Monday, 20 September 2010
Bid me up Scotty!
Junk Bonds Reach Par for First Time Since 2007: Credit Markets
"Investors in U.S. junk bonds are wagering they’ll be fully repaid for the first time since before the credit-market seizure, dismissing concerns the economy will return to a recession and trigger a rise in corporate defaults.
Average prices on high-yield debt rose above 100 cents on the dollar yesterday for the first time since June 2007 after falling as low as 55 cents in December 2008, Bank of America Merrill Lynch index data show. Bonds due in 2031 from Ford Motor Co., which fell 22 months ago to 12 cents on concern the automaker would fail, are trading above par for the first time in more than five years."
At the same time:
"Commercial paper outstanding declined for a fourth straight week, reaching a record low. The seasonally adjusted market for commercial paper, which typically matures in 270 days or less and is used to finance everyday business activities such as payroll and rent, fell $22.9 billion to $1.036 trillion in the week ended Sept. 15, the Federal Reserve said yesterday on its website. The market has contracted from $1.377 trillion in October 2009."
The market, which companies typically use to finance routine costs such as payroll and restocking shelves, is at its smallest size in two months and is roughly half its 2.2 trillion USD peak in August 2007 when the credit crisis broke.
This not a good sign given commercial paper is the cheapest and most flexible way for corporations to get their hands on cash!
In fact US bankruptcies are still rising:
Business and Non-Business Filings
Years Ended June 30, 2006-2010:
And the Asset Backed Commercial Paper market is a shadow of itself:
So how do americans cope with the current downturn? Consumer loans...
GRAPH: US consumer loans expanded more than 42% since the beginning of 2010 and 36% YOY:
Can you read into this? I'll help you, DOUBLE-DIP!
The excellent David Rosenberg sums it all nicely in in the latest "Breakfast with Dave" MARKET MUSINGS & DATA DECIPHERING from the 20th of September 2010:
"What more can you say? I mean, can we really sit back and conclude that government policies have been successful when real median household incomes are down 4.8% over the 2000-2009 decade? That’s even worse than the 1970s when under Nixon, Ford and Carter we saw real median incomes drop 1.9%. We are at a point where so many people have fallen below any acceptable level of income that half the country doesn’t pay any tax. Even with record use of food stamps and stepped-up jobless insurance benefits, the number of folks living below the so-called poverty line jumped 10% last year — an apparent economic recovery year — to 43.6 million people.
So, we have 1 in 6 Americans either under or unemployed and another 1 in 7 who live in poverty and somehow we have a legion of economists and strategists who see what we are in some typical recession-recovery cycle on our hands. Just read the editorial of the current Economist for how mainstream the “muddle through” view has become — downside risks are widely seen as marginal because we have never seen a real “double-dip” recession before.
Reminds us of how everyone was saying back in 2006 not to worry too much about housing risks because national home prices have never declined before on a year-over-year basis. Remind us of how we shouldn’t worry about recession risks in 2007 because the Fed never did tighten rates sufficiently to really invert the yield curve all that much and that there has never been a recession without a policy-induced inversion of the yield curve. And then, through 2008 all we heard was that history teaches us “not to fight the Fed.” So it’s really encouraging to hear how everyone is back to the “it’s never happened before so don’t worry about it” mentality."
"Everyone has this view that growth will merely be slow but that there will be no double dip. Nobody seems to entertain the notion that we may still be in a recessionary state. After all, the UofM confidence index averages 73.7 in recessions and 90.9 in expansions. So not only is the index 24 points below what is consistent with growth, it is also seven points below what is typical of actual recessions. That is why this is more likely a ‘single-scoop’ recession than a ‘double dip’ ... we likely never fully emerged from the one that began in late 2007."
On Gold beating record after record, David once again sums it up perfectly:
"GOLD BREAKS OUT ... AGAIN
What is amazing is that there are just about as many naysayers about gold out there as there are bond bears. Until the investment elite catches on, the odds of these two asset classes continuing as relative outperformers are quite high because no bull market ends until the masses fall in love with the asset or security in question.
What makes the gold story so interesting is that bullion has so many different correlations — with inflation, with the dollar, with interest rates, with political uncertainty — and it also has different faces. This year, for example, gold has shifted from being a commodity towards being a currency — the classic role as a monetary metal that is no government’s liability. This year, there are three events have catapulted gold into currency status, and they all involve attempts by governments around the globe to devalue their own currencies or at least jeopardize the sanctity of the central bank balance sheet:
1. The ECB’s decision to allow non-investment grade bonds as collateral on its balance sheet.
2. The Fed’s decision not to allow, as was planned, an unwinding of its pregnant balance sheet with obvious implications for the growth rate in the monetary base.
3. The decision by the Japanese government to unilaterally intervene in the foreign exchange to reverse the yen’s strength.
Nobody wants a strong currency, and nobody, outside of a few small countries, wants higher interest rates, and now, we have rising U.S.-Chinese trade tensions. Greek bond yields remain at punitive levels and are currently pricing some probability of default. In addition, Ireland seems to be experiencing intense financial difficulties that have compelled the ECB to step in for support. The Mideast peace talks don’t seem to be going anywhere. The U.S. political backdrop is one of intense uncertainty and the most likely scenario post-November 2nd is one of gridlock. How can gold not thrive in this environment?"
Ireland CDS 5 year is now trading at 445 bps, which represents now a 32% of Cumulative Probability of Default. Ireland was trading at 387 bps on the 15th of September. The yield on Irish 10-year notes stands at 6.48 percent from 6.29 percent, compared with 2.47 percent for German bunds that mature the same year, amid concern that nation will need more financial aid.
and Irish banks are doing just fine...
As long as countries are busy debasing their currencies, as long as countries are in the process of lowering the standard of living of their population like I discussed in my previous post, Gold will continue to go up.
VIX is now getting cheaper still at 21.47. Complacency seems to be prevailing again, as in April this year.
"My dear brothers, never forget, when you hear the progress of enlightenment vaunted, that the devil's best trick is to persuade you that he doesn't exist!"
Charles Baudelaire, French poet, "Le Joueur généreux," pub. February 7, 1864