C.M.O. 4.20.2009

Credit Market Overview
April 20, 2009

With the stock market up for it’s sixth consecutive week the analysts will be all over the stats and comparisons on rates of change, Fibonacci numbers and whether the charts of the indexes look more like the 30’s or the 70’s. I am not sure about any of that but it does seem that when everybody is looking at one thing it pays to look at something else and that something else at the moment has a lot to do with what is actually going on in the economy.

California and North Carolina posted their highest jobless rates in three decades recently with CA’s at 11.2% and NC’s at 10.8%. The golden state’s chief economist, Howard Roth, said unemployment in California hasn’t been this high since reaching 11.7% in 1941 after peaking at 14.7% in 1940.

These numbers might be the worst those states have posted in a while but they weren’t the worst ones reported. MI has 12.6% of its residents out of work, which makes sense given the problems with America’s auto industry but Oregon with unemployment of 12.1% and South Carolina at 11.4% are also having trouble keeping people collecting paychecks. Eight states out of 50 are experiencing double digits unemployment rates as reported by the WSJ.

Joblessness is having varied affects as people who just two years ago were protesting the Resolution Copper mine project by Rio Tinto and BHP Billiton are now applying for jobs there. Marles Jimenez, a former protester who has been out of work since last October and was forced to sell his truck to pay the rent on his trailer said “The Leap is beautiful but we need jobs”. The Leap Mr. Jimenez is referring to is the Apache Leap a cliff adjacent to the mining site where it is said Apache warriors leaped to their death rather than surrender to the approaching U.S. Cavalry.

Although the mine is still years away from full operation the 1,132 jobs and $800MM it could add to AZ’s economy seem to be more important to local residents than worries about preserving the storied site.

The CDS level for Rio Tinto peaked on December 5th of 2008 at 1131bps. The stock hit its low one day earlier at $60.72. They closed on Friday at 561bps and $144.41 respectively.

Some other indicators of how the real economy is doing come from news of a 30% drop in net profit of rail carrier CSX after a 17.4% decline in rail volume in the first quarter. The fall in shipping volume has caused a rise in layoffs as the company was forced to furlough 1,000 workers and “park” thousands of rail cars. “What the company couldn’t overcome was is double-digit volume drops in a quarter. For the first time the industry seemingly is suffering along with everyone else.” Anthony Hatch a railroad consultant said.
On Friday the CDS/equity combo for CSX was 87bps/$31.38. In slightly off kilter fashion the CDS hit its high on 11/24/2008 at 222bps but the stock did not hit its low until March 9th of this year at $20.980.

The slowdown in economic activity is also affecting some of the country’s oil refiners. According to the WSJ, analysts believe gasoline demand peaked in 2007. The problem is that expansion plans started before the recession are still under way which could lead to over capacity in refining capability. “The sentiment among refiners is how to start to think about how to close, who is going to close.” Alan Gelder with Wood Mackenzie, an Edinburg consulting firm said. Sunoco and Conoco-Phillips are among the companies analyzing capacity.

SUN’s CDS and equity have had a very positively correlated relationship since October of last year with the CDS topping out in the 470bps region last December while the stock continued to climb and hit its high in January of this year at $47.21. Since then both have declined precipitously closing at 184bps and $28.15 on Friday.

Natural Gas is also feeling the effects of a slower economy. The futures contract for May delivery was down 2.6 cents or 9.4% late last week. Kent Bayazitoglu (5 times fast please) said the storage numbers 1.695TN cubic feet-34.8% higher than last year and 22.5% higher than the 5-year average “continue to support that we have excess gas in the system and that we will have a strong injection season”.

NiSource Inc. (NI) like CSX had a disconnected CDS equity relationship for a while in that the CDS hit its high on January 15th of this year at 690bps but the stock did not bottom until the 5th of March at $7.86. Since early March, however, the relationship seems to have come back into line with the CDS closing on Friday at 404bps while the stock closed at $10.62.

The markets may end the week higher or lower but watching some of the components of the real economy can, at times, give a pretty good look at those things that make the country go.

Enjoy the weekend.

Jim Delaney