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.

Daily Commentary

Heretofore, the technical demand for credit has allowed the market to be somewhat impervious to bad news.  This morning, there is a crack in that resiliency as a trio of bad headlines have spreads wider this morning.  The Fed's negative outlook, new credit card regulations that could hinder profits at the banks and S&P putting the UK's AAA rating on 'outlook negative' are today's culprits.

This holiday shortened week has predictably, and thankfully, had light issuance; yesterday saw only ~$1B in deals with none on tap for today so far.  That being said, secondary volume was very heavy yesterday with the 'dealer sell' vs 'dealer buy' ratio stubbornly high.  

I think most investors can be happy with the progress of bank capital raising.  Remember, only the plans are due by June 6th...yet half the capital has already been raised in only 2 weeks.  The WSJ has a very interesting interactive graphic showing the various capital ratios at pre-crisis levels, a baseline and an adverse scenario.  Be sure to click through all 3.

I regularly mention the negative basis of the market.  I was encouraged to see that that very same metric is watched by the Fed's Open Market Committee (FOMC).  While participants are well aware of the difficulty, equity investors should note that even the Fed can only estimate bid/ask spreads in the corporate market.   

Love him or hate him....everyone has an opinion of Jim Cramer.  This NYTimes article notes a study that his stock picks have outperformed.  

       

Daily commentary

It's been a quiet mixed open for credit this morning.  Global equities were down slightly while swap spreads are slightly tighter.  Yesterday's equity move pushed the Vix higher in one of the largest one day moves in quite some time.  

Today is a heavy day for economic data so we'll likely take our directional cues from something in this slew.

Despite yesterday's markets, new issues from Dupont, Union Pacific and Coca Cola Enterprises were all successfully placed.  For full details, type NIM3 on Bloomberg.  Deals from Roche and Ameren are being marketed this morning.  

The negative basis (the measure of rich/cheap between bonds and CDS of the same name) moved inside -200bps for the first time since October.  When the basis is negative, as it is now, that means that bonds are cheap to CDS.  As this number shrinks and approaches zero, that means bonds and CDS are approaching fair value (to each other).  This tells me that the 'hot money' (hedge funds and dealers) continues to close out their CDS positions.

Former Fed Chairman Greenspan, he of fading relevance and influence, opined on possibly nationalizing the banks.  

The cheapest or widest sectors in the corporate bond market are currently REITs, diversified financials, insurance, financials and consumer/retail.

The richest or tightest sectors are healthcare/pharma, industrials, telecom, utilities and energy.