Daily Credit Summary: April 16 - A Tourre De Force

Submitted by www.creditresearch.com

Spreads widened dramatically today, closing at their wides, as overnight weakness from GOOG's miss combined with further contagious stress in European sovereigns and financials was slammed down following the SEC's charges against GS. IG widened the most close-to-close in over two months and HY underperformed as derisking, which started overnight, was clearly in play and perhaps the initial gappy nature suggest that this rally remains very fragile.

Futures were tracking down after hours following GOOG's new normal disappointment and when Europe opened, it was decompressing with XOver underperforming. Sovereigns, thanks to some comments on Portugal's prospective austerity, were all wider, dragging SovX back to recent wides, contagiously impacting financials (and more specifically the Spanish and Portuguese names) and knocking into Main. 5Y GGBs moved above 500bps over Bunds, underperforming CDS once again as SovX broke back above 90bps (to 94bps). FINLs shifted to 20bps wider than exFINLs in ITRX (the widest in weeks).

Despite a better than expected home starts and permits print (which we wonder is due to the end of the tax credit), the US opened weaker and as the GS news broke, we started to rip. IG, which excludes most if not all of the major financials, did leak wider (somewhat hand-in-hand with the S&P and Main overnight) and HY also broke its six-day winning streak as investors hurried to derisk broadly. Notably, LCDX held its ground today as HY sold off, further reinforcing our view of an up-in-quality trade back in play (HY14-LCDX14 inched back above 250bps today) as HY-IG broke above 400bps again.

GS went from +20 to +40 in a hurry, back to Feb wides and while liquidity was focused in 5Y, the short-end of the curve steepened dramatically. The initial news saw the rest of the major FINLs leak a little wider but not really following suit but around midday, we started to understand the implications more broadly of the SEC charge and the rest of the major FINLs weakened notably.

The underperformance of European financials this week was overwhelmed by US financials today and we suspect will lead to some further decompression on Monday (especially in DB and BARC). The more widespread systemic risk contagion will help those looking for FINL-SovX decompression and may just lead to those on the more bullish side to capitulate a little as we suspect the gaps will be relatively large.

We discussed with a few clients yesterday on how the current skew in SPY and term structure frm 3M - 12M were pretty much in line with one another for the first time since the cycle lows in the great moderation. This coincidence with OPEX today and the spike in VIX suggest that perhaps we have seen the lows in implied vol (and while realized vol will spike empirically on today's adverse move to the trend), we see that this floor also corresponded to a trough in spreads. Of ocurse, its just another indication of a risk premia being overly compressed (see our recent strategy article for a series of others) but the timing was interesting with today's jumps in risk premia.

Breadth in credit was weak as single-names were moving everywhere but we note that in IG, it was index underperformance that compressed the skew to its narrowest since inception in IG14. Low beta credits underperformed, more from insurers that we discussed yesterday) and builders were very weak (as we suspect the overbuilding euphoria is priced out of their stocks and credit). Wideners outpaced tighteners by around six-to-one today with 3s5s steepening and 5s10s flattening seen in most of the major sectors (though we suspect this is as much about 5Y lags than any real positioning).

In IG14, the biggest wideners were UHS (with UnitedHealth Group outperforming), AXP, AIG (surprising given the rally in stocks on prospects of a suit against GS), COFb, FE, AA, NRUC, and TOL. Most of whom saw 3s5s steepening with teh exception of TOL which suggests a drag forward in risk there.

HY remained above par but IG closed wider on the week, back to one-week wides (closing at its wides of the day). HY managed to get back above Thursday's wides but shy of Wednesday's wides. This is perhaps notable as the relative stability in IG and storm of buying in HY seemed hit differently - IG did not need much help to underperform, HY remained a little more stuck by the derisking. Single-names in HY did not move as much as IG names (relatively speaking as HY underperformed intrinsics (even though we did see the higher risk names underperform the lower spread names in HY14 today).

There was a clear up-in-quality move in single-name credit today though all were systemically wider with some underperformance (once again) at the very best quality end on sovereign stress we suspect. CDO-related names slightly outperformed in 5Y over the broad market but steepened very notably. We suspect that this is corr desks using 5Y to hedge (on a beta basis) due to liquidity as we also saw IG9 (and the off-the-runs) outperforming today.

There was notable strength in the JPY suggesting a broader carry trade unwind which is likely to impact European/Asian markets on Sunday as the rest of the FX world lost ground to the USD today. Our fear here is that the trust in recovery and hope-ness that is maintaining this risk asset rally might be coming off and perhaps the linear extrapolation of recent growth may become a little more suspect.

Our simplest perspective on today's price action in credit is that IG14 underperformed intrinsics and tracked stocks in general on the sell-off - with slightly more stress at the close than stocks. HY was less fragile but also it was the indices that moved! This tells me that there was a significant move to hedge/cover/derisk broad exposures as equities faltered as opposed to buying the dips here - cash market liquidity was marginal according to one client today and while IG is back to fair-value, HY is back notably cheap and we suspect this move will drag intrinsics wider this time rather than the other way.

Quick GS Thoughts

The charges that the SEC have brought are somewhat irrelevant. Also we do not want to get into whether this was politically motivated timing or not. The critical point, that we think led to the second leg intraday in CDS moves in FINLs is the fact that this brings the nature of these deals into the public eye much more clearly.

Anyone who understands, or structured any CDO (cash or synthetic, MBS or corporate) back in the old-days (as we were asked to do for some clients from the end-user's perspective - i.e. create a strong-performing CSO) knows very well that the selection of the underlying portfolio is implicitly one of 'adverse selection' - in its simplest form, you want to pick the most efficient names - the names that have the widest spread per rating (or spread per risk factor) that can be optimized to create a large excess spread in the deal. [Perhaps with a longer-term view, the selection of these 'efficient' names was exactly adverse selection as markets front-ran the ratings as they always tend to - how many of these efficient names have dramatically underperformed during the last cycle?]

The issuer (GS) then sells the deal, tranched up nicely, to its clients. The clients are not necessarily dumb but should understand that a AAA 'bond' offering 150bps over Swap is maybe 'not' AAA - the fact of the matter was that the buyers of the tranches had all (or a lot) of the information to judge the deal, but often did not as they were caught up in the chase/grab for yield (sound familiar?).

In the case of Abacus (and the absolutely fab Tourre), the somewhat more transparent nature of the SEC charges that specific securities were picked for inclusion that were considered to be most profutably positioned for Paulson (helped by ACA's asset selection process). We won't judge this but critically, this is waht happened in every deal! Every deal contained a set of deals that were efficient in order that the fees generated were high. The neutral thrid party aspect of the deal is worrisome for GS but realistically it is more about the public exposure of the selection process than it is specific to the names selected.

A pundit on TV commented that GS actually was long this deal - this is again entirely irrelevant as in almost all cases the issuer (GS in this case) held some of the most junior parts of the deal (as they were the riskiest and hardest to sell/market to end-users). Holding some of this poart of the deal was also a great selling point (we hold it so you should!). Of course, GS scraped a handsome fee from the deal (in excess spread) and would have made a fortune on the udnerperformance of the better-rated tranches (even if they lost all of a small part of the most junior tranches). By the way, this was apparently a deal within the AIG book and so any losses GS faced on the most junior tranches they clung to were probably bailed out at 100%!

So the bottom line for us is not about how big a deal this was for GS (in $$ terms), and not about the specifics of the case, buit much more about the public exposure of the averse selection process involved, a rising lack of trust of the financial industry (more specifically in these more complex securities) and finally a leg-up for any Vocker-Rule (or FINREG).

The steepening of the short-end of the curve for most of the major FINLs implies a dramatically higher cost of funding when they come to roll all their TLGP debt in the next 2-3 years and if FINREG is passed sooner rather than later (and is maybe a little more strict than many lobbyists hope) then this will remove much of the support that currently exists for these names.

Of course, a snapback in FINL spreads might happen (or stocks) but it is relatively clear that the underperformance of FINLs in Jan (on Volcker worries) and today's angst suggests that even with blockbuster earnings, the lack of transparency of asset valuations and real unaided earnings has us staying away from buying on the dips here - we prefer to be in 3s5s steepeners especially in GS, MS, DB, and BARC. At one point Citi was a smidge rich to GS but by the close it remained handily wider. JPM was among the worst relative performers and we note that CDR's Counterparty Risk Index jumped back above 100bps once again (and with Europe's early close today, we suspect a contagious catch up from even the underperforming European financials as we open Monday).

Perhaps also of note, the prices of the ABX tranches took a decent tumble today (biggest in a long while) as perhaps the reality of these deals being worth anything is questioned once again.

Movers in Detail

Spreads were mixed in the US with IG worse, HVOL improving, ExHVOL weaker, and HY selling off. IG trades 5.5bps tight (rich) to its 50d moving average, which is a Z-Score of -0.7s.d.. At 87.25bps, IG has closed tighter on only 21 days in the last 333 trading days (JAN09). The last five days have seen IG flat to its 50d moving average.

Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew, HVOL outperformed but narrowed the skew, ExHVOL intrinsics beat and narrowed the skew, HY's skew widened as it underperformed.

8% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by 2.24% to 3.08%. IG's vol is around 4.38% per 1 day period, which leaves 111 names higher vol and 14 lower vol than the index.

The names having the largest impact on IG are UnitedHealth Group Inc (-3bps) pushing IG 0.02bps tighter, and Universal Health Services Inc (+15.5bps) adding 0.12bps to IG. HVOL is more sensitive with XL Capital Limited pushing it 0.03bps tighter, and American Express Company contributing 0.36bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both UnitedHealth Group Inc (-3bps) pushing the index 0.03bps tighter, and Universal Health Services Inc (+15.5bps) adding 0.16bps to ExHVOL.

The price of investment grade credit fell 0.22% to around 100.57% of par, while the price of high yield credits fell 0.87% to around 100.41% of par. ABX market prices are lower by 0.14% of par or in absolute terms, 0.29%. Volatility (VIX) is up 2.54pts to 18.44%, with 10Y TSY rallying (yield falling) 6.4bps to 3.77% and the 2s10s curve flattened by 0.7bps, as the cost of protection on US Treasuries rose 1.25bps to 40.5bps. 2Y swap spreads widened 0.2bps to 15.07bps, as the TED Spread widened by 0.1bps to 0.16% and Libor-OIS deteriorated 0.2bps to 8.3bps.

The Dollar strengthened with DXY rising 0.37% to 80.783, Oil falling $2.53 to $82.98 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 1.07% today (a 2.59% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $22.15 to $1137.1 as the S&P is down (1190.2 -1.51%) underperforming IG credits (87.25bps -0.22%) while IG, which opened wider at 82.5bps, outperforms HY credits. IG13 and XOver13 are +4.62bps and +14.25bps respectively while ITRX13 is +3.78bps to 80bps.

Dispersion rose +1.4bps in IG. Broad market dispersion is less than historically expected given current spread levels, pointing to a more sanguine view of credits as investors discriminate less between names, with dispersion decreasing more than expected today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.

26% of IG credits are shifting by more than 3bps and 39% of the CDX universe are also shifting significantly (more than the 5 day average of 37%). The number of names wider than the index decreased by 2 to 49 as the day's range rose to 5.25bps (one-week average 2.95bps), between low bid at 82 and high offer at 87.25 and higher beta credits (2.21%) outperformed lower beta credits (2.43%).

In IG, wideners outpaced tighteners by around 7-to-1, with 100 credits wider. By sector, CONS saw 71% names wider, ENRGs 88% names wider, FINLs 79% names wider, INDUs 78% names wider, and TMTs 92% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG exFINLs) with the former trading at 76.06bps and the latter at 82.74bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 78.66bps from 71.17bps, but remains below the short-term average of 83.5bps, with the HY/XOver ratio rising to 1.19x, below its 5-day mean of 1.21x. The IG-Main spread decompressed to 7.25bps from 6.03bps, and remains above the short-term average of 6.8bps, with the IG/Main ratio rising to 1.09x, above its 5-day mean of 1.09x. Among the HY names, we see higher risk names (>500bps) underperforming lower risk (<500bps) names. In the IG names, we see higher beta names outperforming lower beta names.

In the US, non-financials outperformed financials as IG ExFINLs are wider by 1.7bps to 82.7bps, with 11 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 8.91bps to 101.04bps, with Brokers (worst) wider by 21.83bps to 134.17bps, Finance names (best) wider by 6.22bps to 257.49bps, and Banks wider by 11.33bps to 95.83bps. Monolines are trading tighter on average by -24.88bps (1.01%) to 2321.77bps.

In IG, FINLs underperformed non-FINLs (3.71% wider to 2.12% wider respectively), with the former (IG FINLs) wider by 4.2bps to 116.2bps, with 4 of the 19 names tighter. The IG CDS market (as per CDX) is 21.8bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (65.47bps), with the bond ETFs outperforming the IG CDS market by around 2.05bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 3.41bps to 76.06bps (with ITRX FINLs -trending wider- weaker by 5.25 to 95.75bps) and is currently trading at the wides of the week's range at 100%, between 76.06 to 72.65bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading at the wides of the week's range at 99.94%, between 68.16 to 64.62bps. ExHVOL underperformed LoVOL as the differential decompressed to 5.95bps from 2.25bps, and remains above the short-term average of 2.98bps. The Main exFINLS to IG ExHVOL differential compressed to 1.96bps from 5.48bps, and remains below the short-term average of 5.28bps.

The Emerging Market index is 2.5% riskier (5.1bps wider) to 206.2bps. EM (Trend Tighter) is currently trading in the middle of the week's range at 37.84%, between 214.5 to 201.2bps. The HY-EM spread decompressed to 283.43bps from 266.74bps, and remains above the short-term average of 280.42bps, with the HY/EM ratio rising to 2.37x, above its 5-day mean of 2.34x.

• Index/Intrinsics Changes
• CDR LQD 50 NAIG +3.7bps to 76.91 (42 wider - 4 tighter <> 10 steeper - 39 flatter).
• CDX14 IG +5bps to 87.25 ($-0.22 to $100.57) (FV +2.13bps to 87.81) (104 wider - 15 tighter <> 21 steeper - 99 flatter) - No Trend.
• CDX14 HVOL -1.12bps to 128.88 (FV +3.33bps to 0) (24 wider - 4 tighter <> 2 steeper - 25 flatter) - Trend Tighter.
• CDX14 ExHVOL +6.93bps to 74.1 (FV +1.75bps to 75.1) (80 wider - 15 tighter <> 76 steeper - 19 flatter).
• CDX14 HY (30% recovery) Px $-0.84 to $100.44 / +21bps to 488.9 (FV +10.23bps to 463.79) (80 wider - 14 tighter <> 15 steeper - 85 flatter) - Trend Tighter.
• LCDX14 (70% recovery) Px $+0.12 to $100.56 / -3.05bps to 235.61 - Trend Tighter.
• MCDX14 +0.5bps to 120bps. - Trend Tighter.
• CDR Counterparty Risk Index rose 9.09bps (9.87%) to 101.22bps (13 wider - 1 tighter).
• CDR Government Risk Index rose 2.39bps (3.13%) to 78.75bps..
• DXY strengthened 0.37% to 80.78.
• Oil fell $2.53 to $82.98.
• Gold fell $22.15 to $1137.1.
• VIX increased 2.52pts to 18.44%.
• 10Y US Treasury yields fell 6.4bps to 3.77%.
• S&P500 Futures lost 1.51% to 1190.2.

Single-Name Movers

Today's biggest absolute movers in IG were Universal Health Services Inc (+15.75bps), Alcoa Inc. (+11bps), and American Express Company (+10.5bps) in the wideners, and UnitedHealth Group Inc (-3bps), Carnival Corp. (-1bps), and XL Capital Limited (-0.75bps) in the tighteners. Today's biggest percentage movers in IG were American Express Company (+17.07%), Capital One Bank (+16%), and Universal Health Services Inc (+10.9%) in the wideners, and UnitedHealth Group Inc (-2.21%), Baxter International Inc. (-1.23%), and Bristol-Myers Squibb Co (-1.12%) in the tighteners.

In the names of the HY index, today's biggest percentage movers were Massey Energy Company (+10.37%), Host Hotels & Resorts, L.P. (+9.5%), and Standard-Pacific Corp (+8.5%) in the wideners, and McClatchy Co./The (-3.71%), Sprint Nextel Corp. (-3.25%), and Mirant North America LLC (-2.33%) in the tighteners. The largest absolute movers in HY were Energy Future Holdings Corp. (+95.94bps), Harrah's Operating Co Inc (+46.63bps), and Massey Energy Company (+46.5bps) in the wideners, and McClatchy Co./The (-33.09bps), Sprint Nextel Corp. (-12.5bps), and Sanmina-SCI Corporation (-10.17bps) in the tighteners.

In Main, the biggest percentage movers were Deutsche Bank AG (+9.06%), UBS AG (+7.55%), and Portugal Telecom International Finance B.V. (+5.56%) in the wideners, and Sanofi-Aventis (-4.3%), Deutsche Post AG (-3.62%), and Deutsche Bahn AG (-2.13%) in the tighteners.

The largest absolute movers in Main were Deutsche Bank AG (+7.75bps), Portugal Telecom International Finance B.V. (+7.5bps), and Banco Espirito Santo SA (+7.19bps) in the wideners, and British Telecommunications PLC (-2.25bps), Sanofi-Aventis (-1.93bps), and Deutsche Post AG (-1.84bps) in the tighteners.

The biggest percentage movers in XOver were Gecina SA (+5.51%), Norske Skogindustrier ASA (+5.38%), and British Airways Plc (+5.3%) in the wideners, and Ineos Group Holdings plc (-2.74%), Thomson S.A. (-2.14%), and ONO Finance, PLC (-1.04%) in the tighteners.

The largest absolute movers in XOver were Norske Skogindustrier ASA (+52.07bps), Seat Pagine Gialle SpA (+39.29bps), and British Airways Plc (+20bps) in the wideners, and Ineos Group Holdings plc (-26.32bps), ONO Finance, PLC (-9.06bps), and Thomson S.A. (-5.36bps) in the tighteners.

The CDR Counterparty Risk Index Series 2 (of brokers and banks) rose 9.09bps (or 9.87%) to 101.22bps. Goldman Sachs Group Inc (34.5bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Goldman Sachs Group Inc (38.12%) is the worst (relative) performer. Royal Bank of Scotland Group Plc (-1bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Royal Bank of Scotland Group Plc (-0.7%) is the best (relative) performer.

The CDR Aussie Index rose 0.83bps (or 1.22%) to 68.63bps. Qantas Airways Ltd (3.95bps) is the worst (absolute) performer, whilst Telecom Corporation of New Zealand Limited (6.85%) is the worst (relative) performer. Australia & New Zealand Banking Group Limited (-2.14bps) is the best (absolute) performer, and Australia & New Zealand Banking Group Limited (-3.17%) is the best (relative) performer.

The CDR Asian Index rose 0.42bps (or 0.53%) to 80.09bps. Cathay Financial Holding Co Ltd (11.24bps) is the worst (absolute) performer, whilst Cathay Financial Holding Co Ltd (21.92%) is the worst (relative) performer. Hana Bank (-5.41bps) is the best (absolute) performer, and Nippon Steel Corporation (-5.9%) is the best (relative) performer.

Comments

[You Cant Handle...]

I kind of feel sorry for Tourre.  Never trust the squid.

[Ras Bongo]

Sorry? He was appointed VP in 2007 when the shit started, I bet he didn't reach 30 y-o by that time. Muss have been di Squid's bait.

[spekulatn]

 GS chooses to f*** in the a$$ a young frenchman. Funny on too many levels, me thinks.

[Grand Supercycle]

Overtextended SP500 / DOW daily charts show more bearish warnings and the next few days will tell us more.

DOW chart :

http://www.zerohedge.com/forum/latest-market-outlook-0