Market Commentary

In my view the credit markets are bifurcated.
March 12, 2010

In my view the credit markets are bifurcated.  Banks are not lending as evidenced by their massive and record reserves…over $1.4 trillion versus the historical average of $1 to $2 billion.  The corporate bond market on the other hand is solid.  Several companies who were virtually shut out of the public markets as little as six months ago are now finding an appetite for their offerings.

I point to recent debt offerings for both GMAC and Citigroup as evidence to this point.  Both companies were viewed as either a poster child or at the epicenter of yesterday’s crisis.  Demand was robust permitting a lower than expected yield. 

How much longer will banks remain on the sidelines?  The answer to this question is pivotal regarding to when the inevitable change in monetary policy will occur.  As penned many times monetary velocity is almost nonexistent.  Any uptick can potentially generate inflationary pressures given the strength of lending in other sectors of the economy.

I think bank lending could potentially rise following the first major increase in nonfarm payrolls, perhaps in as little as 45-60 days.  If and when bank lending does resume, I think the yield curve could shift a 100 basis points to the right or in other words all treasury rates would go up about 1% in yield.

The yield curve however could potentially remain at its current steep slope until the Federal Reserve increases the overnight rate which could then be interpreted as the Central Bank is ahead of the proverbial inflationary curve. Such an increase in the overnight rate could potentially occur as early as May if job growth materializes at a pace some are expecting.

Commenting briefly about yesterday’s market activity, the S & P rose to its highest level since October 2008, led by the financials and health care. Financials rallied as the recovery lowers the probability of event risk and health care advanced under the belief Obamacare will not pass.

Treasuries were quiet.

Retail sales are and the University of Michigan consumer confidence survey are released today.  The data could impact trading.

Last night the foreign markets were up. London was up 0.25%, Paris up 0.51% and Frankfurt up 0.76%.  Japan was up 0.81% and Hang Sang down 0.09%.

The Dow should open quiet. The 10-year is off 2/32 to yield 3.73%.