Posts from Wednesday Jul 22 2009

CDS report: Markets mixed as traders digest earnings

This CDS report was written by Markit’s Gavan Nolan
European credit indices gave back some of their recent gains, prompted by profit-taking and mixed signals from the US. The Markit iTraxx Europe index was back above 100bp, closing at 101bp. The Markit iTraxx Crossover and HiVol indices both widened, though the latter still resided under the 200bp mark. Widening credits only marginally outnumbered those that tightened, with defensive names performing better than their cyclical counterparts. Banks, affected by mixed results in the US, and autos were among the laggards.

Europe has been taking its lead from the US in recent weeks, and today was no different. Both equity and credit markets had a slew of earnings reports to digest, as well as news from the housing market. Pharmaceuticals provided additional momentum to the current rally. Pfizer‘s spreads tightened despite posting a 19% fall in second-quarter profits. But excluding one-off items, the 48 cents a share profit came in ahead of expectations. The company also upgraded its forecast for 2009 earnings to a range of $1.90 to $2 a share, up from its previous estimate of $1.85 to $1.95 a share. Eli Lilly‘s second-quarter figures were even more impressive and it also upgraded its full-year forecast. However, some interpreted the upgrade as conservative and its spread tightening was limited a result. Read more

Death to CDS, Maxine Waters edition

One week ago, Congresswoman Maxine Waters (D-CA), introduced H.R. 3145, or the Credit Default Swap Prohibition Act of 2009.

We’ve tried to refrain from commenting, but since we keep being reminded of its existence… Read more

A forward curve proposition

Commodity curves used to be relatively dependable. Gold, for instance, was pretty much always in a state of perfect contango irrespective of price due its money-like status. This currency-esque characteristic therefore made its curve a reflection of the time value of money.

Note the following chart of the gold curve two years ago: Read more

Lex: Apple

Sales of Macs may have dipped, but the iPhone has more than made up for it.

There are two lessons here for investors. First, despite a confidence-sapping lack of communication about the health of co-founder and chief executive Steve Jobs during his recent mediacal leave, there can no longer be any doubt about the strength of Apple’s management back bench. Second, recession or no, consumers continue to reward innovation. On 26 times forward earnings, Apple trades at a rich premium to other hardware makers.

 Read more

A gap in the output gap

The output gap, a way of measuring how far an economy is from its full capacity, has gained some ubiquity of late.

Central bankers from Bernanke to Bean are using it as evidence of the risk of deflation, citing the amount of ‘slack’ in the economy. Slack occurs when the output gap is a negative number — when the economy is below its potential — and implies deflationary risks as companies cut prices and jobs to deal with the spare capacity. Read more

Subprime Italy?

Italy is facing a two-pronged crisis.

First there’s the fiscal crisis, heightened by waning appetite for Italian bond issues in the face of expected government issuance of up to €260bn this year. Then there’s the current incubation of future bad debt, via the government’s very own encouragement of loosened lending criteria. Read more

Morgan Stanley reports Q2 loss of $159m, EPS -$1.37

Oh poor Morgan Stanley. It loos like it took a big hit on own credit (again) as well as the repurchasing of its Tarp capital.

From the releaseRead more

Lunch Wrap

On FT Alphaville Wednesday morning,

– A ratings CMBS flip-flopRead more

Nothing bullish in crude

Stephen Schork of the Schork report makes an excellent point regarding recent large US inventory crude draws.

As he explains, with reference to contangoRead more

Markets live transcript 22 Jul 2009

Live markets commentary from 

Goodness, the FSA really are handing it out…

During an investigation into various HSBC subsidiaries, Britain’s financial regulator found that unencrypted customer data had been sent to third parties.

Oh, and: Read more

CMBS-saga, cause and correlation

FT Alphaville presents the following CMBS-saga timeline:

– May 19 – Fed announces that it will expand the Talf to include certain legacy CMBS.

 Read more

Money money money, ex-IOFC

Economics wonkiness ahead, but the Bank of England has been trying to modify the way it measures broad money in the UK since September 2007.

Excluding the deposits of ‘intermediate other financial corporations’, the Bank argues, would provide an “economically more relevant measure” of broad money than that based on the traditional M4 definition. IOFCs include central clearing counterparties, mortgage and housing credit corporations, bank holding companies, SPVs, etc. Read more

S&P’s CMBS flip-flop

Okay, figure this one out. Standard & Poor’s has decided to re-assign triple-A ratings to several commercial mortgage backed securities that it slashed into junk territory just a week ago.

On July 14, S&P cut its ratings on billions of dollars worth of CMBS issued by Goldman, Credit Suisse and Wachovia, among others, as part of its ongoing review of its methodologies. Nor were the cuts minor – in one instance, S&P downgraded one class of a Goldman transaction from triple-A to double-B – deep in junk territory – and five others to triple-B minus from triple-A. Read more

Curse of the underwriters

A fascinating paper is out from the Federal Reserve Board, examining the role of securitisation in the expansion of subprime credit (H/T Alea).

We’ll save you the suspense and tell you the paper’s conclusion straight away: Yes, securitisation did exacerbate subprime. Read more

Further reading

Elsewhere on Wednesday,

– The hedge fund fee squeeze. Read more

Pink picks

Comment, analysis and other offerings from Wednesday’s FT,

Pink picks illustrationPaul De Grauwe: Economics is in crisis: it is time for a profound revamp
professor of economics at the University of Leuven writes: There can be little doubt. The science of macroeconomics is in deep trouble. The best and the brightest in the field fight over the most basic problems. Take government budget deficits, which now exceed 10 per cent of gross domestic product in countries such as the US and the UK. Read more

Snap news

Breaking pre-market news on Wednesday,

– CIT expects loss of $1.5bn, may seek bankruptcy – BloombergRead more

Re The 6 AM Cut

FT Alphaville’s daily 6am Cut went walkies today.

 Read more