Market Commentary

Several weeks ago I wrote there is a possibility
March 15, 2010

Several weeks ago I wrote there is a possibility that as bank lending resumes—and contrary to popular opinion and headlines bank lending is occurring to credit worthy borrowers—yields could potentially decline because of ample funds and a dearth of credit worthy borrowers. 

In fact this could be already occurring. As per First Trust total loans and leases held by commercial banks stood at $6.76 trillion at the end of 2009, which was above year end 2007 levels or any time before that.  In other words, bank lending is currently at levels above those that existed during what most people call the bubble year.  Wow!

As written a gazillion times excess bank reserves are now over $1.4 trillion versus the historical average of $1 to $2 billion.  Could some argue from the data above banks are more than willing to lend but there is no demand?  I think yes.

Perhaps this is the case in the in the high yield, high risk leveraged loan market.  As per Bloomberg, prices for the S & P Leverage Loan Index rose to the highest price Friday since July 7, 2008.   Why?  I think it is a combination of too much money, too few offerings and the growing consensus the recovery is indeed sustainable at a pace greater than the consensus view.

Speaking of the recovery, Treasury Secretary Geithner stated Friday the US will rebound from the recession faster and more vigorously than other advanced countries, a recovery at a pace quicker than the consensus view.

Some might question the Secretary’s political motive as the Administration grapples with declining polls; I don’t think Geithner would squander any remaining market capital by making outlandish remarks.

I think Geithner’s view reflect realty and is steeped in historical precedence via the Zarnawitz rule.  [Sharp rebound follows steep declines].  As per JP Morgan, the economy expands by an average 5.2% in the 12 months following the end of a post WWII recession.  As per the Council of Economic Advisors the GDP expands an average 4.5% for the 24 months after the recession ends.

Since the recovery commenced on July 1, 2009, the economy has expanded at annual rate of 4.05%...2.2% and 5.9% growth for the third and fourth quarter, respectively. First quarter 2010 growth is tracking around a 4.5% rate which is closing in on the long term average of 5.2%.

As written last week, the Federal Open Market Committee (FOMC) meets tomorrow.  No change in monetary policy is virtually assured but all will scrutinize its post meeting statement in an attempt to discern the leanings of the Central Bank

Conversely to last week, the economic calendar is heavy.  Several regional manufacturing surveys are released, capacity utilization/industrial production, a host of housing and inflation data, and the LEI.  All data points could impact trading.

Will this week’s trading be the inverse of last week’s?  The Dow traded in an extremely narrow range…about 75 points.  As stated above a number of data points and a FOMC meeting occur in the next five days.  Never short a dull market especially as consensus is expecting a moderation in economic activity.