Four at Four: All Is Forgiven

Four at Four: All Is Forgiven

from WSJ.com: MarketBeat by David Gaffen

MarketBeat is more interested in the opinion of Prince Alwaleed bin Talal’s camels and horses. (Source: CNBC)

The market unambiguously voted for more bailouts Monday, as investors sent shares soaring in a rollicking session that piggybacked on the news of a federal bailout for Citigroup Inc., one that will guarantee a nice sum of capital for the company, handle several billion dollars of losses, and not wipe out the equityholders in the process. The deal fell short of the putative structure that wiped out the common equity of AIG and the government-sponsored entities, and so Citigroup’s shares gained 58%, with more than 700 million shares changing hands on the Big Board. “They’ve managed to craft a solution that in some way, shape or form, managed not to totally torch any of the stakeholders,” says Mitch Stapley, chief fixed income officer at Fifth Third Asset Management. The banking stocks on their own rallied by 20% (even though that still leaves them substantially lower in November) and the strength was witnessed across all sectors as the Standard & Poor’s 500-stock index has managed to tack on a mere 14% over a two-day trading period. “We had the aggressive selloff from last week, which broke through old support levels, and came amid a lot of talk and no action from Congress — a deadly combination for the market,” says Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Atlanta. “It was a series of favorable events following a very difficult week.”

Activity in the credit markets suggested an improvement in tone as well. Credit-default swap spreads improved across the spectrum. Credit Derivatives Research’s counterparty index, an index tracking 15 major financial institutions,saw its average cost for insurance against default decline to $267,200 Monday from $299,600 Friday, suggesting investors were more comfortable with the outlook for the banks. The two-year Treasury auction was a bit soft, also reflective of more comfort with risk elsewhere, and Mr. Stapley says the corporate markets saw a decent amount of buying from investors, who are looking at historic spreads in a number of markets. “At the end of this 15-month nightmare, you take one day at a time, and it’s a little better day than Friday was,” he says. That’s not to say these markets have snapped back, as Todd Youngberg, head of high yield at Aviva Capital Management noted that the average high-yield spread over Treasurys is about 20 percentage points, which is suggestive of default rates in the range of 22% or so, which is worse than the 1930-1933 period, when about 15% to 16% of issues defaulted. “We’re pricing in all-time highs in default rates so we’re expecting defaults to come through the marketplace, but we feel they’re more than priced in,” he says.

The energy markets responded smartly to the strength in stocks and the weakness in the dollar Monday. The last few weeks has seen energy commodities led around by the equity market as investors responded to stock-market weakness by reducing expectations for economic growth — which would theoretically translate to lower demand for energy products. Oil’s 9.15% rise to $54.50 was the largest dollar and percentage gain since November 4, and RBOB gasoline and heating oil also saw their biggest gains since that date as well. “Whether or not we can sustain a real rally remains to be seen,” says Tom Bentz, director and senior energy analyst at BNP Paribas Commodity Futures. “I’m not sure the real long-term sentiment has changed yet but oil has fallen $100 off the highs — so I’m not sure we have a whole lot more downside to this.” Also on investors’ minds: a forthcoming OPEC meeting, where production levels could be slashed, and expectations of this — along with the recent fall — resulted in a change in outlook from large speculators, who collectively turned positive on crude oil. According to the Commodity Futures Trading Commission, large specs held a net long position of 10,985 contracts as of Nov. 18, compared with a net short position of 52,984, which was the largest short position of the past 52 weeks. “There’s perhaps a shift in psychology from the short side to the long side,” Mr. Bentz says.

This is a lot of soup. (Andy Warhol/Wikipedia.com)

Chicken soup may be good for the soul, but it does not contain any properties that help effectively hedge against swings in commodity prices.Campbell Soup Co. fell 7.6%, one of the day’s bigger losers, even though the company said sales rose 12% in its fiscal first quarter, but ended up seeing a 3.7% decline in net income. Part of this was due to a $260 million loss related to hedging. But analysts questioned why the company’s profitability in its condensed soup business wasn’t better, particularly as “everybody on the planet knows that that US condensed business has got to be one of the highest margin businesses in the world,” said Eric Katzman, analyst at Deutsche Bank, on the Campbell conference call Monday. Part of the slim profits recorded had to do with foreign-currency adjustments and aggressive marketing, leading analysts at Janney Montgomery Scott to assert that the outlook was “encouraging,” as commodity costs would soon be offset by pricing.