C.M.O. 07.25.2011

I’m still not sure if they should be called the “Gang of Six”, the “Gang That Couldn’t Shoot Straight” or six guys playing a 3 on 3 game of kick the can down the road but the current impasse in the budget/debt ceiling negotiations is definitely lowering the credibility ratings of our elected officials in Washington even if S&P, Moody’s and Fitch never have the chance to lower Uncle Sam’s credit rating.

Mr. Boehner was on TV yesterday saying, “The path forward, I believe, is that we pull together as a team”, but wasn’t he the one that stormed out of the room on Friday?

Alan DeRose, MD of government trading and finance at Oppenheimer & Co. put it most succinctly when he said in today’s WSJ, “If you don’t know what you’re going to do when the event happens, how do you make a trading decision?”, when asked about the possible down grade of the U.S.A. from AAA.

Jonathan E. Lewis, founding principal of Samson Capital Advisors, with $7BN under it’s roof similarly asks, “How does one determine the term structure of rates for a fading hegemon whose credit rating may be downgraded from AAA to double-A?”  And for those who might think this is a new situation for America none other than one of the founding fathers himself, Alexander Hamilton wrote in the First Report on Public Credit in 1790 “For when the credit of a country is in any degree questionable, it never fails to give an extravagant premium, in one shape or another, upon all loans it has occasion to make.”

David Bianco, chief equity strategist of BofA Merrill Lynch thinks a stop gap deal to raise the debt ceiling “could have a more negative impact on stocks, as a delayed downgrade should give investors more time to digest the implications.”

On the other side of the world where they play proper “footie” they kicked the can very far down the road.  Bild magazine, one of Germany’s most popular, was quoted as saying “After more than a year the euro chiefs, including Angela Merkel, have opened their eyes: Greece can’t go on like this and needs partial debt forgiveness, better late than never.”

They might get their debt forgiven but Fitch said Friday that it would declare Greece in default when the bond exchange of approximately E135BN takes place and it is expected that the other rating agencies would follow suit.  Where were these guys when CDO’s were popping up quicker than crocuses in the spring?  Collecting checks for handing out AAA ratings of course!

As it turns out the 90 largest European banks that were recently subjected to the less than stressful stress tests would face losses of somewhere between E7BN to E14BN, two thirds of which is concentrated among Greek banks.  At least they were eating their own baklava.

With that said the losses would be smaller than many analysts thought but “the reason that they’re smaller is you’re not given guarantees that you won’t face future haircuts” says Andrea Filtri, a banking analyst with Mediobanca Securities in London.

Back on this side of the Atlantic and a third of the way through second quarter earnings season the components of the S&P 500 are reporting numbers that are the highest in four years according to Howard Silverblatt who monitors things of this sort for S&P.  Howard also thinks that the second half of 2011 will be stronger but doubts that strength will either jump start the economy or increase payrolls.

Paul Huck, CFO for Air Products & Chemicals (APD) said “we aren’t creating jobs” in the U.S. during a conference call on Friday also stating that “we think that that number starts to tilt more towards Asia going forward” when asked about where the company plans to make its capital investments.

General Electric Co. (GE) which also reported on Friday had CEO Jeffrey Immelt stating that “our global growth was especially strong” while the company’s CFO, Keith Sherin, countered by saying, “we’re seeing a slow-growth environment here in the U.S.”

As we come to the close of July there are just 16 months before citizens here make their voices heard at the polls.

As Meatloaf wrote in his hit “Paradise By The Dashboard Light”, “What’s it gonna be boy, yes or no?”

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