Editor’s Note : While Sam Collins is on vacation, we’ve asked Nick Atkeson and Andrew Houghton, editors of Big Money Options, to provide you with a comprehensive market outlook and a trade of interest until Sam returns June 1.
The market had a choppy start Thursday given a number of conflicting economic releases, confusion about how the General Motors’ (GM) bankruptcy negotiations were progressing, higher crude oil prices and fears about the seven-year Treasury auction.
By the end of the day, the sum total of the above was the economic news was not all bad, the Treasury auction went better than expected and the details of the GM bankruptcy negotiation carries positives for the corporate bond market.
Much like Wednesday, the long-end of the Treasury yield curve is attempting to hijack the stock market’s bull move. Given the huge amounts of capital the government needs to raise to fund the deficit and Treasury roll-over schedule, the market is convinced long-term Treasury rates are going to have to go way up to attract buyers. To the surprise of the market, the seven-year Treasury auction was better than what bond holders had feared. Relative to expectations, another overhang was removed from the market going higher.
GM is going to file for bankruptcy protection on June 1. It appears the company has reached agreements with its principal stakeholders about who will own what coming through the reorganizing process. General Motors is becoming “Government Motors,” with the Treasury taking a 72.5% ownership position post bankruptcy.
Most importantly, the bond holders were able to protect their rights as bondholders. A committee of institutional bondholders agreed to a deal where the union gets 17% of the company plus debt, while the bondholders get 10% of the company with warrants for 15% more. The secured lenders will recover 100% of their principal.
This outcome should help stimulate further private fund flows in the corporate bond market. Bond holders have again (Chrysler bankruptcy being the first important test) stood up to a cram-down government solution and successfully enforced the rule of law.
The S&P 500 (SPX) closed at 906.83, up 1.54%. The Dow (DJI) was up 103.78 points or 1.25%. The Nasdaq (NASD) closed up 1.16%. The CBOE Volatility Index (VIX) closed at 31.67.
On May 4, the S&P 500 closed at 907.24, within one point of Thursday’s close. The market has spent virtually all of May moving sideways in a narrow trading range; sometimes this amounts to consolidation before another leg up occurs.
What the Markets Are Saying
The market appears to be cautiously optimistic. It is giving the economic recovery thesis the benefit of the doubt while keeping a watchful eye on the ease with which the credit market absorbs Treasury debt issuance.
We have gone sideways in May rather than down. When the news flow turns slightly positive, the market seems to respond. When the news flow is negative, it holds at key support levels.
Looking into early June, the reality of the GM bankruptcy will have been absorbed and the consequences of the Treasury auctions better understood. We suspect the market will begin to refocus back on upcoming earnings reports for evidence the economy is gaining momentum.
Today’s Trading Landscape
Earnings Before Market Open: Golar LNG, Quality Systems, Royal Bank of Canada, Tiffany & Company.
On the economic front, we will see Q1 Personal Consumption (the consensus is 2.0%), Q1 GDP Price Index (the consensus is 2.9%), Q1 Core PCE (the consensus is 1.5%), Q1 GDP (the consensus is negative 5.5%), May Chicago Purchasing Managers Index, or PMI (the consensus is 42.0), the May NAPM Milwaukee and the May University of Michigan Confidence report (the consensus is 68.0).
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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.
