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.

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).

The EU - Part Problem Part Solution - Or Just FUBAR?

And you seriously thought it was getting better?

Moody's Investors Service has today downgraded Portugal's long-term government bond ratings to Ba2 from Baa1 and assigned a negative outlook. Concurrently, Moody's has also downgraded the government's short-term debt rating to (P) Not-Prime from (P) Prime-2. Today's rating action concludes the review of Portugal's ratings initiated on 5 April 2011.

The following drivers prompted Moody's decision to downgrade and assign a negative outlook:

1. The growing risk that Portugal will require a second round of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a pre-condition.

2. Heightened concerns that Portugal will not be able to fully achieve the deficit reduction and debt stabilisation targets set out in its loan agreement with the European Union (EU) and International Monetary Fund (IMF) due to the formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system.

RATINGS RATIONALE

The first driver informing today's downgrade of Portugal's sovereign rating is the increasing probability that Portugal will not be able to borrow at sustainable rates in the capital markets in the second half of 2013 and for some time thereafter. Such a scenario would necessitate further rounds of official financing, and this may require the participation of existing investors in proportion to the size of their holdings of debt that will become due.

Moody's notes that European policymakers have grown increasingly concerned about the shifting of Greek debt held by private investors onto the balance sheets of the official sector. Should a Greek restructuring become necessary at some future date, a shift from private to public financing would imply that an increasingly large share of the cost would need to be borne by public sector creditors. To offset this risk, some policymakers have proposed that private sector participation should be a precondition for additional rounds of official lending to Greece.

Although Portugal's Ba2 rating indicates a much lower risk of restructuring than Greece's Caa1 rating, the EU's evolving approach to providing official support is an important factor for Portugal because it implies a rising risk that private sector participation could become a precondition for additional rounds of official lending to Portugal in the future as well. This development is significant not only because it increases the economic risks facing current investors, but also because it may discourage new private sector lending going forward and reduce the likelihood that Portugal will soon be able to regain market access on sustainable terms.

The second driver of today's rating action is Moody's concern that Portugal will not achieve the deficit reduction target -- to 3% by 2013 from 9.1% last year as projected in the EU-IMF programme -- due to the formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system. As a result, the country may be unable to stabilise its debt/GDP ratio by 2013.

In other words, as the EU is increasingly looking for the private sector to share in the pain, we are going to help make sure it happens.  Over?  Not by a long shot.  Better?  No, but the direction is becoming clearer.

New Issue Hype - Buyside Gets the Pipe

On the tape (Reuters):

LONDON, July 5 (IFR) - Rising disquiet over new issue bond market practices has prompted a rethink among debt syndicate officials regarding the processes they employ and the manner in which they transmit information to investors, bankers said.     Underwriters have been discussing ways to fairly provide investors with information on price and the size of order books.     So-called price whispers, where dealers float a level with a small group of investors could be a thing of the past, for instance.     Another practice that is about to change is regular updates on the size of order books and the controversial, some would say cavalier, use of internal tickets to inflate the magnitude of investor interest. 

Investors routinely overstate their true interest in order to receive a larger allocation of bonds at pricing.     "I think both sides need to be careful. The world has changed - all the clients we deal with are trying to operate higher standards," said the syndicate official.

 This has been the buy/sell side conundrum forever.  If the deal looks hot (and you know it was -as it always is - pre-shopped to the big guys) you have to double or triple what you want to end up with.  Then, god forbid, it falls apart you end up with an over allocation.  The street knows the chronic padders, but this crap inflates the book to monstrous proportions.  I can't think of a way around this.  Blame it on the street for hyping, blame it on the buyside for padding - whatever.  This is the way it is.  It also allows the street to reduce pricing due to demand and see how many people drop from a deal or increase the size of the deal to meet demand.  Accrues to the issuers benefit either way.  Who wins:  street gets underwriting commission and follow on trades, issuer gets lower rates and more money, and the buyside?  Well, someone has to be left holding the bag.

Friday Morning Update

Couple of things pushing the risk on trade today which is evidenced through the rise in equities and the sell-off in bonds.  What is moving us this morning?  Well:


The yen rally on thoughts of cash repatriation by Japanese banks and insurers drove the yen to highs vs USD,  The G7 followed Japans intervention in the currency markets for the first time in 10 years.  The result was significant:

 As well, Libya said it is ceasing all military action and will start talks with rebels, reacting the day after a United Nations vote cleared the way for strikes against leader Muammar Qaddafi’s regime.  Libyan Foreign Minister Moussa Koussa made the announcement in a televised news conference carried by Al Arabiya TV today, adding that the UN resolution authorizing a no-fly zone violates the UN’s charter.  British and French leaders began preparing for possible air strikes against Libya after a United Nations vote cleared the way for the first Western military action against an Arab country since the 2003 invasion of Iraq.


Treasuries are being swapped into risk:

But, not all is peachy in Japan:

Engineers plan to work into the night to restore power to two of the crippled reactors at Japan’s damaged Fukushima Dai-Ichi power plant, while Prime Minister Naoto Kan described the crisis as “very grave.”  Tokyo Electric Power Co. said it may finish reconnecting a power line to the No. 1 and No. 2 reactors by tomorrow morning. The electrical link would be used to restart pumps needed to protect fuel rods from overheating. However, the company said it’s possible the water pumps, damaged in the March 11 tsunami, might not work even with power, Hikaru Kuroda, chief of Tepco’s nuclear facility management department said tonight in a Tokyo news conference.  

As we head into the weekend, we must be aware of the factors that have driven the risk-on trade for any changes.

Wednesday Market Wrap

Another day of uncertainty and volatility.  The risks I listed yesterday were only compounded today leading to more risk shedding.  Until we see some resolution in Japan (and to a lesser extent the middle east), I don't see much of a rebound in risk.  That said, we might see some dip buying at some point.


Some economic and news review:


Home construction plunged 22.5% in February from January to a seasonally adjusted 479,000 homes. It was the lowest level since April 2009 and the second-lowest on records dating back more than a half-century.  Single-family homes fell 11.8% in February. Apartment and condominium construction dropped 47%.  Building permits fell 8.1% last month to the lowest level on records dating back to 1960. Permit requests for single-family homes saw the biggest decline. Apartments and condos remained flat.  This, when piled on the MBA data suggest housing isn't posting a sharp rebound (at least last month as the numbers are volatile).


The Labor Department on Wednesday said the producer price index jumped 1.6% last month, following increases of 0.8% in January and 0.9% in December. Producer prices have risen an unadjusted 5.6% over the past 12 months.  Core producer prices rose a much smaller 0.2%, but it was still the third straight monthly increase. Core prices have risen a much slower 1.8% over the past year. Economists surveyed by MarketWatch had predicted a 0.7 % increase in overall producer prices and a 0.2% increase in the core rate.  Inflation in the pipeline.  Stay close to home on the duration front and watch manufacturers for their ability to pass on price increases.

Reuters reported Wednesday that Patrick Parkinson, the director of the Federal's Division of Banking Supervision and Regulation, that although asset quality was "stabilizing," the banking system was "still in the repair and recovery stage." "Around 30 percent of all banks have less than satisfactory supervisory ratings," he is quoted as saying at the American Bankers Association annual government relations summit Washington, according to Reuters.  Great.
The Federal Reserve Bank of New York bought $6.58 billion in Treasury debt on Wednesday, the latest operation of the Fed's second round of quantitative easing to support lending and spending. Dealers offered to sell the Fed $26.46 billion in debt maturing from 2015 to 2016.  $26B offered, $6.5B bought.  Gotta keep those rates down.

Fixed Income:

Another interesting day in the fixed income markets.  Housing numbers and increased risk overwhelmed the wholesale inflation numbers.

"Risk free" had another strong day as investors shed risk and bought govvies.  Seriously, Look at the long end.  Bets against the long end (like my TBT) are getting crushed.  Curve is flattening though.

Credit markets had a tough day (although trace hi/lo data would suggest otherwise).  Market traded down a bit with CDS ending at HV15 126/136 +5   IG15 91½/92 +3   HY15 101 9/16/101¾.

Cliffs, AGL and Teva were in the market.  Teva broke better, Cliffs broke wider and AGL broke tighter.


While CDS was wider, credit was up on the day using LQD as a proxy:

Equities:


Risk off!  Selloff continued.  Equities tanked mid-day but rebounded somewhat as conditions in Japan seemed to get better (debatable at best, but optimistic).

Not pretty for risk here in the states.

The sell-off was broad based, but conglomerates and tech got an extra bit of beating.  Personally think the drop in GE is overdone, but then again, I am long the name.

Global markets fared no better.


Commodities:


Commodities were mixed, but mostly down.  Gold came back as did silver and cotton got spanked.  I Don't expect much of a rebound in commodities until the damage in Japan is known and we start to get a feel for the global demand impact.

Currencies:


A decent spike in the Yen after a pretty dramatic sell-off.  Greenback is at a 15yr low vs the yen.

While the euro fell versus the dollar, it rebounded a bit late in the day.

Tuesday Fixed Income Brief

Interesting day today to say the least.  Risk came off in torrential form as Asia got pounded and Europe followed suit.  What I see as the primary sources of risk right now:

1. A total meltdown at one or more reactor in Fukushima.  The typhoon has already constrained capacity - which will no doubt be felt by nearly all manufacturers, but a total meltdown will shutter more factories and further reduce capacity.  The hit will obviously be felt more in Japan, but the global markets will roll.  As I am aware as of this writing, it does not look likely, but cracks in the containment units and hydrogen build-up can go bad fast.
2. Continued - and increasing - unrest in the middle east.  With the Saudis in Bahrain, Iran will be pressed to react in some way - either in Bahrain or opening up a new front somewhere else to spread Saudi (and/or coalition) forces thin.  The Saudis are also facing discontent at home, but this move helps keep an opposition movement down with the show of force.  Japan of course has averted the worlds eye from the middle east for the time being.

I am also concerned about the effect of the European Financial Stability Facility ( euro440 billion  - $606 billion) which allows it to buy government bonds (from the governments if austerity measures are agreed to) instead of on the secondary markets - which means the ECB is still the buyer of last resort.

With that said, lets look at some fixed income:

Treasuries obviously had a good day as risk came off the books.

Corporates were mixed, but hi/low ratio for IG and HY continued to be strong:

Quack, quack  AFLAC (75% sales as a % of 2010 revenue from Japan) was a solid 50 bps wider - and fired Gilbert Gottfried. Other bank/finance names out 7-10bps.   EXC, SO, PCG and EIX feeling pressure due to concerns about effect on nuclear power (Germany is taking 7 older units down for inspection over the next few months).  

Oh yeah, lets not forget that Moody's pinged Portugal from A1 to A3:  "The cost of market funding is likely to remain high until the deficit has been reduced to a sustainable level and the prospects for economic growth have improved," it said in a statement.

Kinda tired, gonna close with that.

Fukushima - Some Background and Intra-day Markets

Just some information I found interesting and/or useful in assessing the impact of japan's nuclear problems.









From Stratfor:

The nuclear reactor situation in Japan has deteriorated significantly. Two more explosions occurred at the Fukushima Daiichi nuclear power plant on March 15.

The first occurred at 6:10 a.m. local time at reactor No. 2, which had seen nuclear fuel rods exposed for several hours after dropping water levels due to mishaps in the emergency cooling efforts. Within three hours the amount of radiation at the plant rose to 163 times the previously recorded level, according to Japan’s Nuclear and Industrial Safety Agency.

Elsewhere, radiation levels were said to have reached 400 times the “annual legal limit” at reactor No. 3. Authorities differed on whether the reactor pressure vessel at reactor No. 2 was damaged after the explosion, but said the reactor’s pressure-suppression system may have been damaged possibly allowing a radiation leak. After this, a fire erupted at reactor No. 4 and was subsequently extinguished, according to Kyodo. Kyodo also reported the government has ordered a no-fly zone 30 kilometers around the reactor, and Prime Minister Naoto Kan has expanded to 30 kilometers the range within which citizens should remain indoors and warned that further leaks are possible.

Chiba prefecture, to the east of Tokyo and connected to the metropolitan area, saw levels reportedly two to four times above the “normal” level. Utsunomiya, Tochigi prefecture, north of Tokyo, reported radiation at 33 times the normal level measured there. Kanagawa prefecture, south of Tokyo, reported radiation at up to nine times the normal level. Finally, a higher than normal amount was reported in Tokyo. The government says radiation levels have reached levels hazardous to human health. Wind direction, temperature, and topography all play a crucial factor in the spread of radioactive materials as well as their diffusion, and wind direction is not easily predictable and constantly shifting, with reports saying it could shift west and then back eastward to sea within the next day. It is impossible to know how reliable these preliminary readings are but they suggest a dramatic worsening as well as a wider spread than at any time since the emergency began.

Full post here:  Red Alert: Radiation Rising and Heading South in Japan | STRATFOR

Fukushima vs Chernobyl:

The Chernobyl accident was the product of human error when a test was poorly executed, while the Japanese failure was triggered by an earthquake and tsunami.

Most importantly, thick containment walls at the Fukushima Daini plant shield the reactor cores so that even if there was a meltdown of the nuclear fuel it's unlikely to lead to a major escape of dangerous radioactive clouds into the atmosphere.

At Chernobyl, there was no containment structure. "When it blew, it blew everything straight out into the atmosphere," said Murray Jennex of San Diego State University.

The most severe contamination occurred within the so-called Exclusion Zone, a circular area around the power plant with a radius of 30 kilometers (19 miles) that has been deemed unsuitable for living and is closed to unsanctioned visitors. 

Fukushima vs Three Mile Island:

Three Mile Island:  About half the reactor core in one unit at the Three Mile Island plant in Pennsylvania melted due to the loss of coolant. The other unit suffered no damage and still operates today.  The plant did vent a small amount of radiation to release pressure but nuclear experts said that release did not result in radiation levels beyond what environmental regulations allow.  Operators at Three Mile Island stopped the meltdown by restoring cooling water to the reactor core.

Looking at all three nuclear accidents, thus far Fukushima is more closely related to Three Mile Island than Chernobyl, but the situation continues to deteriorate.  The situation is now deemed more dangerous than Three Mile Island (a 6 out of 7 versus 3MI's 5).


Known radiation levels:

(Reuters) The International Atomic Energy Agency (IAEA), citing information it had received from Japanese authorities at 0350 GMT, said on Tuesday dose rates of up to 400 millisievert per hour have been reported at the Fukushima power plant site. It did not give details or comparisons on the radiation level but exposure to over 100 millisieverts a year is a level which can lead to cancer, according to the World Nuclear Association. The Vienna-based IAEA uses the unit to measure doses of radiation received by people.

Okay, now the money part (of course, in no way minimizing the impact of this tragedy):

 So, what are the markets doing on this:  puking risk!

iShares MSCI Japan Index (EWJ):

SPY:

The Yen:  The yen rose against all of its major counterparts as risk inJapan of radiation leaks from crippled nuclear power stations boosted speculation that insurers will repatriate assets to pay for earthquake damages.

Risk off means risk free (in theory - not mine) rallies:

7s and 10s are enjoying some popularity here.  I would love to short tens here, but stepping in front of freight trains can, at times, lead to severely adverse consequences.

Is this overdone?  It is anyones guess.  The broad based sell-off of just about anything (except, of course, Netflix) may present opportunities, but a full scale meltdown will kick the market in the chops.  I am sidelined for now.

Bond market Update

First, lets look at Trace data:

I wont even bother continuing to point out the hi/low ratio - especially in high yield.  So much for the bubble!  Converts are naturally on fire as equities zoomed today (TMO continues to rock!).

Lets move on to CDS indices:

High yield continues to concern me that it is getting ahead of itself - or at least fully valued.  IG is near value - a little left, but not much.  There might be value in select EM credit, but one has to be very picky here.

And govvies:

Risk off - 'nuff said?  EU might raise rates, US economic data coming in stronger than expectations - the one two punch to globals.  Personally, I am short long US govvies as I feel (and pay) rising inflation that these intellectuals are gonna miss (perhaps they should do their own shopping - unless they shop ex-food and energy).

All in - good day for risk, bad day for "risk free".  Ride the wave friend - but wait for the numbers tomorrow to get the feel for risk positions.

Oh yeah, giving credit where due:  the charts today are from the WSJ online.  Usually I have to dig multiple sites, but tonight I was somewhat lazy.

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.

WSJ Pontificates on the "Bond Bubble"

Good article from the WSJ.  Interestingly, one would assume that the rise in Treasuries was unexpected.  I can't think of many people that honestly believed that rates would stay as low as they were indefinitely.

If you are concerned about rising rates, consider floaters (although they will float off short rates) or stay shorter duration.  It will be interesting to see the impact of rising rates on equities as the cash flow discount rate is increasing (if equities are still priced on a DCF basis).

Enjoy.

WSJ Bond Bubble Bursting

Another Day in Credit

Another day in the fixed income markets.

A quick look at the credit markets:

While volume was decent, the overall tone of the market was not.  As Europe continued to weigh heavy on participants, credit risk was not in favor.

New issues:

Kellogg-CoC                A3/BBB+  $1bn       10y   T+90

Church & Dwight      Baa3/BBB-   $250mm   5y   T+150

Hershey Co -CoC         A2/A        $350mm  10y   T+88

HealthCare Realty    Baa3/BBB-   $300mm  10y   T+262.5

Societe Generale      Aa2/A+       $250mm   3yFRN 3ml+132
Societe Generale      Aa2/A+       $1bn         3y    T+158
Societe Generale      Aa2/A+       $750mm   5y    T+175

Overall issuance volume was decent, but a little light.  Haven't seen the deals break, but most priced at the tight end of guidance so there isn't a lot of juice here.

Secondary volume was decent, but the tone was negative.  Below is the trace data showing the negative adv/dec ratio.

So how did the equity equivalents do (yeah, the ETFs):

 

JNK outperformed PFF today, as it has for the last 2 months.  While much has been said about the outflows recently, performance must not have gotten the memo.  PFF was outperforming until about September, but since then JNK has been on fire, following equities up (and if the past is any indicator, JNK has a bit to run to keep pace - below).

 

I am still a believer in credit here (yeah, we will have risk-free issues, but excess performance is another beast) as the risk premium is still wide to historical standards.

Disclosure:  Long LQD, AGG, various preferred and HY.

Wednesday 12-01-2010 Recap - Risk On!

Ever see the Fantastic Four?  The human torch used to always say "Flame On!" and woosh, he was on fire.  Today we heard "Risk On!" and the market was on fire.  Why?

Ok, start with some decent economic news, ADP payrolls ahead of consensus (sounds good for NFP, right?).  From the release:

This month’s ADP National Employment Report shows an acceleration of employment and suggests the nation’s employment situation is brightening somewhat.  November’s gain in private-sector employment is the largest in three years.  This is the tenth consecutive month of gains, which have averaged 47,000 during that period.  Nevertheless, employment gains of this magnitude are not sufficient to lower the unemployment rate, which likely will remain above 9% for all of 2011.  Furthermore, given modest GDP growth in the second and third quarters, and the usual lag of employment behind GDP, it would not be surprising to see several more months of only moderate gains in employment even as the economic recovery gathers momentum.

Is this a nascent employment recovery taking hold?  I believe so.  Will it really move the needle?  I do not think it will for a while.  That said, the market is looking for reasons to rally, and this is giving it one.

Add in the perpetual EU comment and volatility:

(Bloomberg):  Trichet told the European Parliament late on Nov. 30 that some investors are underestimating governments’ determination to defend financial stability in the currency bloc.

(Bloomberg/BW): The EU's monetary affairs commissioner says measures like the weekend bailout of Ireland could pave the way for added steps from the European Central Bank to contain the continent's government debt crisis.  Olli Rehn says in a speech Wednesday that "these measures could provide a sound basis for the continuation of actions of stabilization by the ECB, which has played a key role in ensuring financial stability in the euro area, for instance last May."

(Reuters): European Commission President Jose Manuel Barroso said on Wednesday he had every confidence in the European Central Bank and was sure it would take whatever action is needed to protect euro zone stability.  "I am sure the ECB is analysing the current situation and that it will take the decisions necessary to guarantee the financial stability of the euro zone," Barroso said after attending a meeting in Brussels.

Whatta ya get:

And once again, the world is safe!  Place yer bets.

So, where was the equity action at (in the US)?

And what of the globe you ask:

Risk party like its 1999!

(looking for a better world snapshot page - suggestions????)

Did the re-risk trade extend to debt markets?

 Nope.

This was all about the lowest part of the capital structure, first loss and eternal duration.

Personally, I am not completely sold on the "risk on" trade, but who am I to fight it?  You know what they say about the collective wisdom of markets (or collective wisdom generally).

Treasuries got whacked, might want to start looking at long 10yr (let it get hit just a little more and start to leg back in).  Listen to the ECB to get EUR/USD direction (or market direction generally). Get out of the way of the A$, hearing fast money taking it off the table.  Large caps won the day, look for Mids to catch up and, as always, keep yer eyes on smalls.  Commodities doing well (ex-meats), let 'er ride.

And as always, be careful, make money and have fun (yeah, its possible).

Global Bond Managers Euro Thoughts

From MoneyMarketing:

At least seven global bond funds revealed top 10 holdings in peripheral eurozone debt at the end of September, according to Trustnet, as Ireland’s financial woes accelerated towards its recent bailout.  Italy and Spain dominated the holdings, rather than Greece and Ireland, which have received a bailout from the IMF and the European Union - in Ireland’s case, the European Financial Stability Fund.

Managers also avoided Portugal, which has a deficit of almost 10 per cent of GDP and is struggling to pass budget cuts. 

Large portfolios which hold Spanish or Italian debt include the £753m Newton International Bond, the £423m F&C Global Bond, the £339.2m Threadneedle Global Bond, the £337m Old Mutual Global Strategic Bond and the £199m Henderson Overseas Bond funds.



Overall, Paul Brain, the manager of the Newton International Bond fund, says Spain is not growing fast enough to stomach the budget cuts required. He has sold out of Spanish debt entirely.

Dave Chappell and Martin Harvey, who co-manage the Threadneedle Global Bond fund, say the Italian situation looks somewhat superior. Like Brain, they have stuck with their holdings in the country.

Full article here:  Money Marketing on Global managers

Personally, It looks as if current Irish bank debt might be a better home (NOT SUB) as they will be receiving bailout funds (while there still are some) and we should see a "grandfathering" of the risk sharing (bail-in) that is being bantered about everywhere.  If this is the case, IRE might be worth a look.

H&R Block - Compelling Swap in Bonds

I have been following (and writing) on the H&R Block story recently (some would say mildly obsessed), but I felt that there is a compelling trade to be done and I can't keep it to myself.

What is this trade?  SELL HRB 5.125% due 10/30/2014 and BUY HRB 7.875% due 01/15/2013.

Lets Take a look under the hood:

SELL HRB 5.125% 2014

Recap:  Z+407, G+430 at par (3.55 ModDur)

BUY HRB 7.875% 2013

 Recap: Z+464, G+480 at par (1.95 ModDur).

Come out of a $400MM deal into a $600MM deal;

Pick 57/z, 50/g;

Shorten 1.75 years, 1.6 ModDur

put in 5pts

MUCH BETTER COVENANTS

Why does this trade exist?

2013 Details(HRB 2013 Prospectus):

• $600MM deal size;
• Unconditionally guaranteed by H&R Block, Inc;
• $101 CoC (below investment grade by EACH of the agencies);
• Coupon steps (from issue coupon, cumulative, 200bps max): 25bps if Ba1/BB+ (50bps combined); 50bps if Ba2/BB (100bps combined);75bps if Ba3/BB- (150bps combined);100bps if below B1/B+ (200 bps combined).
• Limitation on liens -subsidiary, principal property (greater of $250 million or 15% of the total consolidated stockholders’ equity carve-out);
• Governed by NY Law.

2014 Details (HRB 2014 prospectus):

• $400MM deal size;
• Unconditionally guaranteed by H&R Block, Inc;
• make-whole +20;
• NO COC
• NO INTEREST RATE STEPS
• Limitation on liens -subsidiary, principal property (greater of $250 million or 15% of the total consolidated stockholders’ equity carve-out);
• Indenture dated as of October 20, 1997

2013s trade wide to 2014s and have much better investor protection.

Credit Markets - Its All Good

On the tape:

The number of bond issuers that are at risk of being downgraded to junk territory decreased by one in the past month to 55 world-wide, according to Standard & Poor's Ratings Services.

S&P's ratings of BB+ or lower are considered junk status.

Ten entities on the verge of moving to junk territory come from the banking sector, followed by transportation and consumer products, with six each. Hungary remains the largest potential entity at risk of downgrade to junk territory.

S&P said Thursday that in the past month U.K.-based Tomkins Finance PLC became the 14th company whose ratings were cut to junk status.

Meanwhile, 23 companies have been upgraded to investment-grade territory this year because the credit environment continues to improve, according to S&P.

Let the credit rally continue!  Damn the financials, full speed ahead!  Relative spreads are still decent, balance sheets are strong, the Fed's just giving it away and retail continues to jump on the bandwagon!  Giddyup!

Disclosure:  Long LQD among other credit instruments

Wednesday Bonds

Credit did well today with both IG and HY turning in positive advance/decline ratios of approximately 1.1x.  New issue flow was muted and secondary activity kept pace with yesterday, but not much more.

 

BAC continued to be in the headlines today as folks pondered the whole FRBNY/PIMCO/BLK repurchase story.  Wells' earnings did nothing to help their beleaguered peer.  At first bonds started to claw tighter, but couldn't keep the momentum going and slipped deeper down the well.

Looking at the BAC 5.625% 7/20:

How do you think this will fare tomorrow when folks have read - and knee-jerked to -the WSJ story stating:

The federal regulator overseeing Fannie Mae and Freddie Mac hired a law firm specializing in litigation as the agency considers how to move forward with efforts to recoup billions of dollars on soured mortgage-backed securities purchased from banks and Wall Street firms. 

The Federal Housing Finance Agency, which in July issued 64 subpoenas to issuers of mortgage securities, bank servicing companies and other entities, is working with Quinn Emanuel Urquhart & Sullivan LLP, a Los Angeles-based firm that specializes in business litigation, to coordinate its investigations.

Since the financial crisis, 400-lawyer Quinn Emanuel has avoided building a banking clientele, making it a top suitor for plaintiffs pursuing banks. The firm has represented MBIA Insurance Corp. in several lawsuits against top U.S. mortgage banks alleging that the insurer was fraudulently induced to cover losses on mortgage-backed securities. Those cases are ongoing.

Yeah, gonna be fun for BAC holders again. On the fly, I would say BAC holders can feel fortunate they don't own H&R Block paper.  H&R Block CDS rose to 768 from 722 on Tuesday and continued to bleed out today. A credit strategist focusing on U.S. banks said the company could face the same issues as Bank of America because of a legacy portfolio of mortgages from Option One Mortgage Corp., which it agreed to sell in 2008.

The HRB 5.125% '14 opened weak at $92ish and rolled over during the day to land around $89. Oh, did I mention the downgrade?  Yeah, hope those tax receipts are huge - best of luck (honestly though, the company's on the hook for the mortgages even though they were sold, but they have decent enough cash flow to cover a good chunk - but if the repurchases are larger than expected - POW).  Might look at these as a value play soon - wait for them to shed more points.

Moving on....

With the dollar down, risk on trade happening today, govvies did pretty well, all things considered.  Tomorrow 2yr, 5yr and 7yr get announced for auction next week.

Curve steepened a bit in 2-10s and flattened some in 10-30, the net being marginal.

Tomorrow: we get jobless claims (455k expected, 462k prior) and Philly Fed (1.40 expected, -0.7 prior), claims last week were a disappointment - wouldn't be surprised to see modest bounce - and Philly Fed forecasters are looking for uptick, just might get it.
Does it feel like a bubble to you?  Me neither.

Monday Market Recap

Monday already.  Market has a mixed tone as Citi beat, Apple guidance disappoints, Rio and BHP call it a day for their JV and Walmart brings a megadebt offering.  Nothing occurring today that changes my outlook on the markets.  Liked the IP number today (for the trend if nothing else), bank mess seems manageable (ugly, but manageable), Europe was quiet (well, Europe ex France) and political market commentary was somewhat muted.  Still long midcap growth (VOT) with a mild small cap exposure (IJR), bonds (AGG) - with a corporate tilt (LQD) and short long treasuries (TBT), own preferred through closed ends (JPS, PFD) and continue to like C$ and A$.

How about a couple numbers:


Equities:

S&P is posting stale data, so lets move to a different source (yep, Google):

Summary:

And a little sector action:

Financials found their legs today with Citi's earnings, Basic materials took it on the chin with the breakup of the BHP/RIO ore JV, healthcare just continues to motor along.

Growth/Value:

Value steeling some of growth's thunder in midcap space (IWS = midcap val, IWP=midcap growth).

Small cap eating up midcap's advantage (IWO= smallcap Growth).  Keep your eye on this.  Combine the two and...

BOOM, smallcap value (IWN=smallcap value) making its move.  I think it is too early for this to stick, but I will be keeping my eye on it.

Fixed Income:

Mr. Rollback borrows $5B from the markets today.  They buy everything cheap.

IG finally had an up breadth day with advancers leading decliners by 1.38x, but with lower volume.  HY barely held on to a positive adv/decl ratio, turning in a 1.01x on lower volume.

Curve steepening brought to you by stronger belly of the curve.  Still like the steepener trade.

Forex:

Uncle sam gains some ground (as of writing after giving some turf earlier.  QE2 is not going to allow for much gain here.




Errata:

Bank of America announced on Monday that it would resume home foreclosures in nearly two dozen states, despite the running controversy over how banks handled tens of thousands of cases of homeowners facing eviction. Bank of America, the nation’s largest bank and the servicer of roughly one in five American mortgages, insisted that it had not found a single example where a foreclosure proceeding was brought in error.
Bank of America said it would resume foreclosures in the 23 states where judicial approval was required after an internal review turned up no evidence that cases were filed in error. However, Bank of America’s suspension will remain in effect in the 27 other states that do not require a judge’s approval to foreclose, as the bank’s paperwork review proceeds state by state. It was the only bank to initiate a nationwide freeze.Not the end of this issue, not at all.


The Journal found that all of the 10 most popular apps on Facebook were transmitting users' IDs to outside companies.  The apps, ranked by research company Inside Network Inc. (based on monthly users), include Zynga Game Network Inc.'s FarmVille, with 59 million users, and Texas HoldEm Poker and FrontierVille. Three of the top 10 apps, including FarmVille, also have been transmitting personal information about a user's friends to outside companies.  The information being transmitted is one of Facebook's basic building blocks: the unique "Facebook ID" number assigned to every user on the site. Since a Facebook user ID is a public part of any Facebook profile, anyone can use an ID number to look up a person's name, using a standard Web browser, even if that person has set all of his or her Facebook information to be private. For other users, the Facebook ID reveals information they have set to share with "everyone," including age, residence, occupation and photos.   You can't be paranoid enough.


Good luck, lets be careful out there.

Thursday Market Recap

Happy Thursday.  Banks got whacked today as the foreclosure mess took center stage and initial jobless claims rose more than expected.  Market played bank-whack-a-mole in both fixed income and equities, with large bank CDS out 5-20bps and shares down 3-6%.  Earnings mixed, but some positive signs within them (see earlier post on JBHT).  How about some numbers:

Equities:

Smack down on financials, but the rest of the market didn't fare too bad, staples, tech and telecom closed positive.  Still decent on the year though.  Growth/value anyone?

Midcap growth outpaced value, widening the spread between the two.

Given the sector divergence we saw today, correlations within the S&P fell:

On that note, here are asset class correlations (using ETFs):

(trying to find a new source of cross asset correlations, would appreciate any thoughts).

Fixed Income:

Decent day today, with JPM leading the market with size in 10s and 30s ($2.75Bln 10yr +180 and $1.25Bln 30yr +165). Dubai Elec & Water (Ba2/NR) tapped for $2B in 6s and 10s.  Secondary action:

IG advance/decline ratio was 0.57x, financials whacked it and took the most active slots - all down.  HY adv/dec ratio was 1.08x (lower, but still positive) - Ally got whacked and Harrahs kept up the good work.

Steepen it up.

Australian iron-ore mining company Fortescue Metals Group Ltd. is looking to raise US$2 billion in the U.S. and European bond markets, according to two people familiar with the matter, as the miner accelerates its expansion plans to capitalize on the currently high price of iron ore.The Perth-based miner, Australia's third-largest listed producer of iron ore behind global giants Bhp Billiton Ltd. (BHP) and Rio Tinto Ltd. (RTP), refinanced another portion of its debt on Oct. 10 in order to give it flexibility to expand.

Forex:

Dollar breather.  Here's an interesting chart:  commodity duel.

Errata:


Seagate Technology Plc, the world’s largest maker of disk drives, is in talks to be purchased by TPG Capital and KKR & Co., according to people with direct knowledge of the discussions.The private-equity firms are considering an offer of about $16 a share, which would value the company at $7.55 billion, said two of the people, who declined to be identified because the discussions are private. The firms are looking to contribute about $4 billion in equity and may seek other private-equity funds as partners, the people said. The new old thing.  Careful, corporate buyers get a strong COC with an "any" agency downgrade provision.


Four private-equity firms are exploring bids for Northrop Grumman Corp.’s shipbuilding unit, which may draw offers for at least $2.5 billion by a deadline next week, said people with knowledge of the matter.Bain Capital LLC, Carlyle Group, KKR & Co. and TPG Capital have been examining the unit’s finances and meeting with its executives, said the people, who spoke on condition of anonymity because the talks are private. The price may range from $2.5 billion to more than $3 billion, the people said.

More than 100,000 U.S. homes were seized by lenders in September, a record number that probably will decline in coming months as major banks halt repossessions and review their foreclosure practices. Lenders took over 102,134 properties last month, RealtyTrac Inc. said in a report today. That was the highest monthly tally since the company began tracking the data in 2005, surpassing the August record of 95,364. Foreclosure filings, including default and auction notices, rose 3 percent from the prior month to 347,420. One out of every 371 households received a notice.Click your heels three times - its getting better, its getting better, its getting better.

U.S. video game industry sales fell in September, painting a potentially grim picture for the crucial holiday shopping season.U.S. sales throughout for video game software, hardware and accessories fell to about $1.2 billion, a drop of 8% from roughly $1.32 billion in the same month a year earlier, according to market research firm NPD Group. Analyst Anita Frazier said the slowdown particularly hit video game hardware makers, whose sales fell 19% from the previous year. ZAP!


Warren Buffett's Berkshire Hathaway Inc. sold 370,146 shares of Moody's Corp. (MCO), as the conglomerate continues to pare down its stake in the credit-rating company. Thursday's share sale is the latest in a series. Berkshire has been shaving its stake in the company in fits and starts for more than a year. Last month, the company sold nearly 2 million shares. With the latest sale, Buffett's company now has 28.5 million shares of Moody's, while its stake remains about 12%. The sale, at a price of $27.65 per share, was worth $10.2 million. Moody's had about 236 million shares outstanding as of June 30.

Reverberations from the economic crisis are continuing to hit oil and gas drilling in the North Sea as companies focus on cash flow and cost control, said a report from consultancy Deloitte Friday. In Norwegian waters, just seven exploration or appraisal wells were drilled in the third quarter, an unusually large decline of 56% from the same period in 2009, the report said. Across the first nine months of 2010, drilling activity was down 30% on year. Twenty-four exploration and appraisal wells were drilled on the U.K. continental shelf in the third quarter, a fall of 20% on year, the report said. Drilling activity across the first nine months of 2010 was 9% lower on year. 

Bottom line:  Trades remain in place with long midcaps, long intermediate treasuries, short long treasuries, long LQD, long Aussie and Loonie.