Monday, February 28, 2011

Market Review February 28, 2011

Market overview for February 28.


Corporate Market: Decent day today as some issuance came back with Juniper Networks doing a billion in 5s, 10s and 30s (existing 30s sold off on the deal) and Arcelormittal announcing a benchmark size deal in 5s, 10s and 30s.  



As I have so graciously outlined, issues hitting their highs continue to trounce issues selling at their lows. Tells me that credit is still being sought after. Personally, I would still be a buyer of credit - the hell with the polyannas saying bubble and risk due to rising rates - as the risk premium relative to the yield is still attractive and as far as rising rates, credit should provide excess returns vs treasuries or you can swap into floating. For disclosure, I am long LQD.

Equities: Equities eeked out about 50bps on the day as oil fell somewhat on assurances supplies will be maintained. Investors also seemed heartened by Fedspeak about increasing oil prices not affecting growth.

Advance-declines were a little better than 2 to 1 positive on the New York Stock Exchange, and negative by 2 issues on Nasdaq about dead flat. Up/down volume was 2 to 1 positive on New York with total volume was just under 1.25 billion. Nasdaq traded just over 2 billion shares, and had about an 11 to 9 negative ratio.

As I have continually maintained, mid-cap growth is still the sector to be in.  Here's a little snapshot of YTD large cap growth (SPY), mid cap growth (IWP) and small cap growth (IWO).  I am still overweighted mid cap growth in the passive portfolio with small cap growth bringing up the rear.


Personally, I think equities are getting a bit stretched, but I don't fight tides.



Wednesday, February 23, 2011

Illinois Launching a $3.7B deal

New Illinois deal:

ISSUE: State of Illinois Taxable General Obligation Bonds
RATINGS: A1/A+/A (M/S/F)    S/D: 3/10/11      F/C: 9/1/11

MATURITY     AMOUNT           UST                 SPREAD
3/1/2014    100,000M       1.250 2/15/14        +280 BPS
3/1/2015    300,000M       2.000 1/31/16        +235 BPS
3/1/2016    600,000M       2.000 1/31/16        +280 BPS
3/1/2017    900,000M       2.625 1/31/18        +250 BPS
3/1/2018    900,000M       2.625 1/31/18        +280 BPS
3/1/2019    900,000M       3.625 2/15/21        +240 BPS


Attractive in the short/mid maturities, but don't know If I would take the risk at these levels.

The Kingdom - House of Saud Trying to Placate the Masses

The House of Saud seems shaken by events taking place all around them:


IYADH (Reuters) - Saudi King Abdullah returned home on Wednesday after a three-month medical absence and unveiled benefits for Saudis worth some $37 billion in an apparent bid to insulate the world's top oil exporter from an Arab protest wave.
Before Abdullah arrived, state media announced an action plan to help lower- and middle-income people among the 18 million Saudi nationals. It includes pay rises to offset inflation, unemployment benefits and affordable family housing.
No, this isn't a geopolitical blog, it is a market blog.  These are market events.  These actions have the ability to become game changers, and we had better understand the events and their repercussions.  Should we start to see the "winter of discontent" spread to the House of Saud, watch oil, watch margins in just about every industry, watch global growth.  Park the Expedition, unpack the smart car.


Disclosure:  long just about everything that would get smacked.

Libya Turning Black Gold into Black Smoke?

This on the tape (Time via Reuters)


Time Magazine's intelligence columnist reported on Tuesday that Libyan leader Muammar Gaddafi has ordered his security forces to sabotage the country's oil facilities, citing a source close to the government.
In a column posted on Time's website, Robert Baer said the sabotage would begin by blowing up pipelines to the Mediterranean. However he added that the same source had also told him two weeks ago that unrest in neighboring countries would never spread to Libya -- an assertion that has turned out to be wrong.
"Among other things, Gaddafi has ordered security services to start sabotaging oil facilities," Baer wrote. "The sabotage, according to the insider, is meant to serve as a message to Libya's rebellious tribes: It's either me or chaos."
Who remembers the oilfields burning in Desert Storm? 


If this is true, not good.




Disclosure:  I am long oil.

The Shame of the US Political process

Once again, our system of government is showing what it has truly become.  Gone are the days of debate and making tough decisions, gone are the days or a government of the people, by the people and for the people.  The founding fathers would be ashamed of the cowardice.


Most Democratic members of the Indiana House of Representatives have decamped for Illinois to avoid being forced to vote on legislation that would allow workers in private sector unions the right to opt out of their unions and not pay dues, officials said Wednesday.
In a statement released Wednesday morning, the Democratic members, who were trying to prevent a quorum in the House, said: “We will remain here until we get assurances from the governor and House Speaker Brian Bosma that these bills will not be called down in the House at any time this session.”
Following the pitiful conduct by Wisconsin:


The Democratic state senators have fled the state as a way of preventing a vote on the union legislation. Starting Tuesday, those senators, who are in Illinois, will have to watch from afar as Republicans continue the work of governing without them, taking up matters from the mundane to the controversial. 
Now, before I am accused of being a covert Fox neocon, let me just say that this is not about mere politics - it is about the the subversion of the constitution and all that this country has worked for and stands to lose (yes, this is in motion).  It is a shame.  Is it any wonder many nations do not want our democracy?

Risk, Whats Up?

Wow, equities got creamed today in the wildebeest stampede out of risk.  Or was it?

Lets look at equities:

Yep, thats an official creaming.  Where did it take place?  Lets look:


I found it interesting that energy did not sell off anywhere near as much as the broader market.

Observe the following chart (courtesy FINRA):

 Last I checked, the credit markets are risk markets.  Look at the high yield data today.  While volume wasn't huge (by any stretch), those issues trading did okay.  Note the new high/low data.  I understand that energy companies invested in the region are not overly represented in this data set, but this does not point to a broad de-risking.

Yes, Libya is gonna burn before its over, but signs don't point to an apocalypse.   That said, warships steaming towards the Suez, chatter about Iran, and the spreading "winter of discontent" in the middle east, don't make me think of going all in on a down day.  Problem is, risk is increasing (yep, Europe still has issues, Africa and the Middle East) and we have better, but still soft, domestic numbers coming in.  I am kinda sitting on the sidelines here.  Still in mid-cap growth with a leg in small-caps and preferreds.

Tuesday, February 22, 2011

Libya - Corporate Threat Assessment

Trying to compile some companies doing business in Libya.  My concerns stretch far further than Libya at this juncture as I believe we a re seeing a fundamental shift in the governing of Northern African and Middle Eastern countries.  This is not the end of the conflict, rather we appear to be in the 5th/6th inning.  It is going to get worse.

Libya exports some 1.1 million barrels of crude a day from production of 1.6 million barrels -- ranking it about 17th among world oil producers. And it has the largest proven oil reserves in Africa.

The United States, the world's largest consumer of oil, does not import any petroleum from Libya. But disruptions elsewhere can raise the price of oil worldwide.


From Stratfor:

Unlike energy produced in most African states, nearly all of Libya’s oil and natural gas is produced onshore. This reduces development costs but increases the chances that political instability could impact output — and Libya has been anything but stable of late. 
Libya’s 1.8 million barrels per day (bpd) of oil output can be broken into two categories. The first comes from a basin in the country’s western extreme and is exported from a single major hub just west of Tripoli. The second basin is in the country’s eastern region and is exported from a variety of facilities in eastern cities. At the risk of oversimplifying, Libya’s population is split in half: Leader Moammar Gadhafi’s power base is in Tripoli in the extreme west, the opposition is concentrated in Benghazi in the east, with a 600 kilometer-wide gulf of nearly empty desert in between. 




BP - The British firm ended a 30-year absence from Libya in 2007 when it signed its biggest-ever exploration commitment through a bilateral deal. It will spend at least $900 million to search the onshore Ghadames area and offshore Sirte basin with 17 exploration wells.

Royal Dutch Shell - The London-listed company was awarded a gas exploration permit in 2007 for areas in the Sirte Basin, and was also awarded permits in 2005.

ExxonMobil - In February 2008 the U.S. oil major agreed with Libya's national oil company to invest $97 million plus tens of millions in fees in offshore hydrocarbon exploration. The company in 2005 struck an exploration and production-sharing deal with Libya's state oil company that covers the Cyrenaica Basin, covering 2.5 million acres, from deep to shallow waters.

Occidental - The company, which began business in Libya in 1966, reported first-quarter 2009 net production from Libya of 8,000 barrels per day, down from 22,000 bpd a year earlier. In late 2007 it won gas-focused permits to explore areas of the Sirte basin, and in 2005 was the biggest winner in Libya's first licensing round.

Statoil - Statoil participates in land-based oil production and exploration activities in the Mabruk field and in the Murzuk basin. A spokesman said it was keeping its office in Tripoli closed and that a "handful of expatriates" were leaving the country.



Just as a reminder:

While somewhat stale, this should help give you a picture of where the oil comes from in Africa.
Away from oil:
Italy's UniCredit is 7.5-percent-owned by Libyan investors;


While oil is the natural first strike in de-risking exposure to the area, should the political contagion spread further into the middle east (think Iran and Iranian influenced countries) we could see further de-risking on a more broad scale.  Also wise to watch the Euro as Europe is the main benefactor of Libyan oil.
The Euro today is showing strains against the dollar:

More as I get it.

Monday, February 14, 2011

Credit Suisse Issues Cocos

Interesting development in Switzerland with Credit Suisse drawing up an exchange of tier 1 notes into contingent capital (Cocos) notes in order to conform to Swiss TBTF regulations.  While it still has to be approved by shareholders - due to the potential issuance of shares - the deal could be the start of using contingent capital notes to replace tier 1 notes which will not be afforded the capital treatment they have enjoyed under new BASEL rules as well as country regulations.  While this is a private transaction with existing hybrid holders, it will help to raise awareness of the vehicle as public transactions start to occur.


Swiss banking giant Credit Suisse Group AG (CS: News ) Monday said it would issue about 6 billion Swiss francs (about $6.16 billion) in the form of contingent capital to meet future capital requirements under the proposed new capital rules in Switzerland.
The Tier 1 buffer capital notes would be issued to its strategic investors, Qatar Holding LLC and The Olayan Group. Such notes would be paid up after October 2013 for cash or in exchange for Tier 1 capital notes issued in 2008, the company said.
The form of contingent capital will satisfy an estimated 50% of the high trigger contingent capital requirement under the rules of the country's financial regulator FINMA as part of the proposed Swiss TBTF-regime. The Zurich-based bank said it is well ahead of schedule to meet the new capital requirements by 2019.
Under the agreement with the investors, Credit Suisse would issue $3.5 billion of Tier 1 BCN (buffer capital notes), with a coupon of 9.5%, and 2.5 billion francs of BCN, with a coupon of 9%. The issuance will be for cash or in exchange for $3.5 billion of 11% and 2.5 billion francs of 10% Tier 1 capital notes issued in 2008.
In the deal, the BCNs will be converted into Credit Suisse ordinary shares if the company's reported Basel III common equity Tier 1 ratio falls below 7%.
The bank said the conversion price will be the higher of a floor price of $20/20 francs per share, subject to customary adjustments, or the daily weighted average sale price of the shares over a trading period preceding the notice of conversion.

Saturday, February 12, 2011

IMF Stretching to Replace the Dollar

UPI had the following article posted.  Interesting concept, but I would imagine that many participants would convert into the dollar.  I can, however, imagine a creative way to make the dollar basket concept into a quasi reserve currency.  IMF has more work to do.

The International Monetary Fund has suggested a replacement for the U.S. dollar as the world's reserve currency, but one that is not a different currency.
In a report issued this week, the IMF said Special Drawing Rights, which were created in 1969 to represent a claim on currency among IMF members, could have an expanded role in the international financial system.
SDRs are converted, at the request of a borrower, into whatever currency the borrower chooses. The rates are set by the IMF against a basket of other currencies and are, thus, more stable than the U.S. dollar, CNNMoney reported Friday.
IMF Managing Director Dominique Strauss-Kahn said SDRs have a few "technical hurdles" to overcome but that "over time, there may be also a role for the SDR to contribute to a more stable international monetary system," he said.
Analysts say the system could stabilize energy prices, as oil is traded in dollars. As such, when the dollar declines in value oil is more affordable overseas, making the dollar responsible for some of the spikes in energy costs.

Thursday, February 10, 2011

European Debt Problems?

Nope, no problem here.


The European Central Bank stepped in to buy Portuguese bonds on Thursday, traders said, after yields on the country's debt hit euro-era highs on a perceived lack of progress towards resolving the bloc's year-long debt crisis.
Portuguese 10-year bond yields soared to 7.656 percent, surpassing the previous record set in November, before settling marginally lower on the day.

ECB - Publish the Test Results!

Saw this on DJN and the first thing that came to mind was "really?".  Now, forgetting for the moment the farce that was the first European stress test (we'll recall it was like a spa day), how could publishing results of the stress test be problematic?  The only reason I can think of is if the system has not improved as much as thought and there is a fear of "renewed" focus (ie. sell off).



European Central Bank governing council member Ewald Nowotny said Thursday he is sceptical about plans to publish detailed results of European bank stress tests, but acknowledges that there seems to be a political majority in favor of doing so.
The bank stress tests are viewed as an important tool to evaluate the stability of the financial sector and individual institutions in likely crisis scenarios.
The U.S. has chosen to publish specific details about the health of their banks, and the question has arisen as to whether Europe should follow suit.
The issue was discussed at the inaugural meeting of the new European financial sector watchdog, the European Systemic Risk Board, which has the ECB governing council members on its board.
"We have had a discussion on whether to publish detailed results, and I think there's a political majority that wants to do it in the same manner as the U.S., " Nowotny said.
However, he added: "I consider it [to be] very problematic to publish the stress tests." 

Inflation - Evidence Continues to Mount

Thought the following story on DJN was interesting.  All we keep hearing is that inflation is low and contained and as a result, we don't need monetary policy shifts.  I beg to differ.  Inflation is indeed out there and is beginning to be pushed onto the consumer.  This will be evident enough shortly.  As a result, stay flat to short duration and overweight spread product.


(Dow Jones)- Major consumer goods companies are being forced to reassess their business models in the face of soaring commodity costs as they attempt to minimize damage to profit margins and scale back losses.
Whether through raising prices, cutting costs, adjusting product size or altering ingredient mix, companies such as Unilever PLC (ULVR.LN), Reckitt Benckiser (RB.LN) and Kraft Foods Inc. (KFT) are all having to take action as rising input costs show no sign of abating.
As escalating costs have hit all categories of commodities, no single company is better placed than another, so their differing strategies will be under close scrutiny.
 Unilever predicted a 400 basis point hit to full-year margin due to escalating commodity costs while U.S. rival Procter & Gamble (PG) said earlier this month its commodities bill will total $1 billion for the year to the end of June, more than double expectations.
 One needs look no further than the rise in ten and thirty year treasuries and the steepening of the curve.  Ben, do you shop?

Tuesday, February 8, 2011

Fixed Income Update

A post on some of the issues in the fixed income markets today.

Short-dated U.S. government debt prices fell to session lows on Tuesday after remarks from Richmond Federal Reserve President Jeffrey Lacker suggesting the central bank should scale back its $600 billion bond purchase program.  Given the recent data which points towards the footings of a recovery, I would expect we will hear more about scaling back QE2 which will continue to result in pressure on the front end of the curve.

Shorter-dated German bonds underperformed longer maturities on Tuesday with euro money market rates expected to come under renewed upward pressure after a low take-up of European Central Bank loans drained excess liquidity.  Commercial banks borrowed a total of 218 billion euros from the central bank's weekly and one-month tenders, less than the amount expiring and resulting in a 66 billion euro drain of surplus funds.  The liquidity taken out of the system does not help support fund raising by EU members and/or the Euro.  Should this continue, we should expect pressure on front end rates and the currency.

Moody's Investors Service said its measurement of debt defaults worldwide fell to 2.8 percent in January, a marked improvement form the 12.6 percent rate a year earlier. For the first time since 2007, Moody's said, none of the corporate debt issuers that it rates defaulted during the month. By comparison, there were eight corporate defaults last January. The January default rate was down from 3.2 percent in December. The ratings agency said the monthly decline in defaults is part of a gradual improvement in credit markets that should continue through 2011, although debt-laden European governments like Spain and Ireland could endanger the outlook. "We continue to expect stable, low default rates for the near future," Albert Metz, Moody's director of credit policy research, said in a statement. But Metz warned that if lenders become jittery and financing dries up again defaults could rise, particularly in Europe. For January, the U.S. speculative-grade default rate fell to 3 percent from 3.4 percent in December. In January 2010, that rate stood 13.7 percent.  By next January, Moody's predicts that the global speculative-grade default rate will decline to 1.5 percent. It expects the default rate will decline to 1.7 percent among U.S. speculative-grade issuers and to 1.1 percent among European speculative-grade issuers.  Lower default rates imply lower risk which further implies lower spreads (risk premiums) on corporate bonds.  While the market has tightened expecting this outcome, I believe it has further to go and that credit will outperform the risk free and generate positive excess returns.

Bottom line:  While risk free debt gets hit globally, risk assets will continue to perform - although not as well as they have.  We can see the risk appetite through the EETCs getting done, CMBS, drive by high yield deals and IG credit with virtually no covenant protection.

On the credit note:  let these cov lite and no covenant deals get done, do your homework and buy the prior issues with better covenant protection as documents are rarely priced into the market.  A little homework can help mitigate risk and lead to outperformance.

About Me

A student of the markets that has held portfolio management, analysis and trading positions for over 15 years.