So it appears the market has chosen to enter a liquidity crisis. Will run through the stats quickly:
Latam corporate bond spreads are at their May crisis wides:
Latam Corporate Spreads at 2011-08-10
Treasuries rates are at their lows:
US Treasury Rates at 2011-08-10
This is helping to maintain a steady yield in aggregate Latam Corporate Yields though this “calm” is not reflective of the dislocations occurring in the market as higher yield paper has no hard bids:
Latam Corporate Yields at 2011-08-10
The Latin American Corporate Bond Index is showing down 1.7% from its peak and down 1% month-to-date though I am not sure how much stale marks may play in these figures:
Latam Corporate Bond Index Value at 2011-08-10
According to my S&P 500 model, fair value of the S&P 500 is not 1220-1250, so the market is still in oversold territory by the model, but the unfolding banking crisis occurring in Europe (discussed below) renders statements about fair value extremely suspect:
S&P 500 Index Model at 2011-08-10
The state of the bank CDS market is extremely alarming. 5 year CDS spreads of Societe Generale (France) is bid at 260 – its 3 year high:
Societe Generale 5 Year EUR CDS Spread BID as 2011-08-10
Other banks showing similar type graphs are Unicredito (Italy), Commerzbank (Germany), and Bank of America (US).
To have one megabank in stress is bad enough. To have multiple spread around the world is exceptionally bad. This doesn’t seem to be getting much press – perhaps for fear of causing a bank run, but when one looks at the balance sheets of these banks (European banks are levered 15-20 to 1 and US banks are levered 10 to 1) and the recent equity performance of the banks, one should be worried.
The Fed’s recent announcement of keep rates low for another two years doesn’t address the problem of credit quality and leverage of the balance sheet of these banks.
If these banks start to have funding problems, the market will spiral down again.
To me this argues for very low leverage and moving as high up in the capital structure as possible, though the indications are there for a repeat of 2008.
Latin America is not the problem in all of this – its banks are strong and corporations are performing (more or less), but it should continue to trade in sympathy until capital reallocates.
On the whole, a bad situation….
Um abraço,
Arthur O’Keefe, São Paulo Value
