Credit Risk- Market View - Great reads

Rates sensitive themes continue to struggle as continuation of the FOMC sentiment. Credit worry as long awaited is finally being recognized on wall street.

Downside move Led by homebuilders and mortgage lender weakness. CFC, LEND, TOL etc. Credit related themes continue to be at risk despite the positive analyst consensus on the street.

• Competition may get tougher. Wall Street firms, including Lehman Brothers Holdings Inc. and Bear Stearns Cos., are emerging as bigger rivals in home-mortgage lending, expanding beyond their business of creating and trading in mortgage securities. "They don't know anything about the mortgage business, which makes them a dangerous competitor," Mr. Mozilo said. These firms "have no hesitation about paying two or three times what we would pay personnel because they're used to the big bucks."--WSJ

• For years, it was surprising that higher energy and commodity prices didn't produce much overall inflation. That was because commodities make up less than 15% of costs to business. Labor costs were held in check. Now, the cost of labor per unit of output is rising faster than overall inflation. That squeezes profit margins and puts pressure on companies to raise prices.

• S&P: 1250-1280 range continues to be a level to watch in the near-term: overall daily extended and due for further pullbacks. Weekly oversold indicator is not working and in danger of falling back to negative territory.
• Beta index showing that an additional downside move is needed before a change in sentiment.
• Gold: see further downside move: GLD closer to 62 level.
• Rates: 10 year attempting to hold 4.87%.
• Crude: 77.95 resistances.
• Financials continue to offer plenty of shorting opportunity. Continuing shorts on banks/brokers : MS, SCHW, AMTD- shorts here.
• Search for value names in deeply oversold areas but not a timely entry point.
• Defensive names might offer shelter but not a sure bet.
• Soft commodities a theme worth revisiting.

A great conclusion from Financialsense.com: http://www.financialsense.com/Market/barbera/2006/0808.html

History strongly suggests that while Energy stocks, Utility stocks and Consumer Household Product “Staple” Stocks can be defensive at various times there are a few concepts that stand out. They are:

1. During the course of most bear markets, the end stages of a bear where there is panic, liquidation can take these groups down very harshly causing them to give back a good deal of the defensive gains they may have accrued during the broader equity bear market. In essence, if a bear market continues for too long a period of time, as in the 1973 to 1974 and 2000-2002 bear markets, these stocks have a tendency to give up the ghost and succumb to the selling pressures in the final stages of the bear.

2. If one of these groups is deeply depressed going into a bear market and has for several months or years been out of sync with the broad market (underperforming) there is a good chance it will shine in a down market and live up to its defensive potential.

3. Ultra-tight Fed policy and very high real rates makes it almost impossible for any of these groups to perform well, so at some point, the switch from defensive names to cash is necessary if the Fed appears intent on strangling the economy.

4. None of these groups really holds up well in a crash, with the possible exception of Utility stocks, which in years prior had big dividends. Today, the new equivalent might be the Energy Trusts which frequently sport ultra-high dividend yields as many utilities now only pay mediocre returns.

5. Gold Stocks tend to have the strongest non-correlation to the market but will only hold up and perform well if the price of gold itself is gaining momentum and showing tenacity in the face of whatever economic event is driving the bear market. If Gold rolls over, the Gold Stocks can very quickly turn into a high risk proposition and can very quickly give back accumulated gains.