C.M.O. 5.20.2009

Credit Market Overview
May 20, 2009

As the S&P does its damnedest to stay above the 900 line and the bulls root for last Friday’s close of 882.88 to be the next highest low that comes when strings of higher lows and highs attach themselves together and grow horns it is worth remembering that the 882 level had been crossed 30 times between November 20th of 2008 and last Friday. Also keep in mind that it has occurred 10 times in the last 29 trading days. Obviously 882 is making quite a name for itself in the fight between support and resistance.

Speaking of fighting, if wars are won or lost in the trenches then it is usually with a little help from above. I’m not talking Devine intervention here I’m talking about all those great contraptions that drop bombs and fire Gatling guns and shoot rockets.

The markets have had stuff raining in from on high but it seemed more inclined to impede progress than to assist it. The “stuff” of which I speak was $34BN worth of share offerings; both initial and secondary that have been brought to market over the last two weeks. Which, if you don’t keep track of those sorts of things is half the 2009 total. Closer examination of the aerial reconnaissance shows almost an equal split between the semanas of $17BN each.

$34BN worth of equity and some more “less bad” but most certainly not “great” economic data and the SPX moved from 929.23 on 5/8/2009 to 882.88 on 5/15/2009 and then moved promptly away from that much visited level on Monday to close at 909.71. Is that low rumble the hooves of the cavalry riding in or the more distant thunder of stampeding bulls?

There has been supply on the bond side as well and although totals, as provided for the equity markets above, are not readily available suffice to say that there has been over $6BN worth of debt issued already this week.

The way to measure the market’s receptiveness in stocks is price, in bond-land it’s the spread at which paper is purchased above the similarly tenored Treasury. These spreads have been doing their own equivalent of a rally, excepting that everything happens backwards in bond-land so down means up.

The benchmark for these spreads in the non-investment grade area is the Merrill Lynch High Yield Master II Index which has seen these aforementioned spreads move from 20 full percentage points above the Treasury de choix to a mere 13 since the start of 2009. If you were to translate this into price it would be like owning a bond that started the year trading at 55 cents on the dollar that is now worth 71 cents on the dollar.

This 29% return, quite a good investment during any 138 day period, looks even more spectacular when you realize that the S&P is trading right around where it sang Auld Lang Syne.

Enjoy the week.

Jim Delaney