C.M.O. 5.1.2009

Credit Market Overview
May 1, 2009

The economic numbers yesterday continued to paint a less than sunny picture for the economy but from the market’s reaction to the recent statistical releases it would appear that investors are not only wearing rose colored glasses but that those glasses also have photo-chromatic lenses which increase the intensity of their “rosiness” as the news becomes less so.

Much has been written of the political wrangling going on over spending the stimulus money which is serving no other purpose than to delay the small portion of funds (20%) actually scheduled for this fiscal year.

Through all of this however there is a ray of light on the horizon and like the sun it comes from the east, only this east is the Far East and its source is China.

I do not speak or write Mandarin but I’m thinking the symbols for the phrase “shovel ready” must look like the outline of a crane (not the bird) and a bulldozer as just 11 days after the Chinese government approved a $930MM tunnel, bridge and expressway project in East China drilling equipment was already on site.

Where this helps the good ‘ol U.S. of A. is in places like Peoria Illinois; home of Caterpillar Inc. (CAT). James W. Owens left his [rose colored] glasses off when he spoke on a conference call following CAT’s 1Q09 earnings announcement on April 21st saying that plunging sales and the cost of thousands of layoffs were the factors contributing to the company’s first quarterly loss in 17years. He made specific mention at the time that he thought the Obama administration “should have allocated more money for public works under its stimulus plan”. Jim was equally less than optimistic when asked to project CAT’s full year sales and profit as it was at that time “extremely difficult to know how our customers will respond”.

Varying slightly from the well known song title, what a difference 11 days makes. A more recent conversation with Jim found him very much upbeat as CAT’s “excavator sales in China have returned to record levels in recent months, bouncing back from plummeting sales over the winter”.

When asked about future prospects from the land of a billion people he said China continues to have a great need for infrastructure and that projects there could start much more quickly there than could similar projects in the U.S. “It’s something like nine weeks in China versus nine months in the U.S.”

CAT’s CDS/equity relationship is a text book example of the negative correlation these two markets are supposed to exhibit. Additionally, given that the company’s fortunes are tied to global growth a chart of the two price streams represents a short history of the effects of the crisis we have experienced over the last 20 months or so.

With CAT’s CDS continuing to move lower from its March high of 427bps and the stock climbing off its March 2nd low of $22.17 (154bps, $35.58 as of last night’s close) things seem to be improving for CAT.

Who knows, maybe this recovery will have one of those little stickers on the bottom that says: “Made in China”.

Enjoy the weekend.

Jim Delaney