaking at 331bps on June 23^rd.  Prior to the credit crunch CA’s CDS’s ranged between 70-90bps and hit their all time high in December of last year at 456bps.

Michigan’s CDS follow a similar path with slightly different numbers as pre CC levels were around 50bps and the December 2008 high was 406bps.  MI’s CDS level was 282 as of last night’s close.

Now that you’ve enjoyed the short week, enjoy the long weekend!

Jim Delaney

July 1, 2009

If sixty is the new forty and as the hedge funds were saying last year, flat is the new up, then watching the market yesterday can only lead one to believe that breaking windows is the new window dressing.  If PM’s want to own the hottest stocks when the market is on its way up then maybe they used yesterday to off load the dogs they had on the books.

Last Friday, along with news that consumers were saving more than they had at anytime since 1993 as the personal saving rate was reported by the Commerce Department to have risen to 6.9% came the release of the University of Michigan/Reuters Consumer Sentiment Index rising to 70.8 breaking through the previous high of 70.3 set in September of last year.

Yesterday’s release of Consumer Confidence by the Conference Board contradicted last Friday’s number and not only declined from the previous post of 54.9 but fell short of expectations by 6 points or roughly 10.8%.

Contradiction seemed pervasive in June as headlines like “Corporate Bonds Are Signaling Growth” were countered with others reading; “Summertime, and the Credit Ain’t Easy”.

A look at the CDS indices shows a similar pattern.  On the investment grade side the index closed at 138.0 on the last day of May and at 131.4 on the last day of June.  Had you Rip Van Winkled it would appear to have been a quiet month with a slight improvement in credit spreads; something not unexpected during what are usually those “Lazy, Hazy, Crazy Days of Summer”.

As New Yorkers are all too well aware June was not hazy and lazy but the weather was crazy as it was supposedly the wettest June since records have been kept.  The credit markets were a bit more stormy than the opening and closing quotes would lead you to believe as within the sixth month IG spreads were as low as 120.6 on 6/5/2009 and as high as 145.8 on 6/22/2009.  Slicing and dicing those numbers shows that the range for the month (25.2pts) was just about four times the movement for the entire month (6.6pts).

High Yield spreads started June at 1036.7pts; broke through the 900pt level on 6/12/2009 to close at 896.4pts and then made their way, right quick like, to 1065.1pts in just six trading days.  Winding up the month at 948pts the HY index improved by 88.7pts or 8.55% over the month but ranged 168.7pts in the meantime.  The movement to range ratio was just under 2 on the high yield side but reasonably mind bending when you experience an 8 and a 10 handle on the index within the same month.

The debate as to whether the green shoots are growing or wilting seems destined to be fought in the media.  With low summer volumes and lack of conclusive evidence as to which side is winning, the forecast is uncertain at best but with the rain in NY continuing into July and the kind of volatility seen in June keeping your powder dry and yourself seems to be the most prudent way to approach the new month.

Enjoy the short week,

Jim Delaney

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