The credit market was still on shaky ground last week, but there has been a clear improvement in confidence behind corporate solvency. A number of headlines have cast the health of the market in an unsure light. On the positive side, policy officials have maintained their efforts to revive lending; and investors have begun to respond. For the Fed’s part, another $50 billion injection confirms the policy authority’s ongoing help. Suggesting that these periodical liquidity boosters are producing results, Washington Mutual was able to raise $7 billion in the market and an Citi is supposedly on the verge of selling $12 billion in leveraged debt for 90 cents on the dollar. Alternatively, demand is clearly still weighted to the short-term end of yield curve. The IMF’s projection for nearly $1 trillion in write downs certainly doesn’t help matters.
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CREDIT MARKET: HOW IS IT DOING?
The credit market was still on shaky ground last week, but there has been a clear improvement in confidence behind corporate solvency. A number of headlines have cast the health of the market in an unsure light. On the positive side, policy officials have maintained their efforts to revive lending; and investors have begun to respond. For the Fed’s part, another $50 billion injection confirms the policy authority’s ongoing help. Suggesting that these periodical liquidity boosters are producing results, Washington Mutual was able to raise $7 billion in the market and an Citi is supposedly on the verge of selling $12 billion in leveraged debt for 90 cents on the dollar. Alternatively, demand is clearly still weighted to the short-term end of yield curve. The IMF’s projection for nearly $1 trillion in write downs certainly doesn’t help matters.
A DEEPER LOOK INTO THE CHANGES THIS WEEK:
If there are any sure signs of improvement in the financial markets, they would certainly be most apparent in credit default swaps. Risk premium in CDs has retraced nearly half of its run up since last summer thanks to a number of key bailouts by both markets and the Fed suggesting a failure is unlikely. Beginning with the Bear Stearn’s buyout, we have further seen that sovereign wealth funds continue to invest and even Washington Mutual was able to raise capital domestically.
Despite the relief in default fears, the market for short-term money is still very tight. Though there is evidence, through Citi’s sale of a large book of leveraged debt, that the high-risk assets still have significant value; few investors seem to be willing to take the risk and move out of T-Bills. Confirming that there are still serious problems in the financial markets, the Fed’s 9th injection received an 1.83 bid-to-cover and the IMF has warned that total losses on the crunch could quadruple.
STOCK MARKET: HOW IS IT DOING?
Last Tuesday’s sharp equity rally (the ninth largest on record) proved to have little follow through. Investors are clearly still concerned with the health of the economy and the state of credit markets. However, there is a more immediate concern for stock market participants this week. Earnings season kicked off at the beginning of this week and will hit high gear through the coming week. And, though there have been only a few notable announcements, they are already very concerning. Dow component Alcoa reported a 54 percent drop in profit through the opening months of the year – despite elevated commodity prices. Revealing the slowdown in growth is spreading to other area’s of the economy, both AMD and UPS delivered profit warnings. According to a survey conducted by Bloomberg, analysts expect first quarter earnings for the companies in the S&P 500 will drop 11.3 percent.
A DEEPER LOOK INTO THE CHANGES THIS WEEK:
Volatility across the stock market’s major index components has cooled substantially - reflecting the heightened caution before earnings season pick ups. Over the past week, there have been few headlines that have shaken the entire equity market. The economic calendar, on the other hand, has certainly kept pessimism alive. The labor data last Friday printed the third consecutive contraction in payrolls and a jump in unemployment. If consumer spending falters, a 2008 recession will be almost certain.
The financial sector has seen more than a few reports and economic releases this past week that have added to skepticism behind the health of the investment environment. While concerns of an impending recession weigh heavy, the functioning of the credit market is still the primary consideration. Washington Mutual’s ability to raise $7 billion in the market has calmed fears that there is no market for investment. On the other hand, the IMF’s dour outlook for write downs and calls for full disclosure generates uncertainty.
U.S. CONSUMER: HOW ARE THEY DOING?
The American consumer may be removing its support for growth just when the economy needs it the most. Heading into the month, confidence was already at a 16-year low; and recent data has only dimmed the outlook for the economy and the consumer’s financial position further. No indicator had greater influence over sentiment than last Friday’s employment data. Employment contracted for the third consecutive week (the worst trend since 2003) and the jobless rate was bumped to 5.1 percent (its highest reading since September 2005). The Fed’s outlook for the economy no doubt played its own part in bolstering pessimism. The policy authority sees a recession as likely, and has further forecasted a rise in unemployment and a deepening housing slump.
A DEEPER LOOK INTO THE CHANGES THIS WEEK:
While previous indicators have revealed the components for a bottom in the housing market’s worst recession in a quarter century are in place, reports this past week suggest a turn around won’t come anytime soon. From the economic docket, the NAR’s pending home sales report dropped to a record low; and though this is a lagging indicator, it nonetheless acts as a reminder where we are at in the cycle. Far more concerning was the Fed’s outlook for the battered sector. In its minutes for the March 18th rate decision, policy officials reported that there were no signs that a bottom was forming.
The dour outlook for the consumer sector has clearly fed into those equities with a close tie to their spending habits. With earnings season just around the corner, investors will be able to gauge the health of consumer spending over the first quarter of this year. However, with the Fed predicting a recession through the first half and a sharp reversal in employment, the outlook may brand the wrap up of the opening months unnecessary and impotent. Going forward, as consumer sentiment continues to be weighed down by rising joblessness and fading housing equity, Americans will further reduce discretionary spending and shop as discount chains.
