C.M.O. 4.23.2009
Credit Market Overview
April 23, 2009
April 23, 2009
As the mix of sometimes . . . alright constant contradictory evidence of a recovery vs. a continuation of the d . . de . . depre . . alright recession streams through much weight has been put on the shoulders of the stock market as a modern day equivalent of the Oracle at Delphi.
This being the heart of earnings season there has been, it seems, more emphasis on what management is saying with regard to future business prospects as opposed to current results. As Charles Revson, the race car driving founder of Revlon said: “In the factory we make cosmetics; in the store we sell hope.”
Capital One Financial (COF) released earnings on the 17th of $-0.39/share vs. a consensus estimate of $-0.08/share. With the release the CEO said: “U.S. credit card charge-off rates are going cross 10% in the next couple of months, up from 8.4% in Q1.” On 4/16/2009 the CDS for COF closed at 295bps with the stock at $17.86. Yesterday those numbers were 361bps and $14.38 respectively. It should also be noted that COF started dropping before the CDS began rising closing at $19.21 on April 13th. With the financial sector as battered as it is the last thing anyone wants to hear is that there will be more problems in the future. The stock was downgraded from Buy to Neutral by Goldman Sachs shortly there after.
United Technologies Corp. (UTX) reported earning in-line with expectations of $0.78/share while revenues fell 12.2% on a YoY basis. The difference here is that the CEO, Louis Chenevert, accompanied the earnings announcement with his outlook saying that “While orders are still down, the overall rate of decline in orders is slowing”. Adding that “they have stabilized across the businesses. Mr. Chenevert’s outlook going forward was that’ “For the full year, we still expect a better back half.” UTX stock had been rising since it hit its lows of $37.56 on March 9th of this year, closing yesterday at $46.89. The CDS did not peak until April 1st at 117bps closing yesterday at 90bps.
Heavy equipment manufacturer CAT reported its first quarterly loss in 17 years on the 21st of $112MM saying it was hurt by plunging sales and the cost of thousands of layoffs adding that the Obama administration “should have allocated more money for public works under its stimulus plan.” CEO, Jim Owens also cut CAT’s full-year sales and profit forecasts as continued uncertainty makes it “extremely difficult to know how our customers will respond.”
It appears, however, that Mr. Owens is much more pessimistic than the market place about CAT’s prospects as the stock bottomed at $22.17 on March 2nd just a few days before the CDS peaked at 427pbs on March 5th. Since then, in classic CDS/equity fashion, the stock has moved higher and the CDS lower closing yesterday at $32.45 and 248bps respectively. While “shovel ready” looks like it means we’re ready to check that there is a shovel here in the U.S. news of China’s stimulus projects, mainly focused on infrastructure, could be a reason for the market’s optimism on CAT.
Given what the world has been through it does not appear that the market is focusing on what was as much as it is looking towards what will be. Guidance from management seems to be the words everyone is hanging on as the results hit the tape. The movement in COF and UTX stand as testament. The good news is that there are cases where management is not that optimistic but the market still seems to think there is life after the first quarter.
Enjoy the week.
Jim Delaney
This being the heart of earnings season there has been, it seems, more emphasis on what management is saying with regard to future business prospects as opposed to current results. As Charles Revson, the race car driving founder of Revlon said: “In the factory we make cosmetics; in the store we sell hope.”
Capital One Financial (COF) released earnings on the 17th of $-0.39/share vs. a consensus estimate of $-0.08/share. With the release the CEO said: “U.S. credit card charge-off rates are going cross 10% in the next couple of months, up from 8.4% in Q1.” On 4/16/2009 the CDS for COF closed at 295bps with the stock at $17.86. Yesterday those numbers were 361bps and $14.38 respectively. It should also be noted that COF started dropping before the CDS began rising closing at $19.21 on April 13th. With the financial sector as battered as it is the last thing anyone wants to hear is that there will be more problems in the future. The stock was downgraded from Buy to Neutral by Goldman Sachs shortly there after.
United Technologies Corp. (UTX) reported earning in-line with expectations of $0.78/share while revenues fell 12.2% on a YoY basis. The difference here is that the CEO, Louis Chenevert, accompanied the earnings announcement with his outlook saying that “While orders are still down, the overall rate of decline in orders is slowing”. Adding that “they have stabilized across the businesses. Mr. Chenevert’s outlook going forward was that’ “For the full year, we still expect a better back half.” UTX stock had been rising since it hit its lows of $37.56 on March 9th of this year, closing yesterday at $46.89. The CDS did not peak until April 1st at 117bps closing yesterday at 90bps.
Heavy equipment manufacturer CAT reported its first quarterly loss in 17 years on the 21st of $112MM saying it was hurt by plunging sales and the cost of thousands of layoffs adding that the Obama administration “should have allocated more money for public works under its stimulus plan.” CEO, Jim Owens also cut CAT’s full-year sales and profit forecasts as continued uncertainty makes it “extremely difficult to know how our customers will respond.”
It appears, however, that Mr. Owens is much more pessimistic than the market place about CAT’s prospects as the stock bottomed at $22.17 on March 2nd just a few days before the CDS peaked at 427pbs on March 5th. Since then, in classic CDS/equity fashion, the stock has moved higher and the CDS lower closing yesterday at $32.45 and 248bps respectively. While “shovel ready” looks like it means we’re ready to check that there is a shovel here in the U.S. news of China’s stimulus projects, mainly focused on infrastructure, could be a reason for the market’s optimism on CAT.
Given what the world has been through it does not appear that the market is focusing on what was as much as it is looking towards what will be. Guidance from management seems to be the words everyone is hanging on as the results hit the tape. The movement in COF and UTX stand as testament. The good news is that there are cases where management is not that optimistic but the market still seems to think there is life after the first quarter.
Enjoy the week.
Jim Delaney
Labels: CDS, CEC Strategy, correlation, credit, cross asset, equity, Jim Delaney
posted by Jim Delaney at
3:44 AM
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