The Credit Thaw Continues, Gradually

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Even before starting her eponymously named firm, Meredith Whitney had won the role of Queen of the Damned in the drama that has played out on Broad Street (not Broadway) these past few years as a bank and finance analyst for Oppenheimer & Co. The golden haired siren has co-starred opposite the dark and brooding Nouriel Roubini, a.k.a. Dr. Doom, using a script adapted from the Swiss investor Marc Faber’s GloomBoomDoom report.

The show has been a barn burner, almost literally, and has kept audiences glued to their screens, both television with hopes of hearing the next tidbit of news from these prophets of the apocalypse, as well as their computers watching heretofore AAA-rated investments morph into CCC-rated toxic blobs.

As is generally the case with media, bad news sells much better than good so with things no longer falling at terminal velocity the cast has noticed a few empty seats in the house and while not a trend yet, is still worrisome for Meredith et. al.

The solution has been getting published on the Op/Ed pages of various newspapers including the WSJ, and that Chronicler of the Crisis posted a piece by Meredith on October 2nd, discussing the continuation of the Credit Crunch and most specifically how it has now filtered down to the backbone of the economy, small businesses.

I have a lot of respect for Meredith and Nouriel and Marc so any comments here seemingly otherwise are in jest and only put forth to lighten up your hump day a bit. As such and agreeing with the 10/1 piece, I will suggest you read it and not quote any of it here lest the lack of context mar any of Meredith’s intent.

There is other evidence that all is not fixed just yet as although on a eight week run of increases, the Commercial Paper market is still just 60% of its former self reaching $1.3TN last week vs. $2.2TN during its peak in July of 2007.

Long a market for funding short term cash needs for some of the lesser known names, along with those having the designation TBTF after the Inc., LLP or LC at the end of their company names, the recent run-up has been the result of European banks issuing in dollars (another outlet for the cheap dollar carry trade). The WSJ reported that the increase in foreign financial commercial paper outstanding was $27.3BN vs. $3.4BN for U.S. domestic financial commercial paper.

If there is hope in all of this, I would think the example comes from Europe as financing in the Old World was primarily done through bank lending before the Old World almost changed into the No World. The lack of bank funding opened up the debt markets in Europe to a greater extent than they have been before as non-financial firms have sold more that E735 ($1.07TN) in debt through the first three quarters of this year according to Dealogic. On the financial side, banks have issued E105BN ($152BN) in paper that has not had government guarantees attached.

I raise this point as evidence that, while the markets are not completely healed, as mounting numbers of prime borrowers in arrears have yet to be considered for those paying current prices for bank stocks, the markets and human ingenuity will usually find a way around or through most problems.

Investment grade CDS spreads closed last night at 101 on the CDX index. They have now spent 11 days back in triple digits after their first stint of 8 days below since May of last year. If IG spreads continue their current trajectory we will have another sub 100 close this evening, albeit a lot can happen in a day.

The time spent sub-100 in late April and early May of last year could, if things continue, look like the reverse image of the most recent move above 100, with the spring of 2008 being concave and the more recent move convex. Prior to that, you have to go back to January of 2008 to see sub-100 IG spreads.

The Credit Crunch does continue but the market also continues to heal from it. Lower spreads mean easier credit, even if it is for the TBTF guys. The failure of Lehman was a quick freeze; the thaw appears to be taking somewhat longer. Lower credit spreads are at least a sign it is continuing.