The Week Ahead: Bond Insurers Seek Resolution

The week ahead will be an abbreviated one due to the President’s Day holiday. However brief the week may be, it will not be short on drama. It’s very likely bond insurance providers and other interested parties will work through the long weekend as they seek to find resolution to their dire predicament.

New York Governor, Eliot Spitzer, and New York State Insurance Department Superintendent, Eric Dinallo, tightened the clamps on the bond insurance industry last week. Due to their concern that the credit rating agencies might soon downgrade Ambac Financial Group (NYSE: ABK) and MBIA, Inc. (NYSE: MBI), the two most important bond insurers, Spitzer issued an ultimatum. He’s given the insurers 3-5 days to take appropriate action in order to preserve their AAA credit ratings. At that point, if they have not done so, the state is prepared to force the division of the firms’ municipal bond operations from the remainder of the companies’ businesses, which include their troubled subprime mortgage related operations.

Loss of the AAA rating would disable the insurers’ ability to conduct ongoing operations. However, if the municipal insurance business is separated from the parent companies, municipal bond investments would not be at risk. As Dinallo states, the muni-insurance businesses could operate in “rehabilitation” while ironically still maintaining their triple-A status. They would continue to serve their obligations in runoff fashion. Eric Dinallo indicated in a CNBC interview that the insurers have many options, and he seemed to imply there remains a strong likelihood they could continue to operate as they do now with help from the private sector.

So, over the weekend the companies will very likely be working to secure new capital investment from current owners like Warburg Pincus (investor in Ambac), or from new equity interests. New investment could arrive from parties who either stand to benefit from securing their own risk or from gaining equity interests at bargain pricing. Institutional investors holding the municipal bonds or otherwise insured credits stand to benefit from aiding the insurers. If the AAA rating is lost, as the underlying securities are likewise revalued, institutional investors face the potential of further asset write-downs themselves. In other words, I would go out on a limb and say investment in ABK and MBI could prove wise a year from now. Investors must realize, however, that any incremental investment dilutes current shareholders’ stakes.

The Week Ahead

This week offers a relatively light load of economic data, but a busy earnings schedule. Light does not mean inconsequential, however, and some very important data will reach the market. On Tuesday, the State Street Investor Confidence Index should not surprise many with a low February reading, after a measure of 68.8 in January. After all, on the Friday just passed, the University of Michigan Consumer Sentiment Survey measured at its lowest level in 16 years.

On Wednesday, all eyes will be on the January reading of the Consumer Price Index. The Federal Reserve pays close attention to this report in order to keep tabs on inflation. Despite Fed expectations for beneficiary near-term impact to prices arising from economic softness, import prices posted an increase of 0.6% in January, excluding a 5.5% rise in petroleum costs. In other words, don’t get your hopes up.

Speaking of petroleum, it seems OPEC has been spoiled by rich crude prices. The group was rumored to be considering production cuts despite European GDP growth of 2.3% and surprisingly strong demand from Japan. Informally, shipping information indicates OPEC may already be cutting supply. However, on Saturday OPEC decided to keep production steady, while geopolitical trouble-makers Iran and Venezuela suggested a production cut for March.

The Housing Market Index will also be reported on Wednesday. God bless… Its last reading in January was a sad 19.0. Finally, the Federal Open Market Committee January meeting minutes will be released, and considering the depressing testimony of Fed Chief Bernanke on Thursday, this report should prove mute.

Thursday brings the Philadelphia Fed Survey, which shows the status of the region’s manufacturing sector. The New York area report on Friday posted a negative 5.75, indicating a contraction of the business environment for the first time since 2005. Just about every aspect of the report showed deterioration, including expectations for future employment. The only rise within the report was in prices paid, and that’s certainly not good. Weekly Initial Jobless Claims remains an important blip on the regular radar as we attempt to forecast the onset of recession. Finally, Leading Economic Indicators for January are likely to follow December’s negative measure, in our view. Friday will be devoid of economic reports.

Noteworthy earnings reports for the week include: Tuesday – Barclays Bank PLC (NYSE: BCS), Crocs, Inc. (Nasdaq: CROX), Hewlett-Packard (NYSE: HPQ), Marvel Entertainment (NYSE: MVL), Wal-Mart (NYSE: WMT), Whole Foods Market (Nasdaq: WFMI); Wednesday – Aegean Marine Petroleum (NYSE: ANW), Garmin Ltd. (Nasdaq: GRMN), Paragon Shipping (Nasdaq: PRGN), Psychiatric Solutions (Nasdaq: PSYS), Suntech Power (NYSE: STP), Transocean (NYSE: RIG), Tween Brands (NYSE: TWB); Thursday – Barrick Gold (NYSE: ABX), Goldcorp (NYSE: GG), MGM Mirage (NYSE: MGM), Ruth’s Chris Steakhouse (Nasdaq: RUTH), VCA Antech (Nasdaq: WOOF); Friday – Nicor (NYSE: GAS, PG&E (NYSE: PCG), St. Mary Land & Exploration (NYSE: SM) and many more.

Comments

[xander]

thanks,well written