C.M.O. 3.27.2009

Credit Market Overview
March 27, 2009

“Still waters run deep.” The origin of this statement comes from the fact that shallow rivers are rough with waves as the rocks are close to the surface. Deep rivers have a lot of water between the rocks on the bottom and their smooth surface. Additionally, while appearing placid they move much more water towards the sea.

Events this week have proved this to be true once again as the congressional henchmen (p.c. henchpeople) noisily took swipes at Ben and Tim over monies promised to people that had not caused the problems but signed on to bring AIG to an orderly end.

Ben Bernanke always seems especially uncomfortable during those hearings as it just might be possible that his studies of our Great Depression and the Japanese economy in the 1990’s puts a lot of water (knowledge) between his outward demeanor and the giant boulders he knows this economy is coursing over at the moment.

With this in mind Ben had an interesting answer to the question “What keeps you up at night?” during a recent television interview. It wasn’t anyone of the myriad problems he is contending with on the surface these days. Instead he said, “The biggest risk is that we don’t have the political will, that we don’t have the commitment to solve this problem and we just let it continue. In which case, we can’t count on recovery.” I will leave you to decide how shallow or deep that statement is but I thought it had a pretty smooth surface.

Speaking of hidden rocks, I attended a talk at the NYSSA last night which was titled “The Investment Process”. It was an enlightening and informative evening and the speakers included Jason DeSena Trennert of Strategas Research, Steven Frenkel of eponymously named Associates Inc. and Mark Sladkus of Red Lighthouse Investment Management with David Darst MD Morgan Stanley as the keynote speaker.

It would take too much space to review the entire evening but I will share a few things with you here. Jason Trennert believes the investment process [in equities] is moving from an income statement focus to one focused on the balance sheet. I include this because this is one of the major tenets of the Credit Equity Correlation Strategy I have developed as it looks at the CDS market to generate buy and sell signals for equities.

David Darst, as many of you know from his frequent appearances on television, is a wonderful speaker with an engaging personality and had the audience in stitches more than once.

But since this is about rocks in the water I must say that Steven Frenkel’s segment was the most foreboding. Steven is a technician, which begs the question as to how he got to speak to a room full of CFA’s, and has studied market movement going back to ancient Rome. Steve’s specialty is the 75-year cycle (still waters, my friend) and he says that the move down in the stock indexes in 2008 broke a trend line going back to . . . . you guessed it, 1933.

He had presented his work to a group about a year ago and his talk last night compared what he said would happen vs. what happened. I believe the term “spot on” will attest to his accuracy. Steve was also nice enough to inform the crowd that the 75-year cycle just ended was the 5th 75-year cycle and that what happens after the 375th year is the Mac Daddy of 75-year cycle reactions.

Many pundits have suggested moving financial assets into physical assets such as cash and gold held in safety deposit boxes. To the extent that this is the modern equivalent of digging a hole and putting your money in it I can say that after hearing Mr. Frenkel speak I wanted to dig a hole and put myself in it.

Enjoy the weekend.

Jim Delaney