C.M.O. 4.29.2010

Credit Market Overview

April 29, 2010

While there were eleven explicatives uttered during the Congressional hearings on Tuesday one might think there were a few more than that spoken (albeit more hushed) around the EU yesterday as S&P, with its new found conscious, continues its post “We’ll give anything you want a AAA” mantra with its new mission statement; “Downgrade first, ask questions later”; knocking a ratings notch off of Spain just one day after moving Greece below the investment grade line.

This has, once again, brought correlations across and among asset classes to that ominous 1.0.  It should be noted, however, that since this mess started about three years ago the only time 1.0 is not preceded by “ominous” is when it is lead by “euphoric”.

Inclusive in this world of 1.0 are  the most basic components of growth, raw commodities, and prices for all those things we pull from the ground be they liquid, solid or green shoots sunk along with Greece’s rating on Tuesday.

But, as we have seen all too many times in the last little while, today’s goat is tomorrow’s hero and vice versa.  As such a bit more perspective might be needed to determine what is really going on in the raw materials space.

A first clue might come from auto sales figures in China in March which were up 56% YoY to a new all time record high of 1.74MM vehicles, topping the previous record set in January of this year of 1.66MM.  India, too, reported a sharp rise in passenger car sales with 1.53MM units sold, a 25% increase from the 1.22MM sold the previous year.

Those not so sleepy on this Thursday morning might ask why I am talking about the growth in finished products when my stated theme was raw materials?  Given their inclusion in the durable goods category and the amount of raw materials they consume, both during and after production, cars seem to be a pretty good indicator of what might be going on with a good number of those things we categorize as “commodities”.

Before their recent retreat crude oil and copper, to name just two, had regained levels seen in 2008.  The March employment figures seemed to provide evidence that the U.S. economy is continuing to recover and “Although the number on Friday wasn’t a game changer, it does offer hope [for] a swifter emergence from a jobless recovery”, according to Jason Schenker, president of Prestige Economics.

Copper has had the double bang of demand in both the wiring for autos as well as in houses; even if some still live by the credo that “you can sleep in your car but you can’t drive your house”.

With the demand for both cars and housing growing disproportionately in places like India and China, the rise in prices caused by the need for the materials necessary to meet that demand is being felt, disproportionately, in the more developed economies with lower growth prospects.

“The rest of the world is simply not waiting on the U.S. and Europe to fully get their act together,” Douglas Porter, economist at BMO Capital Markets said making a nautical analogy by comparing the “plodding tugboats” of U.S. and Europe to Asia’s “super-charged cigarette boat”.

An example of this can be seen in the cost of rubber which has posted a 74% YTD increase in 2010 after rising 92% in 2009.  Goodyear Tire (GT) has warned of the impact of this on profits but not all producers are feeling the pinch.  Morry Taylor, CEO of Titan International Inc. (TWI) said simply, “I make tires for people, so I charge them more money.  You pass it through”.

Now while Morry’s motto might elicit a few more expletives there is a positive in the fact that his customers are still around and able to pay the higher prices.

Enjoy the week.

Jim Delaney

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