Archive - Feb 20, 2010 - Story

Much has been said about the 25 basis point Discount Rate rate hike announced on Thursday. Some suggest that this was fully expected, priced in, and that to the Fed this is merely a technicality which will not impact the Fed Funds rate in the least. Others, such as Macro-Man, take a decidedly more pragmatic approach, and ask the simple question: if it really means nothing, why do it? "He" also goes on to suggest some possible trade ideas as a result of this action: we suggest checking out his post for further information. Instead of speculating what the Fed may or may not do (we doubt even the Fed knows - as Krugman points out, the Fed's action could be a function simply of what political party is currently in charge), we have decided to show a simple comparison of the Discount Rate and the Fed Fund rate over the past 10 years (chart below).

Much has been said lately about the record cash balance on the books of S&P 500 companies (ex. financials- those are a different story altogether). Bullish pundits claim that this money will be used for all sorts of M&A, stock buybacks, expansions, etc., to make the point that companies can't wait to go out spending, so we should all front run them and buy whatever public companies may one day be on the auction block. We decided to take the inverse approach - by looking at the balance sheet and the cash flow statement of the S&P 500 companies (again, ex fins), we have attempted to understand just what the source of all this excess cash is. Listening to any of the permabulls on CNBC, one could easily get the impression that all this newly record cash comes simply from excess revenue which, courtesy of massive layoffs and a collapsing SG&A line, feeds an ever increasing retained earnings line, which in turn goes straight to cash. While this is certainly possible, our analysis indicates that the primary source of cash over the past year has really been a very generous cash "rotating" adjustment in some critical CapEx and Net Working Capital items. Our findings demonstrate that of the nearly $130 billion in additional cash on the books of S&P 500 companies from June 2008, through September 2009, two key sources, net working capital and a reduced capex spend, have generated over $150 billion, meaning organic operations have accounted for a whopping -$20 billion (yes, negative) of incremental cash.

The interest rate swap market is freaking huge and somewhat new (the first interest rate swap was in 1981 between the World Bank and IBM). It is also a weird animal in that its value derives from an offer rate and a bond yield, not an underlying asset. In this sense, they are more like an asset (bondish) than a derivative. The most elemental parts of the economy—government debt and inter-bank markets—converge in interest rate swaps.

A. Joseph Cohen's replacement as Goldman's bullish headpiece, David Kostin, shares the highlights from the Q&A at the GS Global Macro Conference. And also a lot of charts, updated to the prior week.

Presenting a heatmapped performance update of the key issues in the North American CDS universe. While on a week to date basis the vast majority of names turned tighter (blue), for the month of February the majority of names are still wider (red), with the notable exceptions of AIG, TWC, FO, KFT, JWN, WHR, MOT and NWL. The sectors most impacted by derisking are Materials, Utilities and Energy.