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The Credit Bull and Implications for Equity


Making money between the twenties.

When it comes to reading the credit market tea leaves, there are few folks I respect more than Brian "The Iron Horse" Reynolds from WJB Securities; a firm I believe will be a winner in the new world due to their talent pool (John Roque hangs his hat there), the lack of balance sheet baggage and an avoidance of the reputational risk that plagues traditional players. I'm told Brian recently wrote a research report suggesting that credit markets are trading as if the S&P was already above 1500.

We paid homage to the strength in credit markets in a recent missive and explored other dynamics that might emerge given so many folks are keying on corporate credit as the proxy for additional upside equity action; it's the "see both sides" thing we like to do in the 'Ville. Giving credit where credit is due -- pun sorta intended -- there aren't many folks who nailed both sides of the ride as well as The Horse (a hat tip to Fleck, who shuttered his short fund in March 2009).

There's an adage on Wall Street that you make money between the twenties, a reference to both a football field and a primary trend. I remember the dinner conversation Brian and I had when he climbed aboard the bull in 2003. I believe he rode that posture until 2008 when his work turned bearish. He then partied with Boo through February 2009 before he again flipped the switch. It's as impressive a streak as there's been on the street and I've got mad respect for the man.

I will note, however, that there is often laggage in the credit indicators -- let's call it the Red Zone, for purposes of continuity. For instance, the S&P topped at 1575 in October 2007 and there was roughly 20% slippage, if memory serves, before credit turned tail. Ditto February 2009, when being a month early -- I remember this well as I was trading from the long side -- was a 25% lesson in humility.

My point? There are two. First, respect what credit is saying, even if you don't agree with it and second, understand that Red Zone potential exists. A 20% discount to the S&P 1500 price "implication" would suggest S&P 1200, which is a kitten's whisker away from where we currently stand.

Food for thought as we digest the state of the credit union.

Random Thoughts

  • We wrote on Friday's Buzz & Banter, "Don't be shocked if we awake on Monday to a European Toga Party." Sure 'nuff, following the $61 billion Greek promissory pledge, the odds of a Greek default dropped by almost 18% according to CMA Datavision. The Euro is higher for the third session, but European equities remain mixed.

  • That pledge was sorta expected, right? Everyone, from D-Day to Bluto to Otter, knew the powers that be would stand united to quell Aegean angst. The question is therefore two-fold; first what are the unintended consequences, such as social mood and border strife, and second, will the real issues begin when the second, or third, or fourth country take their hats into their own hands?

  • Remember the "Government is inventing fingers as fast as they can to plug the holes springing in the financial dike" analogy we used oh-so-often in 2008? Keep it handy and bring a translator; Veo una gran cantidad de agua en el horizonte!

  • A.D.D. Moment! I can't shake Dylan's "Like a Rolling Stone" from my crowded keppe and I highly encourage you to join the madness!

  • I will draw your attention to Goldman Sachs (GS) $180, which is BIG in terms of A) potential acne (breakout) and B) potential reverse dandruff. It may also offer a stealth clue with regards to how the tape will react to S&P 1200, if and when.

  • Through the lens of "the reaction to news is more important than the news itself," watch UBS (UBS) today following their highest quarterly profit in three years. Why, you ask? A big bounce by their debt trading unit, natch. Tertiary action in JP Morgan (JPM), Morgan Stanley (MS) and Bank of America (BAC) should also remain on our radar.

  • To Big Jim's comment on The Exchange of my opener, where he said that the Sleep-o-Meter works best when juxtaposed against the Out-of-Town indicator, I'll be away from the fray this Thursday and Friday. Not for work, mind you; these are personal days as I enjoy some much needed down time.

  • RIP St. Vincent's Hospital: after 160 years, the medical mainstay in lower Manhattan is pulling the plug. This is extremely sad news on a few levels, which of course includes the end of an in-patient care facility. The $700 million debt load was simply too much; the question is begged, how many more institutions around the country are facing similar fates?

  • Oh, that $43,000,000,000!

  • Jim Grant offers salient points of interest in this interview; including but not limited to The Phantom of Deflation and debt destruction, both of which are topics familiar to ye faithful.

  • Big week Minyans. Let's roll and hey…let's be careful out there.


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