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.

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.

Court jester Dollar

Currency action today:

Dollar getting beaten again today.  Watch for continued intervention in Yen, but you can't hold back the tide.  Weakness in the CAD is interesting and unexpected (at least by me).

Starting to see competitive devaluation.  Remember the Baht?  Debase your way to exports?

Companies with significant overseas operations ought to benefit.

Tuesday Market Recap

Another day mixed on risk today.  Market feels uncertain and is searching for direction.  So far a strong month, folks trying to digest the reason and create/modify expectations of Q4 performance.


Fixed Income:

Volumes were higher today as IG volume increased 15% and had an ADV/DEC ratio of 1.56x, which was lower than yesterdays 1.65x.  HY volume was 46% higher and the ADV/DEC ratio was 1.18x versus yesterdays 1.30x.  My read on this is that the market is taking a breath and some gains.  Econ data in the US and a continuation of European (read Ireland) fears constrained the risk trade.  Of note, RIG lost about 2 points in both the IG and convert space while the equity gained.

As well, corporate borrowers in the U.S. are squeezing investors as record-low interest rates and a lack of high-yielding alternatives force bondholders to accept the smallest concessions on new debt sales since March.
Yield on new bonds fell to within 15 basis points, or 0.15 percentage point, of existing securities on average last month, according to the most recent data from JPMorgan Chase & Co., the biggest underwriter of the debt. The so-called new-issue premium is approaching this year’s low reached in March, which was the least since the credit crisis began in mid-2007. Concessions

The yield curve was marginally lower today with the long end outperforming as data continues to show weakness and there are buyers-a-plenty.







Munis:

 Interesting news today:

Meredith Whitney, the superstar analyst who famously forecast disaster for America's big banks before the credit crisis struck, is now warning about another looming threat: The wreckage from over-stretched statebudgets.

Today, Whitney is releasing a 600-page report, colorfully entitled "The Tragedy of the Commons," that rates the financial condition of America's 15 largest states, measured by their GDP. Whitney claims that the study is the most comprehensive, in-depth analysis of the states' murky patterns of spending, revenues and benefits programs ever assembled by the government, foundations, or another research firm.

What Whitney found reminds her of the poor disclosure and arcane accounting rules that hid the fragile condition of the banks and monoline insurers that she unmasked. "The states represent the new systemic risk to financial markets," says Whitney. "I see a lack of transparency and an abundance of complacency on the part of investors and politicians, just as we saw before the banks imploded."

 Put simply, the study warns that the giant gap between states' spending and their tax revenues, estimated at $192 billion or 27% of their total budgets for the 2010 fiscal year, presents two dangers that investors are seriously underestimating. First, municipalities could start defaulting on their bonds guaranteed by the cities and towns themselves, an exceedingly rare event over the past three, mostly prosperous, decades.  "People keep saying it can't happen, just as they said national housing prices could never go down," says Whitney. "Now, it's a real danger."

On that note, the City Council of Harrisburg, Pennsylvania, capital of the sixth most-populous U.S. state, voted to hire lawyers to explore seeking bankruptcy protection.The City Council voted 5-2 to seek professional advice on bankruptcy or state oversight. Harrisburg, which needed state aid to avoid default on $3.3 million of bond payments this month, rejected hiring a financial adviser at Pennsylvania’s expense. The council opted instead to seek a new adviser and experts who can lay out the benefits and pitfalls of bankruptcy.

And finally, from the QSCB (affectionately Q SCAB) market (qualified school construction bonds):

The Pennsylvania State Public School Building Authority is selling $325.5 million of taxable qualified school construction bonds in the largest deal since the program began in February 2009. The securities, set for issue Sept. 30, will fund the renovation and building of schools in 46 Pennsylvania districts, improving energy consumption and laboratories. The bonds are ranked AA by Fitch Ratings and Aa2 by Moody’s Investors Service, both third-highest, according to preliminary offering documents. The school-bond subsidy is paid directly to the issuer, as is the case with Build America Bonds. The U.S. government subsidizes as much as 100 percent of the interest costs on the school debt and a fixed 35 percent on Build Americas.

But enough of fixed income already.

Equities:

Meager day in the equity markets today with the index gaining just shy of 50bps.  To reiterate the obvious, energy and healthcare lead the charge, while telcom and materials treaded water.  Is that a word, treaded?


I have been spending some time on looking at the growth/value and capitalization proposition, should have more on that tomorrow (cant wait, can ya?)

Growth, its all about growth right now.




Currencies:

Dollar weaker today - again.  Unless something implodes in Europe (or rather, until), I cant see a reason to rally the buck.

That's all I have tonight.  Later.

Monday Market Recap

Somewhat mixed day in the capital markets today.  Here is some data and thoughts:

Equities:

Equities tried to rally throughout the day, but just couldn't pull it off.  Financials got whacked as news of a breakdown in the MTD/STD merger hit the tape, European banks got hit (yep, another day in Ireland), and Citi found out the government might not be out by the end of the year.  Telecom and utilities pulled off positive performance due to the perceived safety of the sectors.

Like it or not, the near term trend continues to be up.  Tactical overweight.

Growth stocks continued to diverge from value as investors continued to jump on the equity gravy train.

Growth is where you want to focus a tactical overweight in equities.


Fixed Income:

Secondary IG market volume was low today compared to recent days and advancers outnumbered decliners 1.65x.  In the HY market, advancers outnumbered decliners 1.3x.

$13.5B priced new issue today, with notables being NBCU with $4.1B and Santander with $1.1B.

The yield curve steepened as 7s and 10s rose more than 30yr bonds.  Despite all the talk about "bond bubbles", I believe that treasuries still have some upside from here as there is a price insensitive buyer (I have heard instead of cash tax refunds, we could be getting treasuries).  Treasuries rallied on the back of a record setting 2yr auction.




Currencies:

Dollar continues to get beaten on as participants speculate that QE2 (or whatever the heck they will call it) is on the way, and rates in the US aren't attractive relative to most other currencies.







Bottom line today:  mixed on risk, still strong demand for govvies and credit and resistance against the leper formerly known as the dollar.