C.M.O. 11.7.2011

Much has been written in this space in the recent past regarding the extraordinary level of correlation across all assets and asset classes.  Also remarked on has been the level of volatility and the comparison of the “risk on” / “risk off” nature of the markets made to a youngster playing with a light switch.

Andrew Cox, an FX strategist for Citigroup captured this sentiment when he said recently, “Europe is driving all asset markets, we are going through a time when fundamentals matter little”.  Now, while Andrew might have been thinking about all “financial” assets, his comments would seem to also apply to the art market as the fall auctions held by Christie’s and Sotheby’s came to two very different ends last week.

On Tuesday evening Edgar Degas’ “La Petite Danseuse de Quatorze Ans”, a bronze of a young ballerina failed to meet it’s pre-sale estimate of $25MM to $35MM and was sent back to its owner as was Picasso’s “Head of a Woman”.  It should be a surprise to no one, given what we know of Picasso, that he would decapitate the object of his affection, at least on canvas.  Just one day later however, Sotheby’s sold Gustav Klimpt’s “Litzberg am Attersee” for $40.4MM well above its $25MM presale estimate.

Whether these failures and successes were tied to the political bobbing and weaving of Messer’s Papandreou and Berlusconi remains to be seen but the weight with which each and every bit of news out of Europe effects the markets is proving quantifiable.  Mr. Cox and his team at Citibank have developed what they call a “Merkel Signal”.

In creating this strategy they counted the number of news articles Angela Merkel’s name appeared in each day.  They then measured the return they would have generated if they would have bought the Euro when Ms. Merkel’s name appeared more than the average for the last five days and sold it when it appeared less than that same average.  This very simple strategy would have returned 32% since the beginning of 2011.

Jeffrey Saut, chief investment strategist at Raymond James, has a possibly more interesting if less logical way to make money.  It has more to do with the calendar than the newspaper and is based around our current 12 month marker.  For one Jeff notes, 2011 has an abundance of dates that contain all “1’s” such as 1/1/11, 1/11/11, 11/1/11 and 11/11/11 which comes this Friday.  Additionally, people born in the last century will find the sum of 111 when they add the last two digits of their birth year to their age. (Go ahead, I’ll give you a minute to try it.)

Possibly the most constructive calendar coincidence is that this past October contained five Saturdays, five Sundays and five Mondays which, according to Mr. Saut, occurs only once every 823 years and signifies, again according to Jeff, a “Moneybag” year.  Our numerologist friend believes that “If we don’t talk ourselves into a recession, performance anxiety is going to force money managers to buy stocks”.  With just 55 days to go in this year with double ones we won’t have long to wait to see if this theory works.

As a quick aside and staying with the numbers theme, social-email software provider harmon.ie recently found that 57% of the interruptions during a typical work day involve a social networking tool and that 45% of workers go no longer than 15 minutes without being interrupted, costing businesses around $10,375 a year per employee.  If the founders of the various social networking companies were not being made multimillionaires if not billionaires by the IPO’s of their respective companies this last number would truly be one for those who seek to occupy nothing more than there own self pity.

Some other numbers of note last week included U.S. auto sales which jumped 7.5% in October, the second fastest pace of the year.  Chrysler, a unit of the Italian car maker Fiat SpA led the pack with a 27% rise followed by Hyundai, Nissan, Ford and GM with 23%, 18%, 6% and 2% YoY respectively.  “No doubt we’re seeing a kick up” in the pace of sales was how Don Johnson, sales analyst for GM put it continuing that, “we see 13mm as the baseline for 2012”.  Adding to this BMW AG announced on Thursday that earnings were up a better than expected 24% with CEO Norbert Reithofer saying, “We achieved new records for sales volume, revenues and earnings”.

Another optimistic number came from MasterCard (MA) which reported a 38% rise in Q311 profit along with a 25% boost in net revenue.  “Double-digit increases in volumes and processed transactions in most regions across the globe” helped drive the higher results, Ajay Banga, president and CEO of MasterCard said in a statement.  While the retail sales figures that came in last week disappointed some it would appear from MasterCard’s results that lots of people in lots of places are using their “plastic”.

Thursday was also the 10th biggest day this year for investment grade bond issuance this year according to Dealogic as companies sold $11.65BN of debt.  “Today’s deal flow relates to the expiry of the September 30th earning blackout periods, several M&A-oriented financing’s, a growing recognition that the interest-rate opportunity is, indeed, perishable, and the fact that next week is expected to be exceptionally busy as well”, according to Bryan Jennings, head of fixed income capital markets in the Americas at Morgan Stanley.

In the high-yield market Sprint (S) captured the headlines with a sale of $3BN in bonds with the 7-year selling at 9% and the 10-year yielding 11.5%.  This should be compared to the 8.375% yield on the notes the company sold in August of 2009.  “Historically they have financed at much lower spreads.  But they got downgraded, [to B+] and people are more aware of their issues, so it could be more challenging.  They should have come earlier in the year” was how Brian Hessel, MD at Global Credit Advisors put it.  Also to be noted however is that the deal was slated to be $2BN in size but was increased due to demand.

The volatility in the markets has taken its toll on the high-yield market as the Bank of America Merrill Lynch High Yield Master II Index was trading at 725bps recently as compared to 587bps in early August.

With that said the SPDR Barclays High Yield Bond ETF (JNK) saw $253MM of net inflows for the week ending last Wednesday.  The 30-day yield calculated in accordance with SEC rules is about 7.8%.

With things remaining fluid in Europe and the Super-committee running up against its November 23rd deadline the headlines are sure to keep things hopping this week.  Hopefully with 11/11/11 in the wings the “Moneybags” will come your way.

Enjoy the week.

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