Daily Credit Summary: July 20 - New Highs

Spreads were tighter in the US as all
the indices improved (with HY at new contract highs but IG staying wide
of its tightest levels as the S&P closed at 2009 highs - although
VIX is massively lower than the 60% levels last seen when SPY was
here). Indices typically underperformed single-names (as a late day
pick up in single-name activity suggest some index arb flows at play) with
skews mostly narrower as IG underperformed but narrowed the skew, HVOL
underperformed but narrowed the skew, ExHVOL outperformed pushing the
skew wider, XO underperformed but compressed the skew, and HY
outperformed but narrowed the skew.

The
names having the largest impact on IG are CIT Group Inc (-615.69bps
with an intraday swing of over 400bps from open tight to wides to close
tight) pushing IG 2.67bps tighter, and ERP Operating LP (+5.5bps)
adding 0.04bps to IG. HVOL is more sensitive with CIT Group Inc pushing
it 11.98bps tighter, and ERP Operating LP contributing 0.19bps
to HVOL's change today. The less volatile ExHVOL's move today is driven
by both National Rural Utilities Cooperative Finance Corporation
(-30.79bps) pushing the index 0.31bps tighter, and MDC Holdings Inc
(+1.39bps) adding 0.01bps to ExHVOL.

The
price of investment grade credit rose 0.26% to around 98.95% of par,
while the price of high yield credits rose 1.0575% to around 86.19% of
par. ABX market prices are higher (improving) by 0.16% of par or
in absolute terms, 0.43%. Broadly speaking, CMBX market prices are
higher (improving) by 0.06% of par or in absolute terms, 0.02%.
Volatility (VIX) is up 0.05pts to 24.34%, with 10Y TSY rallying (yield
falling) 3.9bps to 3.61% and the 2s10s curve flattened by 2.2bps, as
the cost of protection on US Treasuries rose 0.76bps to 35.76bps. 2Y
swap spreads tightened 0.4bps to 47.06bps, as the TED Spread tightened
by 0.2bps to 0.34% and Libor-OIS improved 0.5bps to 30.8bps.

The Dollar weakened with DXY falling 0.61% to 78.864,
Oil rising $0.7 to $64.26 (outperforming the dollar as the value of Oil
(rebased to the value of gold) fell by 0.32% today (a 0.49% rise in the
relative (dollar adjusted) value of a barrel of oil), and Gold
increasing $13.4 to $950.9 as the S&P rallies (948.6 1.25%)
outperforming IG credits (125bps 0.26%) while IG, which opened tighter
at 125bps, underperforms HY credits. IG11 and XOver11 are -10.59bps and
-22.32bps respectively while ITRX11 is -4.28bps to 103bps.

Dispersion
fell 45.7bps in IG. Broad market dispersion is a little greater than
historically expected given current spread levels, indicating more
general discrimination among credits than on average over the past
year, and dispersion increasing more than expected today indicating a
less systemic and more idiosyncratic spread widening/tightening at the
tails.

79%
of IG credits are shifting by more than 3bps and 75% of the CDX
universe are also shifting significantly (more than the 5 day average
of 59%). The number of names wider than the index stayed at 42
as the day's range fell to 3.63bps (one-week average 6.28bps), between
low bid at 124.375 and high offer at 128 and higher beta credits
(-5.77%) underperformed lower beta credits (-6.31%).

In IG, wideners were massively outpaced by tighteners at around 20-to-1,
with only 4 credits notably wider. By sector, CONS saw 0% names wider,
ENRGs 0% names wider, FINLs 5% names wider, INDUs 11% names wider, and
TMTs 0% names wider. Focusing on non-financials, Europe (ITRX Main
exFINLS) underperformed US (IG12 exFINLs) with the former trading at
103.75bps and the latter at 107.82bps.

Cross Market, we
are seeing the HY-XOver spread compressing to 221.6bps from 234.66bps,
and remains below the short-term average of 225.02bps, with the
HY/XOver ratio falling to 1.33x, above its 5-day mean of 1.31x. The
IG-Main spread compressed to 22bps from 23.72bps, but remains above the
short-term average of 20.54bps, with the IG/Main ratio falling to
1.21x, above its 5-day mean of 1.18x.

In the US,
non-financials underperformed financials as IG ExFINLs are tighter by
6.9bps to 107.8bps, with 100 of the 104 names tighter. while among US
Financials, the CDR Counterparty Risk Index fell 12.17bps to 127.22bps,
with Brokers (worst) tighter by 11bps to 142.2bps, Banks (best) tighter
by 14.57bps to 168.83bps, and Finance names tighter by 85.28bps to
823.88bps. Monolines are trading tighter on average by -185.74bps
(5.68%) to 2644.55bps.

In IG, FINLs outperformed non-FINLs (8.28% tighter to 6.02% tighter respectively),
with the former (IG FINLs) tighter by 31.3bps to 346.7bps, with 20 of
the 21 names tighter. The IG CDS market (as per CDX) is 25.4bps cheap
(we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation
of investment grade credit (99.62bps), with the bond ETFs
underperforming the IG CDS market by around 6.48bps.

In Europe, ITRX
Main ex-FINLs (underperforming FINLs) rallied 3.83bps to 103.75bps
(with ITRX FINLs -trending tighter- better by 6.09 to 100bps) and is
currently trading tight to its week's range at 0%, between 123.44 to
103.75bps, and is trending tighter. Main LoVOL (trend tighter) is
currently trading tight to its week's range at -0.01%, between 89.67 to
73.16bps. ExHVOL outperformed LoVOL as the differential compressed to
-9.11bps from -6.74bps, but remains above the short-term average of
-9.23bps. The Main exFINLS to IG ExHVOL differential decompressed to
39.7bps from 37.84bps, but remains below the short-term average of
41.65bps.

Commentary compliments of www.creditresearch.com

Index/Intrinsics Changes
CDR LQD 50 NAIG091 -11.63bps to 151.27 (0 wider - 49 tighter <> 31 steeper - 18 flatter).
CDX12
IG -6bps to 125 ($0.26 to $98.95) (FV -10.93bps to 145.4) (4 wider -
121 tighter <> 86 steeper - 38 flatter) - Trend Tighter.
CDX12 HVOL -7bps to 318 (FV -31.59bps to 392.1) (1 wider - 29 tighter <> 23 steeper - 7 flatter) - Trend Tighter.
CDX12 ExHVOL -5.68bps to 64.05 (FV -5.01bps to 76.29) (3 wider - 92 tighter <> 32 steeper - 63 flatter).
CDX11 XO -10.7bps to 350.4 (FV -14.82bps to 430.14) (0 wider - 34 tighter <> 24 steeper - 10 flatter) - Trend Tighter.
CDX12
HY (30% recovery) Px $+1.06 to $86.1875 / -35.4bps to 900.6 (FV
-24.77bps to 843.25) (8 wider - 85 tighter <> 61 steeper - 32
flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $+1.05 to $87.4 / -43.68bps to 650.74 - Trend Tighter.
MCDX12 -10bps to 180bps. - Trend Tighter.
CDR Counterparty Risk Index fell 12.34bps (-8.85%) to 127.06bps (0 wider - 14 tighter).
CDR Government Risk Index fell 2.4bps (-4.29%) to 53.68bps.
DXY weakened 0.61% to 78.86.
Oil rose $0.7 to $64.26.
Gold rose $13.4 to $950.9.
VIX increased 0.06pts to 24.34%.
10Y US Treasury yields fell 3.9bps to 3.61%.
S&P500 Futures gained 1.25% to 948.6.

Comments

[Anonymous]

Maybe some smart (knowledgeable on financial) guy here on the board can enlighten me since I'm know only TA and very shallow knowledge on financial stuff. Intel is going to offer 1.5 Billion debt for mostly used for buying back their common shares?

http://www.marketwatch.com/story/intel-plans-to-offer-15-billion-in-debt

So what does that mean? Does that mean they going to borrow money to buy back their own shares? But that (from my shallow knowledge) would only mean that:

1. They think their share will go alot higher (higher then 10%) so they can make back the money they pay for interest? So if the interest is 10% they think their stock will rise more then 10%?

2. They think their share will fall alot and need extra money to prop it up?

If is the first scenario, and if you think your share will go up alot, why do you want to gamble with borrow money? The only people who borrow money to play (in stock market) are the once who really desperate, no? And we are not talking about small money, they are borrowing 1.5 billion, that's alot...

and if is the second scenario, well, then that's bad...

[Anonymous]

I would circle #2 on your quiz.

[economessed]

I risk being oversimplistic about this, but share buy-backs are management expressions of stewardship exhaustion.  Because what they are saying is that management can find no other way of putting capital to work that can produce a higher return than by buying back its own shares.

In a technology company, this always means just one thing.  Management is saying that buying back its own shares will pay a higher return than investments in research and development.  In technology, ideas are the currency of earnings.  You conceive, you convert the idea into something physical, and you earn a return.  But when Intel goes into debt to buy shares, they are signaling that they are out of ideas.  Sandbagging capital into shares is the best return they can identify.  I wouldn't reward them, but I'm sure lots of other people will find a way to play along and profit from their management mediocrity.

[saveourcountry (not verified)]

money being used to prop it up

good finance articles opinion articles stock market blog finance articles finance opinions

[Anonymous]

I see it as a ploy to manage their earnings upward. They buy shares worth $1.5 billion and their earnings per share goes upwards, smart to do with historically low interest rates but still gaming the system. Also, $1.5 billion is not a lot for Intel. Either way its the same earnings game. But gaming never goes away