C.M.O. 4.30.2009

Credit Market Overview
April 30, 2009

On Monday the headlines were all about the spread of the deadly Swine Flu. The S&P dropped 8.72 points, just a tad over 1% as fear of the unknown health hazard gripped the world’s population. One already weary of battling the financial pandemic brought on by the distribution of mis-rated securities.

The fear continued on Tuesday as more was learned of the disease and its reach. Those countries that are home to the emerging economies of the world seemed most at risk. Unwelcomed news both for the people in those regions and for the fact that many were looking to the emerging markets to pull this spec of dust out of its financial malaise. You got the feeling that the world was bracing for some bad news that was going to get worse and possibly much worse, before it was going to get better. (Again? Many were asking) The S&P was down another 2.35 points by the close, 0.27%, but had spent part of the day as low as 847.12 an additional 10.39 points or 1.22%.

As all of this was going on U.S. economic figures being released were showing some optimistic signs. Dallas manufacturing activity was better than the down 44.2% survey by 12.6 percentage points or 28% less than expected. The Case/Schiller index came out higher than forecast, albeit by .37 index points, but higher none the less. Consumer Confidence beat its surveyed numbers by a whopping 9.5 points, close to 32%. Were signs of economic life emerging even as real lives were being threatened? Given Tuesday’s action the market seemed to put more worried about the flu.

With the world’s anxiety levels high, one would have thought a 1Q09 GDP report 1.4% lower than forecast, a miss of nearly 30% off expectations would have been the nail in the proverbial coffin. Instead the reasoning that inventories were down to such spare levels that the wheels of industry were going to be forced to turn at some point in the future was the point of focus. Even as the number of countries affected by H1N1 grew.

It struck me in all of this that there was a separation growing how investors were reacting to the threat of the H1N1 on the world economy vs. the how the U.S. economy was fairing given the economic releases of the week.

The CDS for Mexico closed last Friday at 291 bps as the Bolsa closed at 22582.17 the highest level seen since January 6th of this year. Default protection for Mexico hit its high for this week (so far) on the 28th when it closed at 328 bps. The stock index hit its low on the same day at 21662.53; down 919.64 points or ~4% from the previous Friday. Yesterday’s CDS close for Mexico was 297.84bps; off Tuesday’s high but still above last Friday’s level. The stock market in Mexico recovered some as well yesterday with the Bolsa closing at 22079.34.

Uncle Sam’s CDS level closed at 45bps last Thursday and stayed at that level through Monday’s close. Tuesday saw a slight tick up to the 45.71bps level but yesterday’s move down to 42bps put the risk of a U.S. default lower than it was perceived to be during the stock market rally last week. The 42bp level was in fact lower, by 0.18bps, than the previous low for the move down in CDS levels that started after the 100bps level was reached on February 24th of this year. The last time anything south of 42bps was seen was 11/20/2008 when the cost of protection closed at 38.5bps. The high close for the move in the SPX was 869.60 on the 17th. Last night’s close eclipsed that level and if classic theory holds, lower CDS levels could point to higher index levels going forward.

Enjoy the week.

Jim Delaney