From 99 to 1

Well, after a very short time on the beach, it's time to head back to being gainfully employed.

While recently passing by Zucotti Park on the way to my new employer, I choked back the urge to tell them that I was likely in the midst of a transfer from the 99% "unemployed/screwed by Wall Street" back to the 1%.

Not long ago, I was stunned by the unanimity of the view the "Europe will only get worse." Now, I'm equally as amazed that only vague rumors of a 'bazooka' bailout are all that are needed to cause a huge rally. Unless and until dealer capital returns to the market, we can expect these market swings to become the norm.

So, this blog will now become dormant...until the next 'reduction in force."

Benford's Law and Weezer

Credit spreads have spent much of the day wider post JPM earnings.

There are many items to discuss within their earnings release however I feel the most relevant to me, and my livelihood, is their FICC revenues which were down 14% (adjusted for one time costs). JPMorgan spreads (in cash bonds) were ~10bps wider on the day but are outperforming BAC and MS spreads which are ~15bps wider.

Morgan Stanley recently noted, in it's 10Q, that if it's credit rating were to be cut "we may be required to provide additional collateral to certain counterparties." (via UBS credit research).

There are a few data points that highlight how 'cheap' the high yield sector currently is. As of Q2, aggregate leverage has fallen from it's peak of 4.7x to it's current 3.6x. This is where it was in the beginning of 2007. In addition, the covenent stress index is approaching a historic low of 1.8% (all time low = 1.4% in '05). So why is the HY CDX index pricing currently reflecting a 50% cumulative default rate over the next five years? (data via UBS)

Dealbreaker posted an very interesting story about Benford's law. Benford's law posits that there is a natural distribution to all numbers in the universe (i.e. lengths of rivers, the populations of cities, molecular weights of chemicals). This professor had taken 43 financial variables from 20,000 firms and they fit the predicted outcome (of Benford's law) almost perfectly. However, she warns that recently, this same data set is no longer 'fitting' and the deviation is becoming an outlier. She warns that "accounting data seem to be less and less related to the natural data-generating process" and "Benford's law casts serious doubt on the reliability" of this data. No one would label me a quant, but this thesis seemed worthy of note to this layman as a warning that the reported numbers may be more 'adjusted' than we realize.

Today's 'off topic' note - Two weeks ago, the ex-bassist from the band Weezer tweeted that he dreamt he would die the following week of a heart attack in his sleep. Lo and behold, he died the following week of a heart attack in his sleep. ABC new story on this here.

Beer, fried chicken and video games

Again today, optimism seems to prevail as the headlines, to this reader at least, seemed pretty grim. Yet spreads are opening firmly tighter to start the day.

German industrial production was weaker than expected...yet the rest of Europe, lead by Italy of all places, was stronger.

ECB President Trichet used the term "systematic" when discussing the current crisis in Europe.

A German bund auction received fewer bids than the amount on offer and technically failed.

The Chinese tariff bill passed the Senate causing the Chinese official news agency to quickly warn/remind us of the Smoot-Hawley tariff act which many feel lengthened the Great Depression in the 20s and 30s. For an eye opening and exciting read of Chinese offensive capabilities, be sure to read this November 2010 article from Seymour Hersh in the New Yorker.

Many hedge funds are breathing a bit easier this morning on the news that the threshold for 'systematically important' institutions will be $50b. This exempts most hedge funds from the increased regulatory scrutiny that comes along with that 'systematic' label.

The credit strategy group at JPMorgan recently raised their asset allocation in credit to neutral, from underweight, citing attractive absolute yields, inflows into the sector, some "hints at progress" in Europe and ahead of anticipated year end allocations into this "best asset class."

The team at UBS has highlighted a divergence in trends that may be applicable for our equity brethren. They note that while the trend of dividend increases is actually declining (3 straight quarters), the trend in equity buybacks (highlighted by Berkshire Hathaway) has actually remained robust increasing for the last 8 quarters.

For you Red Sox fans...or haters...the finger pointing has begun (in this Boston Globe article). Starting pitchers Beckett, Lester and Lackey were "drinking beer, eating fast-food fried chicken, and playing video games in the clubhouse during games while their teammates tried to salvage a once-promising season." The "consequences were apparent as their body fat appeared to increase and pitching skills eroded."

The animal spirits are happy this morning encouraged by strong comments from Geithner and payroll data coming in above expectations.

While speaking yesterday afternoon, Geithner said yesterday before the Senate banking committee that there was "absolutely" no chance that a big US bank would fail.

Non farm payroll data this morning was both above expectations and included upward revisions to the previously two monthly reports. Tempering that enthusiasm is the knowledge that the current 3 month average growth of ~97k is well below the needed 125-150k needed to keep up with natural population growth.

If you work as a lobbyist, it's likely you pulled an 'all nighter' last night reviewing the leaked draft proposal of the Volker bill. The WSJ highlights the following section as particularly worrisome for fixed income trading divisions : "[trading] must be designed to generate revenues primarily from fees, commissions…or other income not attributable to appreciation in the value of covered financial positions it holds in trading accounts." I've noted repeatedly that you cannot have liquidity without capital. If regulations impede, restrict, or forbid the ability of banks/brokers/dealers to hold bonds (even for a short amount of time), clients liquidity will be impacted. Glenn Schorr (Nomura) cautions that this draft could intentionally be dire "in order to facilitate further discussion during the 60-day public comment period."

In falling markets or dwindling liquidity, one is often forced to sell NOT what one wants but rather what one can. A Goldman piece warns (via FT/Alphaville) that this soon may occur with the French banks; what they can actually sell at the moment is US assets. They opine that the sales could be focused on "(1) aircraft leasing, (2) commercial real estate, (3) equipment financing, and (4) leveraged loans."

Markets can handle both good news and bad news. However, markets detest uncertainty. I'm concerned that the imminent and pending clash between Congress and the White House over potential tariffs on Chinese goods (as result of them being labelled currency 'manipulators') adds yet another healthy and potentially dangerous dose of uncertainty. This opinion piece in The New Republic (via Poltico.com) sums it up nicely.

You'll note that yesterday's rumor of a new round of Euro bank stress tests has been officially denied. Also, Sarkozy and Merkel are meeting this Sunday over their differences about how to implement a bailout package.

OFF TOPIC - I heard this fellow interviewed on NPR this morning and found him to be intelligent, articulate and enthusiastic. He has written a non-consensus op-ed in today's NYTimes titled "This War Can Still Be Won" about his experiences in Afghanistan. He is a Special Forces major who speaks Dari and just spent twelve months embedded with the Afghan army (his impressive bio is here).

Jobs, showers and a point

There seems to be increasing realism in Europe. On one hand, the ECB buying of debt is actually having meaningful impact; perhaps it's fleeting but it's tangible at the moment. In addition, the talk of another round of European bank stress tests has the revolutionary idea of....gasp....using market values for sovereign debt.

The recently conducted Spanish debt auction resulted in yields that were a full 130bps lower than the previous auction. You can thank the ECB purchases for that....but before you yell "Ole!" please recall that Spanish gov't yields are still at historic wides versus German gov't yields.

On the matter of the coming stress tests, I discovered (via FT/Alphaville) a fancy interactive graphic tool here to input your own variables for a customized Euro bank stress test.

For those that watch retail investor behavior for leading but contrary indicators, please know that Morgan Stanley has set a record pace of issuance of structured notes to retail investors that are keyed off of interest rates. When mom and pop capitulate, it (name your sector/security/market) is headed the other way.

Ann Coulter, on the 'occupy wall street' protestors: "I am not the first to note the vast differences between the Wall Street protesters and the tea partiers. To name three: The tea partiers have jobs, showers and a point."

Be aware of Geithner on the tape today at 2pm on the domestic jobs bill and the European crisis.

Hope, hackers and clueless

If I were banned from looking at the screens this morning and simply read of a 3 notch Italy downgrade, Deutsche Bank speaking of "significant and unabated slowdown in client activity" and more proposed legislation of a financial transactions tax, I would think we'd be opening weaker.

But alas, apparently hope, still springs eternal and the risk markets are rallying to start our day. 'Hope' is currently taking form of 'IMF support'.

Eric Beinstein's (JPMorgan) excellent data and research shows that the broad corporate market's negative basis is narrowing to it's tightest level in over a year (with the exception of a brief spike the day of the US AAA downgrade). A narrowing (negative) basis implies that cash bonds are less cheap to CDS. When cash bonds rally vs CDS as they are now, it's usually a sign of sustainable demand for corporate bonds. When CDS rallies, it's usually 'fast money' or the dealers who's time horizon is typically much shorter.

Once again, Costco announced strong earnings. For the majority of this year, the credit markets have viewed Costco as more creditworthy as the US Treasury (comparing the 2 credit default swap spread levels).

Marketbeat/WSJ note that the S&P closed on October 3rd, 2008 at 1099.23. Yesterday, October 3rd, 2011 it closed at 1099.23.

For Warren Buffett watchers, he gave a fairly lengthy interview (here) yesterday. His broad observations started with "our housing-related businesses are as bad as they've ever been during this period. Everything else you name is up. And our railroad carried 200,000 car loads last week, that's the highest total in three years."

While most in our industry view 'occupy wall street' as completely clueless, Erin Burnett at CNN managed to capture and confirm this thesis here. She asks a protester if he knew that the bank bailout package actually made money for the taxpayers and he replied "umm, no" and conceded that that information would change his thinking.

Forgive me for sounding like Chicken Little, but a fairly effective and well known hacker called Anonymous has targetted the New York Stock Exchange. Previously, he successfully took down PayPal and Mastercard. While he, or they, haven't specified whether it will simply be nyse.com or the actual market infrastructure, I believe it warrants notice....so tread carefully on Monday October 10th at 3:30pm. CNBC has the video threat here.

Them there CDSSers

I'd be regurgitating old information were I to cite the drivers of today's malaise in the risk markets. Have no fear, the Fed will "continue to closely monitor developments" according to Bernanke at Congress today. I was really hoping he would stand up and say "this is John Galt speaking."

The New York Fed released a very interesting study about CDS trading. Some of their observations and conclusions may come as no surprise to someone that has actively traded them while other points were long suspected but never confirmed. In what is becoming patently obvious at the moment, the report noted "little evidence that dealers hedge large trades" and that they "typically hold on to risk taken on in customer trades for some time." Also, only 500-100 unique participants trade on a daily basis (in single name CDS) and over half the transactions occur between the G14 dealers. The 'majority' of single name CDS traded "less than once a day" while the "most actively traded changed markedly over our three month sample." All in all, it's a must read.

Dick Bove released an assertive report stating that bank stock declines are overdone and should be bought. You can read his brief rationale here (via Dealbreaker.com).

Waiting For Superman

Greece remains at the fore of the risk markets yet again. This time, the release was notable not for it's content but rather it's honesty and realism. They admit that they are unlikely to meet the deficit targets set only months ago.

As you well know, when credit spreads for a certain issuer invert, it means there is concern about the credit. The most visible and broad intra-day index in the credit markets is the CDX. Their 5yr and 10yr spreads are now the narrowest (i.e. still normal, not inverted) that they've been in ~15 months. Please be aware that the CDX does not contain and banks/finance entities (who's curves have been flat/inverted for some time).

One of the primary drivers of the longer term sustained rally in credit has been strong retail demand for the product. The most recent AMG data shows sustained, but subdued, inflows into taxable bond funds....but if you remove ETFs, that turns to the first (small) outflow in several weeks.

While this observation may be too late to make you any money during this move, it's one to be aware of nonetheless. The CRB RIND index is a commodity index made up of basic commodities (details here) that are not primarily traded on a futures exchange and therefore can be viewed as less influenced by speculators. During August, the regular/normal CRB index rallied strongly causing some to believe commodity prices were moving higher. Astute observers, namely Julian Garran at UBS, warned not to believe the hype and that commodities were still weak and weakening. Alas, he proved right this time as the broader index eventually retreated. On Bloomberg, it is CRB RIND .

The Sunday Times is reporting (via FT Alphaville) that Goldman will be zero-ing out their bonuses and attempting to hold their revenue pay out ratio to an all time low of 35-40%.

As recounted by former Senator Phil Gramm, when Abraham Lincoln first met Harriet Beecher Stowe, he allegedly said "so I finally get to meet the woman who wrote the book that started the Civil War." Her book had humanized the outrage of slavery and moved it from a distant concept/practice to a painful reality that needed action. Senator Gramm went on to say that the movie Waiting for Superman will be the Uncle Tom's Cabin of our generation.

On the beach

Alas I find myself in a similar situation to when I first started writing this blog in the beginning of 2009. Due to decisions made well above my pay grade and across the ocean, I find myself 'on the beach' once again. Before you immediately put my missive on the junk/spam filter watch list, I assure you that I will not be sending many of these. Hopefully only a handful as I have already been re-engaged by several potential future employers.

I'd like to say I'm back due to popular demand. Exactly two friends responded "good, now you can re-start your blog" when they learned of my recent departure from the payrolls of a large bank.

My first observation is a repeat of a long held belief that 'you cannot have liquidity without capital.' Take a look at this graph (Fed data) of US broker/dealer holdings of corporate bonds:

The capital provided to clients as liquidity to trade corporate bonds has fallen off a cliff. The non-capital/agency dealers must be licking their chops. However, it can take a long time for large institutional investors to alter their thinking and trading styles to a more 'patient liquidity' model.

My second observation may be overly simple and perhaps naive. There are few, if any, investors (in any asset class) that believe the European sovereign situation will improve any time soon. In my >20 year career, every single time the entire market felt the same way about a future outcome, that particular outcome rarely actually occurred. While I'm not predicting an immediate positive solution/outcome to Europe, I would posit that a 'positive' outcome would like be the most disruptive to the market. Witness early 2010 when almost every single investor (ex Rick Rieder @ Blackrock) thought US rates were going to rise dramatically. They made salient fundamental and technical arguments for why this was inevitable. Yet, the exact opposite occurred. Back to Europe, be sure to read, or re-read, Michael Lewis's very prescient article from October 2010 about Greece.

Many have observed that Wednesday night was perhaps the most exciting group of games in baseball history. The NYTimes has an article where they write that the odds of those particular game outcomes were 1 in 273 million. In addition, on a more painful and personal level, they note that the odds of the Red Sox making the playoffs, as of September 3rd, were 99.6%.

The End

Well, it's over. My time on the beach as a blogger has come to an end. I've decided to re-join the ranks of the gainfully employed and I'm pretty confident my new compliance department will not take kindly to my predilection for blogging.

So, thank you all very much for actually reading it and thereby forcing me to think hard about the credit markets on a daily basis.

Keep up the vigilant curiosity, avoid bland certainty and aspire to regular critical self reflection.

Daily Commentary

Spreads are tighter this morning following China's big equity move and an 'as expected' ECB leaving rates unchanged. Secondary volumes are actually about normal while the new issue calendar is fairly light. We did see >$4B in issuance yesterday; the bulk of which was a series of issues from Westpac. So far, no new issues in the queue and I'd be surprised if we saw much ahead of tomorrow's US payroll number. I am encouraged by the recent steepening in the credit curves. It may be solely in reaction to the flattening of the underlying US Treasury curve but it's a healthy sign nonetheless.

Please note that the main credit index is about to roll. The new constituents for CDX #13 have been chosen and it will start to trade on September 21st. Initial analysis has the new index trading ~16bps tighter than the current one.

I was a bit surprised to see S&P putting >$5B in corporate loan CDO's on creditwatch negative; perhaps I was a bit naive in my belief that the worst had passed us by.

Warren Buffet seems to believe that the worst has past in the mortgage market as evidenced by his recent purchase of Capmark's mortgage unit. Spreads in BRK paper did not react much at all.

While the ECB remains unchanged, the FOMC has "considerable uncertainty" about the strength of the economy (minutes here). This leads me to wonder why Fed governor Plosser was on the tape predicting that rates will have to rise "very rapidly".....he did, however, add a codicil of "if the time is right."

While I'm generally pretty dismissive of most financial tort lawsuits (being a believer in 'caveat emptor'), this recent suit has some interesting tenets. The rating agencies are claiming their opinions are protected under "free speech". Well, this particular judge does not believe that defense is adequate and is allowing a class action lawsuit to proceed against them. Here's the Bloomberg story.

If you can survive the first few paragraphs about golf, Bill Gross does eventually get to what he believes is the 'new normal' for the financial markets in his recent monthly outlook.

Here's some more interesting Labor Day weekend reading....in which the SEC rails at the SEC for not catching Madoff...even Madoff himself was surprised he didn't get caught.

Daily Commentary

Spreads are still slightly weaker despite a higher ISM Manufacturing number. We certainly feel rangebound in this last summer week. Yesterday's month end (daily) volume was very low versus previous month ends.

Market participants all seem to be awaiting the determining factor of September supply. As JPMorgan notes, supply could be heavy given attractive all-in yields for the issuers and impending October earnings blackout. Countering that are the already high cash on balance sheet levels and moribund capex spending. Plains All American Pipeline is the only new issue queued up this morning.

Here's a marketing piece from PIMCO where one of their portfolio managers notes their concerns about declining recovery values in credit (via Blooomberg news).

The volume of stories about current or pending CMBS defaults seem to be approaching a crescendo. Here's the latest from Bloomberg news.

AIG credit is getting whacked just as badly as the equity post Bernstein downgrade and lawsuit dismissal.

Those traders at RBS really stayed glued to their desks don't they.....oh wait, those are protesters who have glued themselves to the desk. (via FT/Alphaville)

Daily Commentary

Weaker global equities have credit spreads following suit. Secondary volume was very very light on Friday and once we get past today's month-end activity, I suspect the rest of this pre-Labor Day week will be light as well. Only one new issue, from Republic Service Group, is in the market today.

M&A is definitely back as 2 deals were announced today. Disney buying Marvel and Baker Hughes buying BJ Services. BHI spreads are ~7-10bps wider on the news and they made a comment on the conference call that if the bond market stays where it is, they'll term out the debt (i.e. it's really attractive for us to fund now). DIS spreads were only a few basis points wider in line with the broader market.

Radio Shack is following the trend of deleveraging and tendering for 1 of it's outstanding bonds at above market prices. To give you equity folks a feel for corporate bond trading, these particular bonds only traded once during June, once during July and once during August in non odd lot size. As one could extrapolate, this throws quite a wrench into the works for those that had bought protection on RSH in the credit default swap market (i.e. a short squeeze).

Speaking of credit default swaps, I've mentioned more than once the existence of an oligarchy that profits quite handsomely from this market. Here is a Bloomberg story about their efforts to lobby against regulation and change.

I've recently noted the potential harmful impact on the banks of the pending accounting rule change with regard to securitized assets. Apparently, the FDIC also recognizes this and is now proposing a phase-in as opposed to a Big Bang.

Yes, this is slightly old news but Bloomberg has a good piece about the leverage at the banks picking up. Speaking of banks growing....here's a Washington Post piece (via The Atlantic) about those banks that were 'too big to fail'...and are now bigger.

Post a failed LBO, there's often loads of sour grapes whining. Here's a piece in BreakingViews about Tribune bondholders claiming fraudulent conveyance.

I missed this piece last week in FT/Alphaville which was a commentary from PIMCO's El-Erian regarding a 'to-do list' for Bernanke for his second term.

Fortune magazine has a longer article about Chris Flowers and the loss of his Midas touch.

Daily Commentary

Spreads are meandering slightly tighter this morning following equities. While I acknowledge it is a summer Friday, I'm surprised that secondary volumes are so light given the impending month end. No new US issues are on tap so far today. Looking at the JPMorgan credit index, the current yield is 5.45% and the average bond price is $105.24.

I'd think the credit markets would have been more encouraged by AIG's new CEO saying that he would be patient with his asset sales. A prudent seller helps all markets...AIG CDS is slightly weaker on the day however.

It's rare to find an enormous disparity between the credit views of the two major ratings agencies Moody's and S&P. Thus today's Reuters story highlighting their current wildly different beliefs about high yield default rates makes for interesting reading.

Recently I noted that Israel was the first central bank in this cycle to hike rates. Contrast this with Sweden which recently cut rates below zero (story here).

Clearly I should not delve too far into global macroeconomic theory given that this story surprised me a bit....the Economist maintains that a country's investment returns are not correlated with it's GDP growth.

While some companies would prefer to avoid their regulators at all costs, others feel it benefits them to be close or friendly. This approach, from disgraced financier Allen Stanford, is taking the latter to a creepy extreme.

Daily Commentary

Spreads are largely unchanged this morning in light volume. On the new issue front, only 1 deal from Praxair seems to be queued up. The recent P&G benchmark deal, which can be used as proxy for the health of the new issue market, remains a few basis points tighter than where it was issued. While secondary volume is off a bit, the breadth of the market remains healthy.

JPMorgan credit research recently noted that EBITDA margins in Q2 were actually above the average of the last decade.

Diageo's CEO was on the tape this morning making comments about his eagerness to make acquisitions; spreads in Diageo CDS were about 5bps wider to the low 70bps area. I note this as it's been quite some time since I've seen any M&A chatter affecting spreads.

The long awaited FDIC rules (39 pages of them) regarding private equity firms buying failed banks have been released (here). As expected, the capital requirement was lowered from the proposed 15% to a more palatable 10%. However, this Reuters Blog astutely notes that it's no longer pure Tier 1 capital (reserve) but rather Tier 1 Common Equity.

Fed governor Lacker made comments (here) that concluded with his intention to revisit whether the Fed should complete it's entire targetted purchase of $1.25T of mortgage backed securities. This is likely to raise many eyebrows amongst the mortgage crowd. In theory, most investors disapprove of any government intervention in the markets....while in practice, everyone privately likes it when the government artificially inflates the price of securities you own.

Given the lack of credit focused news items to write about this morning, I'll delve into mortgages for the second time today. The NYTimes has an article about the enormity of pending mortgage rate resets coming in the next few years that could easily threaten any real estate recovery. BusinessInsider's Henry Blodget also has some graphs on the same matter (here).

Buttonwood from The Economist has a short posting here about the debate whether private equity owned firms outperform public firms.

Daily Commentary

The market is suprisingly resilient for a late August day. Spreads are unchanged to slightly wider but secondary volume and breadth are quite healthy. I would like to reiterate, however, that credit spreads have definitely lagged the rally in the S&P since early July.

The new issue market is performing well with a large issue yesterday from P&G (which is slightly tighter in the secondary) and new issues today from Westfield Group and Roper Industries. Roper is barely investment grade rated yet the deal is several times oversubscribed.

Zerohedge has posted a copy of a letter to the SEC attributing blame for the money market fund problems clearly on the rating agencies. While this in itself is no shocker, the fact that the author of the letter runs a rating agency himself is unusual...as you can imagine, he largely points the finger at his competitors.

Looking at the DTCC data, I did notice one data point that was out of line with much longer term trends. Gross index outstanding has actually picked up for the first time in a long time; growing liquidity in that index bodes well for the market. Before the credit crisis, you could easily do a $2B trade, on the wire, with little impact to the market. During Q1, that liquidity dropped to $25-50mm but has gradually crept back up to $500mm-$750mm size markets.

This slightly dated article from the NYTimes draws some comparisons between GE and Enron with regard to their earnings management (aka manipulation). It quickly reminded me of one of my favorite contrarian articles of all times from Malcolm Gladwell in the New Yorker (here). In it, he argues that all of Enron's financial information was publicly available for those willing to solve a very very complex puzzle.

Commercial real estate is still struggling. However, some may point to the recent drop in delinquencies (the first since August 2008). Realpoint Research (via FT Alphaville) notes that it's simply a technical due to a large amount of GGP backed loans temporarily returning to 'currently paying' due to modifications.

Daily Commentary

Credit spreads are largely unchanged this morning in advance of a slew of real estate data. Case/Shiller for June was slightly better than expected while we are still waiting on FHFA for June and new home sales for July.

While we're only seeing 1 small deal from DUK in the US investment grade market today, Europe is witnessing 2 very interesting offers from Banco Santander. Their first offer is to buy back securitized product that they issued at slightly discounted prices (details here). This is certain to help liquidity in their ABS market as investors jockey positions to take advantage of this. Their second offer is an exchange similar to what Viacom did recently. They are offering to buy back several of their off-the-run existing issues at a discount in return for new benchmark sized bonds. These are both signs of healthy and growing liquidity.

More than once you've heard me note the wide spreads and lack of liquidity in the REIT sector. CreditSights has published a relatively bullish fundamental piece this morning noting that REITs are "no longer focused on last resort measures of bolstering liquidity" and they have sufficient cash or credit to meet maturities through 2012.

Quick pop quiz....are any central banks raising rates? Yes, Israel did this morning from .50% to .75% .

While this certainly shouldn't come as a surprise, apparently the FDIC will ease their rules that had precluded private equity firms from buying banks.

To those that howled in protest over the government bailout of Citi, I will now respond "should we taxpayers keep the $11B we've made so far?" (story here)

While some may express surprise that Goldman, or any other firm, allegedly gave their opinions to certain clients but not all, I am not. Let's be realistic here.....in ANY industry, clients that provide the largest revenue streams get the best service. If you spend big bucks at an airline, you get the best food, best flight attendants and comfortable big seats. If you spend loads of dough at Saks Fifth Avenue, you get a personal shopper and an early look at the Tory Burch Spring collection. No one should be surprised or offended by this gradation....remember, they are opinions and only that.

Daily Commentary

Credit spreads are slightly better this morning as they blindly follow equities. Equities were obviously buoyed by Bernanke saying that the "prospects for growth in the near term were good."

We've seen four straight weeks of declining secondary volumes and this week is unlikely to break that trend. In addition, so far today only 1 smaller issue from Westpac has been announced.

There's likely to be little on the docket this week to drive spreads with the possible exception of the US Treasury auctions of 2 year, 5 year and 7 year bonds. I don't think the folks at treasury are thrilled with the timing of PIMCO's McCulley saying on Bloomberg radio this morning that the "big gains to be made in our lifetime in treasury bonds have been made." (more here).

FT Alphaville pointed out the ECB's lending survey data which shows that lending standards have eased back to the level of mid 2007.

If you're headed to the beach and would like some light reading, here are Bernanke's "Reflections on a Year of Crisis." from the recent central banker boondoggle in Jackson Hole.

The WSJ made reference to a recent S&P report that asserted 75% of all fixed income funds, including 98% of mortgage funds, have underperformed their benchmarks. While this ex-active buysider is certainly biased, the underlying indices in fixed income are very difficult to virtually impossible to actually replicate in the markets.

Existing home sales in the US were well above estimates driving stocks higher which in turn has credit spreads doing better this morning. While many are citing (whining?) about volatility in spreads being exacerbated by low secondary volume, the TRACE data shows that it's down only slightly. That being said, the tech/media/telecom names do seem to be gapping tighter on few actual trades.

Half of the recent mutual fund flow data was a continuation of recent trends; positive flows into high grade bond funds and outflows out of money market funds. However, it was a bit of a surprise to see both high yield bond and equity funds have outflows.

Earlier this week, I mentioned how a FAS ruling about off balance sheet securitization (being reversed) may hurt the banks. Apparently the FDIC is quite concerned about the impact as well...."the timing gives me heartburn" said their chief here.

Earlier this month, I had a post about prime mortgage borrowers defaulting at a higher rate than sub-prime borrowers. Here's more on that alarming trend from the Mortgage Bankers Association (tip from FT Alphaville).

Apparently, mom and pop can now 'hedge' (or speculate on) their real estate risk. Read about it in this Economist article.

The fact that corporate treasurers are being conservative with their balance sheets right now should not surprise anyone. This WSJ article will add some more data points to the argument.

The Vix has now had 7 days of opening up higher and closing lower....today's open was lower however. So much for my prediction that a base was forming....

Zerohedge points out that Goldman CDS has widened from ~100bps to ~150bps during August while the stock is about unchanged over the same time frame. Looking at a broader 3 month regression tells the same story (stock 'should be' lower or the CDS tighter) but with a weak R squared (~.51).

Spreads are holding firm this morning on this very light news flow day.

Yesterday's new issue from Viacom saw a slight upsize due to demand; the 10 year bonds are trading this morning about flat to where they were issued yet the 5 year bond is trading about 10bps through issue spread.

Stealing a page book from Rahm "Never let a crisis go to waste" Emanuel, the CFTC is making a move to 'enhance' the current derivatives regulation proposal. This occurred despite Geithner's urging of agency heads to stop campaigning for changes.

While I have been concerned about the Vix's attempt at a move higher, it seems that the last 6 days have seen the index move higher on the open but close lower on the day.

Given the lack of other things to write about, I've perused the most recent DTCC data on credit default swaps. The only thing that caught my attention was a healthy spike in the amount of swaps referencing Credit Suisse (granted it was off a relatively small base).

While it is clearly dull as dishwater, I'd like to keep people's attention on the debate over mark-to-market accounting. The most recent salvo comes from Nobel prize laureate Robert Merton (and others) supporting the use of mark-to-market (aka fair value).

This blurb from StructuredCreditInvestor points out an interesting conundrum with regard to structured product payouts in the event of the Lehman bankruptcy. While technically, investors in a typical ABS should receive an 'accelerated' payout in the event of (some) default, this court case says that should not be true as that would be 'favoring' some creditors over others.