Daily Credit Summary: November 12 - Deficit Schmeficit

Following yesterday's modest rally in European credit, US opened tighter and rallied to the week's tightest levels on jobless headlines and the 'Job Summit'. Equities failed again at 1100 and helped by FHA comments, weak MBA apps data, and an outstanding effort on the deficit, slid gently lower. Credit wavered all but unch from Tuesday's close for much of the day (covering yesterday's small gains overseas) until a late day test of Tuesday's lows in stocks and 100bps in IG13. HY broke $93.75 and underperformed IG but the sell-off was orderly and volume only picked up as we edged lower.

Indices swung from out- to under-performing intrinsics on the day with low beta names notably underperforming higher beta. Europe closed basically unch from Tuesday's close while US closed wider although while stocks were able to break Tuesday's lows, IG and HY were not (although DXY and VIX are notably higher).

The 30Y auction 'miss' twanged the govvie curve and we saw a majority of single-name CDS curves flattening (as well as the indices) with off-the-runs underperforming (confirming this decompression) although IG12x13 seems hell-bent on compression...

There was more cross credit quality compression early on (a theme we have seen recently) with CCC+ and below outperforming A- and above but it appeared much more idiosyncratic than systemic thanks to the likes of AMD. As the late day sell-off came on we did see a more systemic decompression of spreads across all ratings with some notable weakness in airlines and builders.
From early trading, Transportation, Labs & Equipment, Refining & Marketing, and Independent Power Utilities were the biggest relative underperformers (based on opening levels) while the early loser REITs, Lodging, and Gaming were gradually improving as the day went on (relative to other sectors by lunchtime). By the close Apparel was also weakening as were Capital Goods and the broader Consumer Cyclicals sector. While the Leisure sector in general was mixed (Gaming weak and Lodging better) it gathered momentum as the day progressed, ending up one of the better open-to-close performers. Advertising was the only other standout industry in terms of decent performance as IPG rallied notably.

The Intel-AMD settlement saw AMD rally around 275-300bps, helping the hardware sector outperform significantly on the day dragging Technology to the top of the charts which along with Telecoms were the only two broad sectors to manage net gains on the day. Capital Goods, Energy, and Healthcare were among the weakest overall performers.

Based on our relative performance rankings, the names that stood out as better performers across our broad universe were AMD, Smithfield Foods, Toll Brothers, and Qwest Comms. The laggards of the day were YRC Worldwide, UAL and AMR, Motorola, and Parker Drilling.

Financials

ITRX Sen-Sub FINLs continues to decompress, breaking above 60bps today for the first time since series 12 started trading (9/22), well off recent tights of 45bps and we look to a shoulder around 85bps as a 'serious' move indication but the 30% plus move wider since 10/29 is noticeable and this decompression could be another canary in the coal mine (as rights issues, CoCos, and break-up threats continue to worry European bank investors).

Around lunchtime, we saw a rather sizable short-dated bank debt BWIC come through. Seems like either someone needed to dump their most liquid closest-to-par issues to cover some losses/collateral or the exact opposite that funds want to extend duration into financials. The latter was not immediately apparent in CDS land as although we saw 3Y underperforming, 5Y was unch from early trading (suggesting covering short-dated longs rather than duration extension in our opinion).

The last two days have seen both US and EUR banks underperform with the CRI rising modestly (though still below that seemingly magical 100bps level). The US-EUR differential widened modestly today but we note that the main theme within the financials today was low beta outperformance, the tightest names unch to slightly tighter, the wider names wider.

Banks and REITs ended the day wider today as ABX prices fell and CMBX prices rose very modestly in low volumes.

Munis Moving

Some interestingly prescient comments by Governor Paterson on the likelihood of CALI defaulting (inevitable?) and NY unlikely to pull off the tobacco bonds makes them prone to major cuts or face the same threat. We note that MCDX13 (illiquid) is 20bps wider in the last few days, now 30bps wider than IG13. It seems that the growing consensus is that the AAA/AA rated Munis are far more risky than the AA/BBB rated corporates of IG13 - oops. We note for interest that NY is 75/95 and CALI is 165/185, both of which seem very tight to our ignorant selves (given the revenue shortfalls).

Commentary courtesy of www.creditresearch.com

Index/Intrinsics Changes (from Tuesday's close!)

CDR LQD 50 NAIG +1.08bps to 88 (36 wider - 9 tighter <> 17 steeper - 32 flatter).
CDX13 IG +2.13bps to 100.13 ($-0.09 to $99.99) (FV +0.95bps to 104.91) (83 wider - 24 tighter <> 57 steeper - 66 flatter) - Trend Tighter.
CDX13 HVOL 0bps to 185 (FV +0.44bps to 186.76) (16 wider - 11 tighter <> 14 steeper - 16 flatter) - Trend Tighter.
CDX13 ExHVOL +2.8bps to 73.33 (FV +1.11bps to 79.83) (67 wider - 28 tighter <> 52 steeper - 43 flatter).
CDX13 HY (30% recovery) Px $-0.19 to $93.6875 / +5.4bps to 668.7 (FV -1.29bps to 622.49) (50 wider - 32 tighter <> 45 steeper - 52 flatter) - Trend Tighter.
ITRX12 Main +0.12bps to 84.25 (FV -0.08bps to 82.36) (53 wider - 58 tighter <> 68 steeper - 52 flatter) - No Trend
ITRX12 HiVol 0bps to 138 (FV -0.18bps to 132.41) (12 wider - 15 tighter <> 14 steeper - 15 flatter) - Trend Tighter
ITRX12 LoVol +0.16bps to 67.28 (FV -0.05bps to 66.89) (41 wider - 54 tighter <> 41 steeper - 54 flatter) - Sideways Trading
ITRX12 XOver +2.5bps to 515 (FV -0.49bps to 526.67) (23 wider - 21 tighter <> 23 steeper - 22 flatter) - Trend Tighter
LCDX12 (65% recovery) Px $-0.18 to $99.05 / +5.91bps to 580.36 - Trend Tighter.
MCDX12 +2bps to 129bps. - Trend Wider.
CDR Counterparty Risk Index rose 0.77bps (0.81%) to 95.51bps (9 wider - 5 tighter).
CDR Government Risk Index fell 0.41bps (-0.83%) to 49.14bps..
DXY strengthened 0.87% to 75.67.
Oil fell $2.35 to $76.7.
Gold fell $1.92 to $1103.88.
VIX increased 1.4pts to 24.24%.
10Y US Treasury yields fell 3.6bps to 3.44%.
S&P500 Futures lost 0.49% to 1086.5.

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