June Contradictions in the Credit Markets

If sixty is the new forty and as the hedge funds were saying last year, flat is the new up, then watching the market yesterday can only lead one to believe that breaking windows is the new window dressing. If PM’s want to own the hottest stocks when the market is on its way up, then maybe they used yesterday to off load the dogs they had on the books.

Last Friday, along with news that consumers were saving more than they had at anytime since 1993 as the personal saving rate was reported by the Commerce Department to have risen to 6.9%, came the release of the University of Michigan/Reuters Consumer Sentiment Index rising to 70.8, breaking through the previous high of 70.3 set in September of last year.

Yesterday’s release of Consumer Confidence by the Conference Board contradicted last Friday’s number and not only declined from the previous post of 54.9 but fell short of expectations by 6 points or roughly 10.8%.

Contradiction seemed pervasive in June as headlines like “Corporate Bonds Are Signaling Growth” were countered with others reading; “Summertime, and the Credit Ain’t Easy”.

A look at the CDS indices shows a similar pattern. On the investment grade side the index closed at 138.0 on the last day of May and at 131.4 on the last day of June. Had you Rip Van Winkled it would appear to have been a quiet month with a slight improvement in credit spreads; something not unexpected during what are usually those “Lazy, Hazy, Crazy Days of Summer”.

As New Yorkers are all too well aware June was not hazy and lazy but the weather was crazy as it was supposedly the wettest June since records have been kept. The credit markets were a bit more stormy than the opening and closing quotes would lead you to believe as within the sixth month IG spreads were as low as 120.6 on 6/5/2009 and as high as 145.8 on 6/22/2009. Slicing and dicing those numbers shows that the range for the month (25.2pts) was just about four times the movement for the entire month (6.6pts).

High Yield spreads started June at 1036.7pts; broke through the 900pt level on 6/12/2009 to close at 896.4pts and then made their way, right quick like, to 1065.1pts in just six trading days. Winding up the month at 948pts the HY index improved by 88.7pts or 8.55% over the month but ranged 168.7pts in the meantime. The movement to range ratio was just under 2 on the high yield side but reasonably mind bending when you experience an 8 and a 10 handle on the index within the same month.

The debate as to whether the green shoots are growing or wilting seems destined to be fought in the media. With low summer volumes and lack of conclusive evidence as to which side is winning, the forecast is uncertain at best but with the rain in NY continuing into July and the kind of volatility seen in June keeping your powder dry and yourself seems to be the most prudent way to approach the new month.