C.M.O. 2.27.2009
Credit Market Overview
February 27 2009
I have offered in this space recently historical evidence of how fiscal stimulus is not the right prescription to bring the economy out of its current malaise by quoting FDR’s Treasury Secretary, Henry Morgenthau’s dairy entries including: “We have tried spending money. We are spending more than we have ever spent before and it does not work.” which rings so true in the face of the recent +/-$800BN spending bill just signed into law.
Additionally, I have also discussed the work of Friedrich Hayek a contemporary of John Maynard Keynes but an opponent of Keynes’ thinking “that general employment was always positively correlated with the aggregate demand for consumer goods."
As these do not seem to have made an impact I bring another more contemporary example; that of the great growth engine of the world at the moment, China. The government of the People’s Republic has put about 230BN Yuan ($34BN) into stimulus projects in that country recently. Immediately following the announcement of this package steel prices began to rise and bank lending increased. Affects the current administration is hoping will repeat themselves in the U.S.
The problem is that those affects are now proving to be superficial and do not appear to have restarted China’s real economy. Steel prices, which had gained 15% from the November lows to the beginning of February are now falling again, industrial output in Shanghai was down 12.7% in January from the same period last year and the 1.62TN in new loans made, twice the 2008 number, are being hoarded by those companies that borrowed the money so the usual expansive effect of “borrowing to build” is non-existent.
“Recent monetary and credit data do not reflect real economic demand.”;Ha Jiming, chief economist of China International Capital Corp. You see, even they realize it’s not working.
I quoted Robert Rodriguez, CEO of First Pacific Advisors, yesterday as recently saying that his investment mantra was: “Winning by not losing.” Proof of how RR’s words ring true in the current market place and especially for the CEC Strategy can be found by looking at the CDS/equity relationship of names in the healthcare field.
CVH is the most dramatic example as CDS spreads have recently come in from their highs around 570bps to the 475 level, a 95bp or 16.67% contraction. Moves lower in CDS spreads, ceteris paribus, usually portent higher stock prices but the just announced plan to pay for the health care plan by taxing the healthcare providers has thrown a “spanner in the works” as the stock has plummeted from the $16.87 recently to $11.88 yesterday. That’s $4.99 or 29.58% for all of you that had a “Thirsty Thursday” last night.
When the markets move as they have been and policy announcements change the economic landscape overnight, Mr. Rodriguez’s mantra seems to be a good one to keep in mind.
Enjoy the weekend.
Jim Delaney
February 27 2009
I have offered in this space recently historical evidence of how fiscal stimulus is not the right prescription to bring the economy out of its current malaise by quoting FDR’s Treasury Secretary, Henry Morgenthau’s dairy entries including: “We have tried spending money. We are spending more than we have ever spent before and it does not work.” which rings so true in the face of the recent +/-$800BN spending bill just signed into law.
Additionally, I have also discussed the work of Friedrich Hayek a contemporary of John Maynard Keynes but an opponent of Keynes’ thinking “that general employment was always positively correlated with the aggregate demand for consumer goods."
As these do not seem to have made an impact I bring another more contemporary example; that of the great growth engine of the world at the moment, China. The government of the People’s Republic has put about 230BN Yuan ($34BN) into stimulus projects in that country recently. Immediately following the announcement of this package steel prices began to rise and bank lending increased. Affects the current administration is hoping will repeat themselves in the U.S.
The problem is that those affects are now proving to be superficial and do not appear to have restarted China’s real economy. Steel prices, which had gained 15% from the November lows to the beginning of February are now falling again, industrial output in Shanghai was down 12.7% in January from the same period last year and the 1.62TN in new loans made, twice the 2008 number, are being hoarded by those companies that borrowed the money so the usual expansive effect of “borrowing to build” is non-existent.
“Recent monetary and credit data do not reflect real economic demand.”;Ha Jiming, chief economist of China International Capital Corp. You see, even they realize it’s not working.
I quoted Robert Rodriguez, CEO of First Pacific Advisors, yesterday as recently saying that his investment mantra was: “Winning by not losing.” Proof of how RR’s words ring true in the current market place and especially for the CEC Strategy can be found by looking at the CDS/equity relationship of names in the healthcare field.
CVH is the most dramatic example as CDS spreads have recently come in from their highs around 570bps to the 475 level, a 95bp or 16.67% contraction. Moves lower in CDS spreads, ceteris paribus, usually portent higher stock prices but the just announced plan to pay for the health care plan by taxing the healthcare providers has thrown a “spanner in the works” as the stock has plummeted from the $16.87 recently to $11.88 yesterday. That’s $4.99 or 29.58% for all of you that had a “Thirsty Thursday” last night.
When the markets move as they have been and policy announcements change the economic landscape overnight, Mr. Rodriguez’s mantra seems to be a good one to keep in mind.
Enjoy the weekend.
Jim Delaney
Labels: CDS, correlation, credit, equity
posted by Jim Delaney at
3:28 AM
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