Market Commentary

Earning season has commenced.
April 13, 2010

Earning season has commenced.  Will results again exceed expectations?  What about forward looking statements?  The next three weeks will be interesting.

Several weeks ago I commented that for the first time in over 30 years corporate debt yielded less than the comparable treasury.  Wow!  Albeit it was only one company…AA + rated Berkshire Hathaway, I ask is this a harbinger of things to come given the lack of fiscal restraint in Washington?

As per Bloomberg, the government issued a record $2.1 trillion in debt for 2009, far exceeding the $1.08 trillion that was issued by investment grade companies.  Moreover corporate borrowers are reducing debt at a record pace reducing obligations by $282 billion during the fourth quarter to $7.1 trillion, the lowest amount in a decade.

The President’s proposed budget calls for a record $1.6 trillion budget deficit in 2010, up from last year’s record $1.4 trillion gap, causing the US to potentially issue $2.43 trillion of debt.

At this juncture Congress has yet to adopt a final 2011 budget.  It has until April 15 to meet this deadline and it is largely expected that it will come to pass.  This is not the first time Congress has missed this deadline, occurring four other times in the last 35 years…fiscal years 1999, 2003, 2005 and 2007.

Perhaps a reason for such a delay is the President’s and Congress’s plummeting approval ratings, partially predicated upon uncontrolled spending.  In my view today is a bad time for investors to become nervous about treasury issuance given the incredible supply that must come to market to fund operations.  All must remember lending is all about confidence and credibility.

As per CNBC the S & P 500 is awash in cash…a record $1 trillion.  As per the Federal Reserve banks have over $1.4 trillion in excess reserves, far exceeding the historical $1-$2 billion level.  It is because of these large cash balances is why it is generally accepted corporate balance sheets are a lot healthier than the federal governments’.

I again ask the question, what are the odds that corporate debt consistently yields less than treasuries and benchmark pricing that all are accustomed to is obliterated?  Wow!  Talk about an unexpected or unintended consequence, an environment discussed at length about 12 months ago.

What will occur today?  Alcoa nominally exceeded expectations.  The trade gap as is import prices are released at 8:30. 

Last night the foreign markets were down.  London was down 0.32%, Paris down 0.14% and Frankfurt down 0.34%.  Japan was down 0.81% and Hang Sang down 0.16%.

The Dow should open nominally lower as aluminum giant Alcoa exceeded profit expectations but missed on revenue projections.   The 10-year is up 3/32 to yield 3.83%.