Monday, November 28, 2011

November 28, 2011 Credit Markets

Risk on readers, risk on. Decent initial estimates of US holiday sales and more European "solution pablum" lead the market down the "hakuna matata let's add some risk" path. Too early my friends, don't buy the hype. There has been no viable solution presented as there is no viable solution. There is no "periphery" issue, only a European issue.

Decent new issue calendar today:


Issuer                                Rating            Size             Mat      Pricing
Scripps Networks               Baa1/A-        $500mm        5y          T+180
National Fuel Gas               Baa1/BBB    $350mm       10y          T+295
Pacific Gas & Electric        A3/BBB+     $250mm       30y          T+160
AGCO Corp-CoC,144a       Ba1/BBB-    $300mm       10y           5.875%
Tesco-CoC,144a                 A3/A-          Bench            3y          T+165-170
Tesco-CoC,144a                 A3/A-           $                   5y          T+180-185
Canadian Pac Railway        Baa3/BBB-   $500mm      10y           T+275
Canadian Pac Railway        Baa3/BBB-   $                 30y           T+300
DTE Energy-$25                Baa3/BBB-   $150mm       50NC5      6.50%

The DTE's are junior subordinated debt ($25 par)where interest can be deferred for up to 20 quarters and callable at par in 2016.

You look at the spreads on the two energy companies and you realize that there is risk beyond their regulated subs (NFG does own timberlands). 

Breadth wasn't all that impressive in the credit markets today as Ig was decidedly negative, HY was almost flat and converts positive on small volume:


bottom line - don't like risk here.  The deals brought today are interesting and have decent risk premiums, but I don't see out-performance here.

Monday, November 21, 2011

Bond Market Monday - We Have Learned NOTHING!

As today's tile might suggest, I am thoroughly dismayed at the complete ineptitude our (yes, I am obviously from the states) elected officials are displaying.

(NY Times) Leaders of the Congressional committee charged with finding at least $1.2 trillion in deficit reductions conceded on Monday that panel members had failed, setting up what is likely to be a yearlong political fight over the automatic cuts to a broad range of military and domestic programs that would go into effect starting in 2013 as a result of their inability to reach a deal.  In a statement, the panel’s leaders, Representative Jeb Hensarling, Republican of Texas, and Senator Patty Murray, Democrat of Washington, said, “After months of hard work and intense deliberations, we have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline.”
Really?  Imagine if you will a world in which these same officials could read the paper:

(WSJ) A selloff in euro-zone bonds continued on Monday, as investors shrugged off the election of a fiscally conservative government in Spain and continued to clamor for bold action by European policy makers. A day after Spain's Popular Party won a sweeping victory over the ruling Socialists in the general election, Spanish borrowing costs approached their highest levels since the European debt crisis began. Italy's 10-year yield continued to rise, as did yields for Portugal, Ireland and Greece. The yields on the highest-rated European bonds also pushed upward, with the Netherlands, Austria, Finland and France all rising.  The German government repeated its view on Monday that the euro-zone crisis was caused by a lack of fiscal discipline and economic competitiveness in some nations on the euro periphery—and that the solution therefore lies in overhauls in those countries, not in ECB bond buying or collective European debt issuance.
Sound familiar?  The US government seems focused on going down the same failed road as pressured European countries.  I guess its a good thing our GDP is much bigger and our printing presses are even bigger than that!  The US is rapidly going from the "last best hope" to the "least worst refuge".  Its only a hop, skip and stumble away from "Treasuries, yeah they used to be safe".  Imagine what the rating agencies might rate US debt if they weren't under scrutiny from the government - do you really want to downgrade the country that regulates you and is investigating you?  No sir, not me.


Standard & Poor's Ratings Services said its ratings on U.S. sovereign debt wouldn't change because of federal lawmakers' latest failure to reach a budget deal--as long as Congress continues to follow the rules it set in August.The short statement came after a congressional deficit-reduction committee tasked with slashing the U.S. budget gap failed to reach an agreement, a move that triggers mandatory cuts to military spending and some social programs starting in 2013.S&P still rates the U.S. at double-A-plus, the second-highest possible rating, and has a negative outlook on the debt. The credit-ratings service shook markets in August when it downgraded the country's then-sterling credit status, citing political gridlock that was hindering lawmakers' ability to significantly reduce deficits
Moody's Investors Service confirmed Monday its triple-A rating on the U.S., saying that the failure of the congressional supercommittee to reach a deficit-reduction agreement isn't decisive, according to a company representative."The rating for the U.S. government is Aaa with a negative outlook," the rating company said."As Moody's stated on Nov. 1, the deliberations of the Joint Select Committee would be informative for the rating analysis but not decisive, and failure to reach an agreement would not by itself lead to a rating change for the U.S. government," Moody's said Monday.
It's almost laughable.


In any event, here we are.  "Risk free" had a good day being the global safe haven.  Curve flattened a bit as buyers bid the long end.



Credit markets were somewhat silent as the holiday shortened week is not known for issuance - even at these lower absolute rates.  CDX IG was out 3bps, cash was weaker and thin.  CDX HY down a buck change to $88.75.  Financials continued to take it on the chin - out 5-30bps in the 5yr.  BAC and Goldie taking it the hardest - out around 30bps.  We are starting to see some interesting trading/swap opportunities in some of the financial names as you can shorten and pick (at the same level in the cap structure to boot).  MS is just one example here.  If you are going to own financials, optimize your positions (well, you should always be doing this, but.....)!

Volume in credit was lower and negative, reflected in today's Trace data:


Morgan Stanley printing all over the most actives with Jefferies absent (was one of the most active in convert space).   Compiling data and details on the Jefferies complex, not sure whether to post here or to my SeekingAlpha slot.  Got thoughts - hit me with them.

Sorry for the brief commentary, this guy is tired.  Lets see what happens tomorrow.  Reading that S&P futures are stronger overseas.

Later.


Friday, November 18, 2011

Europe - Nighttime in the Switching Yard

Once again (or better yet, still) all eyes are focused on Europe.  My take:



Europe's financial situation (sovereign and banks) is a trainwreck.  There is no solution for the situation.  It is too big, resources are too thin and political/economic idealogies are to far apart.

This morning the Daily Telegraph released a document sourced from the German government with suggestions for an EU treaty change.  Contained within it:
The establishment of a procedure for an orderly default as part of the ESM:
For member states that are covered by an ESM programme, but despite complying with it are unable to achieve debt sustainability, the possibility of budgetary interventions is not sufficient. Therefore, there must also be the option of an orderly default in order to reduce the burden on taxpayers ( in the other eurozone states), and also to provide the affected country with an opportunity for a fresh start.  In the present ESM Treaty the possible participation by private creditors through socalled "collective action clauses” (CACs) is not sufficient.
The ESM should consider the request made by a member state for relief loans against the criteria of debt sustainability. If this is negative, the affected member state would instead receive loans for a limited time only, during which the procedure for an orderly default would be prepared.
In order to make sovereign defaults possible where they are unavoidable, the threat of instability in the financial system resulting from such a default must be able to be credibly excluded. A plan to maintain the stability of the financial system in the event of an orderly default needs to be developed in close co-operation with European banking regulators. This would determine which banks would be restructured and/or recapitalised, which will necessitate the drawing up of Europewide rules on bank restructuring.

Document here:  s3.documentcloud.org/documents/267781/brusselsembed.pdf

Germany sees the writing on the wall - sovereign defaults and the recapitalization of the banks.  Prepare for the worst and hope for the best.  It is not time to enter the fray with value eyes for there is only a value trap waiting.  Liquidity is non-existant, buyers are gone and there is no plan.  Continue to avoid European issues.

Thursday, November 17, 2011

November 17, 2011 Credit Market Recap

The tone in the fixed income markets today was one of de-risking as Spanish yields on the auction blew out.  Eurozone concerns continue to weigh heavy on the markets and the financial sector has been bearing the brunt of the smackdown.

The general tone in the credit market was somewhat negative as CDX NA IG/HY 17 were off a tad more than 1% with the indices adding 1.7 and 12.6 bps respectively.  European CDX fared slightly better with the series 16 shaving 5bps off the index.

Source: Markit

Breadth in the market was negative (as one would expect given the magnitude of financial issues)


FIG issuers have been body slammed by the turmoil with JEF (and brokers) leading the way:


The above chart is JEF 6.875% '21.  Closed out at $78 for a 10.6% yield (the 5.125 '18 are $78.25 9.8% and the 8.50 '19s are $86.25 11.2%).  I find this to be somewhat interesting.  Obviously these maturities are further out and should they come out of this situation, the bonds will perform well.  With this in mind, we buy the lowest cost exposure - the '21s.  Ahhhhh, but what do some of us who got kicked in the teeth in '08 remember?  FINANCIALS ARE BINARY!  They are good or not.  The equity continues to trade down after hours hitting fresh two year lows.  That said, this is a situation that warrants further investigation for value players (like myself).

And Morgan Stanley....well MS has never fully recovered from "the crisis" and gets taken to the woodshed faster than the rest.  See MS '21s closing +525 (remember a scant month ago the re-opened this baby at +335) out 50bps.   Ouch.   Goldie fared little better with GS '21s 425/15 out 35bps.


The new issue market was somewhat robust with approximately $5B in deals announced.


Personally, I have liked LLL in the defense space and think it warrants consideration in the 5yr.


Yield Pain in Spain

Ay, que es un alto rendimiento

The Spanish Treasury Thursday paid the highest yield on a 10-year government bond at auction since the inception of the euro but garnered enough demand to sell EUR3.563 billion of the bonds (the plan was EUR4 bil). The maximum yield paid for the 10-year bond, which matures January 2022, was 7.088%, a euro-era high.

Initial Claims 11-17 - My 2 Cents

From the initial claims release this morning:
In the week ending November 12, the advance figure for seasonally adjusted initial claims was 388,000, a decrease of 5,000 from the previous week's revised figure of 393,000. The 4-week moving average was 396,750, a decrease of 4,000 from the previous week's revised average of 400,750.

The advance number of actual initial claims under state programs, unadjusted, totaled 360,139 in the week ending November 12, a decrease of 42,355 from the previous week. There were 409,548 initial claims in the comparable week in 2010.

States reported 2,935,466 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending October 29, a decrease of 18,358 from the prior week. There were 3,961,485 claimants in the comparable week in 2010. EUC weekly claims include first, second, third, and fourth tier activity.
We seem to be getting some traction in reducing the number of initial claims, which should begin to help prop up employment figures.  While not an out of the park number, it is a decent sign - especially when combined with the reduction in EUC and EB.



Now we have to make a more meaningful impact on the continuing claims series.



All in all, I think this should be taken as a modestly positive sign for the US economy.  Absent the problems in Europe, Treasuriy prices should drift lower (higher yields) given the firming employment picture.  Unfortunately, we can't invest "absent the turmoil in Europe" so it is still too early to set a short in UST.  This may, however, reinforce the premise that corporate America is solid credit iis still a decent play (the equity market is dictated by the European whack-a-mole).

November 16, 2011 Corporate Bond Issuance

Corporate issuance slowed today from its breakneck pace.


I personally think there is some value remaining in corporates as the credit risk premium is still attractive (not fat and juicy attractive, but attractive nonetheless).

Wednesday, November 16, 2011

November 16 Market Review

Another day of the "de-risking" trade.  Anyone else getting tired of the "Europe has a plan!", "Europe has no plan" volatility.  Lets cut straight to the point - there is no possible plan!  Brushing aside for the moment the constitutional crisis enveloping the continent, what we have is a downward spiraling ecosystem.  Debt piled on when times were good (and a haughty wink-wink, nod-nod by the EU regarding debt levels) turned to lead as the system slowed.  In order to tame the beast, austerity measures are bantered about which are growth killers (not to mention they get in the way of the mountain of entitlements the populace is used to) and result in higher relative debt/GDP ratios for the foreseeable future.  The populace chokes, governments collapse and the sovereign crisis continues.  Then comes the good part - the crisis spreads (probably a poor choice of words, I will admit) to the banking sector (poor choice because it has always been in the banking sector as well) which compounds the problem, further retards growth and ushers in a "new 2008" crisis.  Good stuff, no?  Yeah, just wait until we address the capital shenanigans the Eurobanks like to play with risk, risk models and risk management (recall what AIGFP was used for - removing capital hogs from Eurobank balance sheets).

In any event, enough of my discourse, what the hell did we see out there today:

Equities:


After grinding back up from an out of the gate drop, Fitch come out with a report on US banks and their exposure to Europe.  Some snippets:
Contagion Effects Potentially Large: U.S. banks could be greatly affected if contagion continues to spread beyond the stressed European markets (Greece, Ireland, Italy, Portugal, and Spain). Exposures to large European countries and banks are sizable. The ongoing economic and market effects are additional concerns. The crisis has been negatively affecting European credit profiles and has resulted in numerous rating actions recently.

Report here:  11-16 Fitch

Net exposure.  Gotta love it.  Ummmm, what happens when exchanges are voluntary and 50% of your holding is wiped out without triggering your insurance policy....  Yup, net is gross.  Honestly, is this news?

About Me

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