Wednesday 3 August 2011

Markets update - Credit - Rates - Equities - U can't touch this...Hammer time...


I told you homeboy u can't touch this
Yeah that's how we're livin' and you know u can't touch this
Look in my eyes man u can't touch this
You know let me bust the funky lyrics u can't touch this

MC Hammer - U can't touch this lyrics

Markets in a spin again, equities, you definitely can't touch this...It's hammer time in the markets!

10 year German Government Bund still experiencing flight to quality:

In the two year government bond space, Greece widening again:

In the Credit Space, credit indices widening as well:
Itraxx Crossover 5 year index:

Itraxx Financial Sub 5 year index (synthetic index comprising subordinated CDS levels of European Banks, the reference bonds in these CDS being subordinated debt):

and Italy's sovereign CDS and Government bond spreads an ongoing concern:
[Graph Name]
Italian Financial Senior 5 year CDS widening as well:
Daily Focus Graph
France 5 year Sovereign CDS is quoted at 135 bps.

Meanwhile the aggressive cut from the Swiss National Bank seemed to have had little effect on curtailing the EUR/CHF trend, here is the intraday picture:

Yen is still hanging at record low level suggesting Bank of Japan is on the lookout, we are at intervention levels but what kind of intervention?

Gold reaching a new record, here is the intraday move:

No more Ipads for the US consumer as per Bloomberg's Chart of the day:
And US consumption is 70% of US GDP. It is called deleveraging.

The other chart of the day, again from Bloomberg is more worrying as it shows the average Debt/Ebitda Ratio for closely held US companies, hold your breath it isn't pretty:

In relation to my previous post relating to the toxicity of stimulating high ownership rates, please find another "Chart of the day", from Bloomberg. As I mentioned in my post "Is the policy of achieving a high home ownership rate the biggest threat for an economy?", Australia is facing the same issues relating to its housing market as the UK have been facing and the US:

Yes indeed, house prices in Australia are over-valued and no, it's not different this time for housing and not different for LBO loan costs in Europe which, now exceeds Lehman crisis according to Bloomberg article from Patricia Kuo and Stephen Morris.
[Graph Name]
Private-Equity firms face funding costs for European LBO which exceeds even the aftermath of the Lehman collapse. Interests on loans to finance LBOs have risen to average 450 basis points more than benchmark since June, from 413 bps in the first five months. The record was at 437 bps following Lehman's demise.
But it is not LBOs that are in trouble to fund themselves. The recent rise in bond yields for Italy and Spain, spell similar funding issues.
According to Bloomberg, European leveraged loans fell to 91.08% of face value at the end of July, whereas in the US, leveraged loans stand at 94.41%. Leveraged loans are deemed High Yield and are rated below Baa3 by Moody's and lower than BBB- by S&P. The Itraxx Crossover index displayed previously is a good proxy.

The reality is slowly sinking in, everyone is competing for funding and costs will rise.

In the CMBS space, there is a disturbing trend as well:

Commercial-Mortgage Late Payments Increase to Record in July - Bloomberg

"Delinquencies on the debt jumped 51 basis points in July to a record 9.88 percent, according to real estate data provider Trepp LLC. The increase follows two months of declines, the New York-based firm said today in a statement. The jump is partly because of how loan servicers report mortgages that are in foreclosure, Trepp said."

This is very significant because it will have a very big impact on Banks level of provisions and will increase losses. It also justifies my previous stance on this blog, relating to US bank stocks and the reason to avoid them. For more on the subject, you can read what I have written on the subject: "Extend and Pretend" - Banks bloated balance sheets and the Impact of Real Estate crisis.

"Wall Street lenders may incur ”hundreds of millions of dollars” in losses as prices on commercial-mortgage bonds tumble, Barry Sternlicht, the chief executive officer of Starwood Capital Group LLC, said on a conference call with investors today for Starwood Property Trust, a unit of the firm."
Daily Focus Graph

And on the economic data, it was another disappointing day, Factory orders down 0.8% as durable goods decline (Highlighted above in one of the chart of the day) and ISM services slightly below consensus at 52.7, confirming the ongoing weakness in the US economy.

To be continued, now back to the bunker...


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