It is LIke Drinking Water From a Fire Hose

I called a lot of my friends this week that work in the fixed income markets and their stories are off the charts. To say the market is dislocated is like saying Hurricane Katrina was just a mild tropical storm. The stories of the messed up muni-market dominated the headlines, though descriptions of credit-default swaps came a close second. There is definitely huge contagion in fixed-income securities with corporate bond spreads at historical wides, high yield spreads, mortgage-backed bonds, leveraged loans…. you name it. Spreads are so off the charts that hedge funds are scrambling to launch NEW funds for March 1st that are multiples in size of previous funds. I had a call this week with a distressed fund manager that is soon to launch a $9 billion fund. $9 billion. Though I challenged this very experience manager over the fund size he was quick to quote numbers as to how much supply has been created over the past couple of years and how much of that supply is in deep trouble. For money that is in this space already it cannot find the exit fast enough, and for new money, it is the opposite. How this is all going to shake out will be mighty interesting indeed.

More and more commentators are talking about the disconnect between what the fixed income markets are telling us and the relative strength of the equity markets. The former is predicting a truly nasty, nasty, shake-out and the latter is still not sure if in fact the US is in a recession. If the monolines get restructured the equity markets will likely experience a nice pop, but I still believe that any rally is a bear market one. Splitting the monolines will help the muni-market, but it will not do much for the other asset buckets.

Fingers are starting to point toward the Commercial Real Estate Market as well. Though defaults are at record lows, the numbers I have heard thrown around as to the cap rates of recent purchases is enough to make your hair fall out. Index spreads have already gotten hammered anticipating some mighty nasty default rates.

Where is the good news you ask? Hmm… very hard to find. Very. Corporations are sitting on a lot of cash ($611BB) , and the fed can still cut rates, but other then that, ?????

Oh my gosh… how could I not mention inflation and commodity prices? We got some disturbing numbers in the US ( CPI up 4.3% yr over yr ), but did you see China’s? I still firmly believe that the US rates are understated. All you have to do is take a look at overall commodity prices, or compare your own bills year over year. I will say it again… Stagflation, and know it seems like I am not the only one saying it.

In closing, a few random facts I pulled out of the papers this week
– 8.8 MM homeowners or 10.3% are underwater according to an estimate by Moodys, ( NYT Friday)
– Thrift industry posts a record $5,2 bb Q4 loss, the largest since they started collecting records in 1984.
– Quant Funds were down 6% as a group in Jan.
– Medicare unfunded liability is $74 trillion
– Sharper Image and Lillian Vernon file for bankruptcy.
– Credit Swiss announced a surprise loss resulting from pricing errors of $2.85 bb

Have a great week.. I am off to California!

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