C.M.O. 5.7.2009

Credit Market Overview
May 7, 2009

The Oracle of Omaha said in his Op/ed piece in the NY Times last October that “a simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful”. Fittingly WB wrote that in the middle of a month that has some of the worst stock market memories history has known. The S&P closed at 940.55 on October 17, 2008 and if you pulled a “Van Winkle” between then and now you’d think: Not bad Warren, down a little over 2% but you’ve been down at least that much with your positions in Coke, and Salomon Brothers, back in the day so I’m sure you’ll be fine.

What you would have missed is the harrowing trip from the mid 900’s to the mid 600’s and back and while we will never know how greedy Mr. Buffett or anyone else was down where the devil plays it does make sense that capitulation came when everyone stopped looking for it and started looking for the nearest exit.

The rush to get out does not seem to have been countered by a rush to get in but the few brave souls that have ventured to the long side haven’t had to push very hard to move things up a fair amount in the process.

In some cases it might be argued that the only bravery needed was to keep the algorithm running, shut your eyes and hope for the best. Like the people who close their eyes and step on the gas when they have to pass a big truck on the highway; I might die doing this but at least it will be over quick!

It has also been interesting to see what has moved in this move and how some of the most time tested and oft-repeated axioms have once again held true. (How else to you get to be time tested and oft-repeated?)

“What leads you down will lead you up” comes to mind with the financials up 100% off their lows they have definitely been the poster child for this entire cycle. The Nasdaq too, made up of about 100 names you do know and many more you don’t, is far out pacing the broader, “higher quality” some might say, indexes.

This has also proved true on the fixed income side of things as High Yield bonds a.k.a. Junk is up 11.47% as a whole but digging a bit deeper we see that the stuff close to the border (BBB=good; BB=not so much) is up only about 7% while deep down in CCC land the price of paper has risen about 22%. For those not completely familiar with the ratings latter triple C is still three notches off of the bottom rating of D. (The numbers here are taken from the Merrill Lynch High Yield indexes.)

The warning that most often accompanied the hype of “spreads of 20% over Treasuries available on Junk bonds” a months or so ago was that the wave of defaults coming would do more damage to a portfolio of high yield bonds than the high spreads could fix.

This has not proved to be the case thus far as the HYG ETF a more readily trackable proxy for a portfolio of Junk was up almost 14% in April while 40 individual issues defaulted including the headline grabbing Chapter 11 filing of Chrysler in the last week of the month. HYG started the year at 76.01 and closed yesterday at 76.66 (let’s call it even for the year) while a total of 102 issues defaulted.

Steady and still floating looks a lot better than swamped and it’s also nice to see that through the worst of the storm the part of the bond market that is supposed to deliver “equity like” returns is doing just that.

I truly doubt we are out of the woods just yet and cannot get Marc Farber’s comment that “a true bull market never stands on one leg” out of my head. In present context that would mean a revisit to something near the devils playground. It also needs to be recognized that with stocks and bonds moving higher in tandem the progress the markets are making is balanced and that is never a bad thing.

One more wakeup!

Jim Delaney