We start off with an update to last week’s piece on corporate bonds (CB). It looks like I am not the only writer who has spotted the possible turmoil in store for CB’s. This is a small snippet from an article on Bloomberg which highlights the problem at a corporate level: 

” General Electric Co. is one of five U.S. companies rated AAA by both Standard & Poor’s and Moody’s Investors Service, making its ability to repay debt unquestioned. Yet when the Fairfield, Connecticut-based firm sold 2.25 billion euros ($3.35 billion) of five-year bonds last week, its annual interest payment was $17 million higher than on a sale nine months ago.”

What caught my eye was that this is GE we are talking about, it’s a mega-conglomerate which constantly reminds the markets that it’s very size and diversification makes it almost untouchable.

So what is GE involved in? Well it is well diversified, it manufactures jet engines, plant turbines, locomotives, medical equipment and is involved in security, water treatment, aircraft leasing, large appliances, real estate, private label credit cards and loans.

Uh ho. Real estate, credit cards and loans. GE is exposed in a direct way to current credit market conditions. Is the corporate bond market being overly pessimistic about this exposure?

Not according to this:

Notice the RSI struggles to go above 50 and isn’t oversold? GE could face further selling pressure and a visit to $27, $4 lower than current prices. Even that trip lower might not be enough to make GE attractively valued. Interestingly GE is one of only 3 companies that is in the S&P 500 and also appears in the top 10 investment graded bond issuers. Now if that isn’t a warning about the state of the US economy, I don’t know what is.

One final update on CB’s, here is a close up of the chart I used last week:

This doesn’t quite give us the whole story. Here is the result of the 3 month T-Bill auction held on Monday:

US TSY: 3-mo bill high 1.420% at allotment of 70.69%, bid/cover 2.67. You can add another 58bp of risk premium into the melting pot and expect continued, large FFR cuts.

Whilst we are on the subject of FFR cuts we need to look at the Federal Reserve policy regarding liquidity. By now most readers are aware of the new TAF limit and the expanded temporary open market operations being used by the Fed to bolster the capital reserves of Financial Institutions. What has been not been mentioned widely is the Fed decision to begin permanent open market operations to sell Fed holdings of US treasuries and thus take cash out of the economy. From the latest Weekly Report:

The Fed trading desk announced it was selling $10Bn of US Treasury Bills to the markets “in order to maintain a level of reserves consistent with trading at rates around the operating objective for the overnight federal funds rate.”

Which was followed by this announcement on Monday:

On Thursday, March 13, 2008, the Federal Reserve’s System Open Market Account will redeem $5 billion of Treasury bill holdings. The Federal Reserve Open Market Trading Desk will continue to evaluate the need for the use of other tools, including further Treasury bill redemptions, reverse repurchase agreements and Treasury bill sales.

Both of these transactions exactly matched the first of the “expanded” repo temporary open market operations carried out on Friday for $15Bn. The Fed has withdrawn liquidity and replaced it with an injection of solvency for Financial Institutions.

Finally we need to look at Fannie and Freddie, both of which are massively beaten down to new 52 week lows. Speculation appeared in Barron’s that a government bailout of Fannie maybe required in the near future and talk is that if either GSE collapsed the government would bail them out. Fannie’s shares dropped $2.95, or more than 12 percent, to $19.82 in afternoon trading and Freddie stock fell $2.50, or 12.8 percent, to $17.15

It would appear that the rise in the spread of Freddie/Fannie guaranteed mortgage securities to new 22 year highs above Treasuries has investors extremely worried, especially since 1992 F & F have only been required to hold a fraction of the reserves that commercial banks would need. With a joint portfolio of guarantees worth over $4.9Tn on mortgage debt being affected by falling prices it is possible that additional capital may be required to keep the GSE’s solvent.

Market Snippets

Chicago AP – McDonald’s Corp.’s big push on coffee and new breakfast items in its U.S. restaurants contributed to a double-digit jump in same-store sales last month, accompanying even stronger growth in Europe, the company said Monday. Two straight months of solid results to start the year have reassured investors worried about the impact of the economic slowdown. McDonald’s shares rose $1.97, or 3.8 percent, to $54.24 in afternoon trading.

NEW YORK (AP) – Gasoline prices were poised Monday to set a new record at the pump, having surged to within half a cent of their record high of $3.227 a gallon. Oil prices, meanwhile, surged above $108 to a new inflation-adjusted record and their fifth new high in the last six sessions on an upbeat report on wholesale inventories.

The national average price of a gallon of gas rose 0.7 cent overnight to $3.222 a gallon, 69 cents higher than one year ago, according to AAA and the Oil Price Information Service. Last May, prices peaked at $3.227 as surging demand and a string of refinery outages raised concerns about supplies.

Commentary by Mick Phoenix

on behalf of An occasional letter from The Collection Agency

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. The views in the article are for informational purpose only.