News that Moves: CDX Index Rally, Corp. Debt Rally, Auto Rescue, Obama's TARP, & Calpers

RCM Comment: In order for this equity market rally to actually have sustainability we need to see improving credit markets. The following two stories shed some light on this topic and suggest that the rally may have support from the credit markets albeit minor at the moment. We will need to monitor this relationship closely over the coming days and weeks.
M.S. Howells & Co.-
Specifically, the CDX IG11 Index rallied 22bps for the second straight day to bring total spread tightening to over 45bps since Monday’s close. The index has declined from 265bps to 220bps over the past two trading days. This is the tightest index closing level since November 18 – the day that US Treasury Secretary Paulson announced that the government would not be implementing its previously announced plan to purchase troubled bank assets. The CDX IG11 Index has tightened nearly 45bps since Mondays close and 50bps since last Wednesday’s close. The initial impetus of the rally – Fed action, planned Automaker support, successful GMAC tender- appeared to generate a considerable amount of momentum trading.
However, unlike Tuesday’s rally, Wednesdays rally was accompanied by an average of 20bps tightening in individual index members. This is a good sign, because many of the previous credit market rallies were short-circuited by the lack of single name CDS spread tightening

Higher-quality debt draws interest; cautious dabbling in junk bonds - WSJ
WSJ reports the Federal Reserve's interest-rate cuts are pushing some investors to seek higher returns in credit markets, driving down mortgage rates and yields on corporate debt. One side effect of that is to push fixed-income investors into slightly riskier assets where they can make more return, namely the highest-quality issues, which still are paying 6.5 percentage points over comparable Treasury bonds, according to Merrill Lynch. "There is relative value in the investment-grade market and sentiment is shifting that way," said Bill Larkin, fixed-income portfolio manager at Cabot Money Management. The risk premium on some bonds of J.P. Morgan, Bank of America, General Electric Capital and Morgan Stanley fell by a quarter of a percent, according to MarketAxess, a relatively big move relative to the slump of recent months, and given headwinds like losses and profit warnings that continue to plague these companies... Junk bonds saw modest improvement Wednesday, but investors in that market remain cautious on expectations for defaults to increase in 2009.

RCM Comment: Expect positive news spin going into Christmas as Bush tries to improve his legacy by playing Santa to the Auto industry.
Paulson takes lead in auto rescue talks - NY Times
NY Times reports the White House and the Treasury are deep into negotiations with General Motors (GM) and Chrysler over reorganization plans that could result in freeing up more than $14 billion in emergency loans to keep the companies afloat through the first quarter of 2009, according to industry executives and a senior administration official. The Bush administration appears to want an agreement with the automakers before Dec. 25. It was unclear, however, when all of the particulars might be worked out, said the senior official, who spoke on the condition of anonymity because of the delicate nature of the negotiations. But the official indicated that the administration was inclined to do more than just keep G.M. and Chrysler alive until President-elect Barack Obama takes office, saying, "Giving them enough money to limp along doesn't solve anything." In the negotiations, the Treasury secretary, Henry Paulson, is effectively taking on the role of "auto czar," which was envisioned in the carmakers rescue bill written by the White House and Congressional Democrats and approved by the House but blocked by Senate Republicans. In the days since the White House said it would step in to prevent the collapse of G.M. and Chrysler, Treasury officials have been poring over detailed financial data in a meticulous exercise that one G.M. executive likened to "putting on the aqualung" and diving deep into the companies' books.

RCM Comment: Don't forget to put on your gold colored glasses whenever you read stories about Obama's economic rescue plans. As owners of the precious metals we must stand and salute every time we read about these massive handouts.
Obama works to overhaul TARP - WSJ
WSJ reports the incoming Obama administration is considering a series of initiatives to combat the financial crisis, including some efforts to help banks that the Bush administration has tried with limited success. Among the plans being discussed are injecting more capital into banks, creating a market for illiquid assets clogging the books of financial institutions and helping borrowers who are having trouble making their mortgage payments... The new administration is "trying to put components together that...will be complementary...while recognizing there's no easy answer," said a person familiar with its plans. The Obama team, hoping to avoid the criticism leveled at Mr. Paulson by lawmakers that he lacks a consistent strategy, is also working to come up with a way to cogently explain the rationale behind its approach. One key distinction will be in the approach to helping homeowners facing foreclosure. Mr. Paulson and the White House have resisted calls to embark on a government rescue of homeowners. The Obama team, by contrast, sees that as a critical leg of its financial-crisis rescue plan, people familiar with the matter said. Democratic lawmakers are pushing for Mr. Obama to take steps quickly to help at-risk borrowers. Details of the Obama foreclosure plan aren't known, in part because they are still being hashed out.

RCM Comment: This story is a glaring example of what is inherently wrong with the real estate market and why the recovery will take a long time to develop. Calpers by definition was supposed to be a conservatively managed pool of assets and yet they employed an obscene amount of leverage during the time of free credit to purchase land at the top of the market. If Calpers was leveraged to this degree you can imagine the bellicose leverage used by aggressive pools of capital. Credit has now collapsed and there is a massive supply overhang so a recovery will be problematic.
Risky, ill-timed land deals hit Calpers - WSJ
WSJ reports at the height of the property bubble, Calpers, made a fateful decision: It aggressively poured money into real estate. As a result, today it's one of the biggest owners of undeveloped residential land in America. Partly because of these investments, California Public Employees' Retirement System is struggling to avoid one of its worst annual declines since its 1932 inception... The problems come at a time of uncertainty for the nation's largest public pension fund, which has been without its top two executives for nearly half a year. Calpers is poised to appoint a new chief executive as early as this week, people familiar with the matter said. Calpers is now warning California's cities, towns and schools that they may have to cough up more money to cover the retirement and other benefits the fund provides for 1.6 million state workers. Some towns are already cutting municipal services, and at least one is partly blaming the Calpers fees. Calpers in recent weeks said it expects to report paper losses of 103% on its housing investments in the fiscal year ended June 30. That's because Calpers invested not only its own money, but billions of dollars of borrowed money that must be repaid even if the investment fails. In some deals, as much as 80% of the money invested by Calpers was borrowed. In the latest wrinkle: To generate sorely needed cash, a troubled Calpers venture known as LandSource recently started the process of selling land during the worst property market in a generation. Calpers could potentially lose nearly $1 billion on LandSource, a $2.5 billion deal completed early last year, and one of the priciest U.S. residential-land transactions ever. LandSource is now under bankruptcy-court protection.