Daily Commentary

Equity markets globally are rallying on the employment data and stress test results release.  Credit spreads are following suit.  The stress test results themselves were little different from the leaks thus the relief rally result; markets can handle good news and bad news but not uncertainty.  

When equity investors can rattle off the bid-to-cover and tail of a 30yr treasury auction, you know it went poorly.  As deficit spending skyrockets, each additional basis point being paid out by treasury on coupons will haunt us in the future.  Treasury yields will be the 'de rigeur' subject-of-the-day going forward (replacing the TED spread and Vix).   

The new issue market continues to churn along successfully.  Morgan Stanley and BoA both have been in the market with non-FDIC guaranteed deals; likely as a necessary precursor to repayment of TARP funds.  Hasbro and CBS are 2 of the non-finance names currently in the queue.  Credit investors were also enthusiastic about WFC's smooth and successful equity raise.

To remind you why new issues are flying off the shelf, I will cite the $52B in inflows into bond funds this year which is ~10% of the assets under management industry wide. 

In another encouraging sign for consumer spending/finance, AXP needs no further capital and intends to pay back it's TARP money.  Personally, I was a bit surprised to see the MET is in the same boat.  

Whenever credit investors feel too giddy, all they need to do is catch up on Nassim Taleb's latest utterances....the author of the book Black Swan told a conference in Singapore that this crisis is "much worse than the 1930's".  This is the same guy that said yesterday debt should be banned.  

Perhaps I haven't had my eye on the ball, but I was surprised to hear Weyerhaeuser was cut to junk by Moody's.  S&P still has them rated investment grade.  Spreads on the name did not react but expect some selling pressure as many funds will be forced sellers due to client guidelines.    

I found the following explanation of the growth of risk during this bubble to be quite succinct (from WSJ editorial):

"First, businessmen seek to maximize profits within a framework established by government. We want businessmen to discover what people want to buy and to supply that demand as cheaply as possible. This generates profits that signal competitors to enter the market until excess profit is eliminated and resources are allocated most efficiently. Financial products are an important class of products that we want provided competitively. But because risk and return are positively correlated in finance, competition in an unregulated financial market drives up risk, which, given the centrality of banking to a capitalist economy, can produce an economic calamity."