C.M.O. 2.26.2009
Credit Market Overview
February 26 2009
Robert Rodriguez, CEO of First Pacific Advisors, stated during a Barron’s interview recently that his investment mantra was: “Winning by not losing.” True to his word RR had up to 45% of his main fund in cash at certain points last year.
Although the VIX is down from its 52.62 close on 2/23/2009 that might be reflecting non-participation as much as a reduction in fear. Since 2/10/2009 there have been only 2 days with less than a 2% range from the previous night’s close on the SPX. The average daily range for this period has been 3.3% with a max of 5.2% on the 10th. While there might not be fear it would appear uncertainty abounds.
One of the things people do feel pretty certain about is that it will take a bottom in housing and the financials for any turn higher in the market to be more than an oversold technical rally.
Tuesday’s release of the Case/Schiller home price data showed prices 27% from their 2006 highs and inventory levels at 9.3 months of overhang vs. 11.2 months in November. While these numbers might seem encouraging Michelle Meyers, an economist at Barclays warns that the inventory numbers are not seasonally adjusted so they could rise again come spring.
The other two caveats she mentions are that a good portion of the recent purchases were by speculators who will not hesitate to dump their properties back on the market if the downturn persists. Additionally, while the current roughly 9 months of unsold home supply is better than the 11 number from November it is still twice the “normal” level of about 5 months. Michelle does not feel housing prices will bottom until a peak to trough number of about 40% is reached.
One can only imagine what the additional 13% drop in home prices will do to foreclosures and their ripple will affect on all things credit and confidence related.
An interesting piece in the WSJ Op/Ed section yesterday discussed how earnings were calculated for the S&P and how it differed from how the index itself was calculated. The index, as we all know is capitalization weighted so that a 1% move in XOM affects the index more than a 1% move in JNY.
The earnings it seems are not weighted in the same proportion so that if XOM makes a buck and JNY loses one S&P earnings are said to be zero. Using this methodology people are coming up with earnings numbers in the $40-$50 range and saying that the current SPX levels are too high as a result. The Op/Ed piece argues that earnings should be weighted in the same proportion as the stocks themselves. In doing this the author calculates that earning on the S&P are probably closer to $70.
I have never constructed or arbitraged indexes but the logic of the argument does seem to make some sense if only for reasons of consistency. As with all things, however, the market looks at what the market looks at and as we have all learned, the market is ultimately always right.
Enjoy the week.
Jim Delaney
February 26 2009
Robert Rodriguez, CEO of First Pacific Advisors, stated during a Barron’s interview recently that his investment mantra was: “Winning by not losing.” True to his word RR had up to 45% of his main fund in cash at certain points last year.
Although the VIX is down from its 52.62 close on 2/23/2009 that might be reflecting non-participation as much as a reduction in fear. Since 2/10/2009 there have been only 2 days with less than a 2% range from the previous night’s close on the SPX. The average daily range for this period has been 3.3% with a max of 5.2% on the 10th. While there might not be fear it would appear uncertainty abounds.
One of the things people do feel pretty certain about is that it will take a bottom in housing and the financials for any turn higher in the market to be more than an oversold technical rally.
Tuesday’s release of the Case/Schiller home price data showed prices 27% from their 2006 highs and inventory levels at 9.3 months of overhang vs. 11.2 months in November. While these numbers might seem encouraging Michelle Meyers, an economist at Barclays warns that the inventory numbers are not seasonally adjusted so they could rise again come spring.
The other two caveats she mentions are that a good portion of the recent purchases were by speculators who will not hesitate to dump their properties back on the market if the downturn persists. Additionally, while the current roughly 9 months of unsold home supply is better than the 11 number from November it is still twice the “normal” level of about 5 months. Michelle does not feel housing prices will bottom until a peak to trough number of about 40% is reached.
One can only imagine what the additional 13% drop in home prices will do to foreclosures and their ripple will affect on all things credit and confidence related.
An interesting piece in the WSJ Op/Ed section yesterday discussed how earnings were calculated for the S&P and how it differed from how the index itself was calculated. The index, as we all know is capitalization weighted so that a 1% move in XOM affects the index more than a 1% move in JNY.
The earnings it seems are not weighted in the same proportion so that if XOM makes a buck and JNY loses one S&P earnings are said to be zero. Using this methodology people are coming up with earnings numbers in the $40-$50 range and saying that the current SPX levels are too high as a result. The Op/Ed piece argues that earnings should be weighted in the same proportion as the stocks themselves. In doing this the author calculates that earning on the S&P are probably closer to $70.
I have never constructed or arbitraged indexes but the logic of the argument does seem to make some sense if only for reasons of consistency. As with all things, however, the market looks at what the market looks at and as we have all learned, the market is ultimately always right.
Enjoy the week.
Jim Delaney
Labels: CDS, correlation, credit, equity
posted by Jim Delaney at
3:20 AM
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