Last week, 5 of the 8 risk measures registered negative readings on a week-over-week basis, while 1 was neutral and two were positive - a negative overall reading suggesting the market is still in high anxiety around Europe concerns and a domestic economic slowdown. Interesting to note is that Greece bond yields have begun to widen considerably once again, after stabilizing for a period following the EU trillion dollar bailout announcement.
Our risk monitor looks at the following metrics weekly:
1. CDS for all available US Financials (30 companies).
2. High Yield
3. Leveraged Loans
4. TED Spread
5. Journal of Commerce Commodity Price Index
6. Greek Bond Spreads
7. Markit Subprime Spreads
8. AAII Bulls/Bears Sentiment Survey
1. Financials CDS Monitor – Mortgage insurers and AIG saw credit default swap spreads decrease last week, but all other Financials saw spreads widen. The largest decreases week over week were AIG, PMI, MTG, and RDN. Swap prices remain considerably elevated compared to a month ago, with the most widening at XL, MBI, ABK, and AGO. Conclusion: Negative.
Contracted the most vs last week: AIG, PMI, MTG, RDN
Widened the most vs last week: ACE, ALL, TRV, SAN-ES
Contracted the most vs last month: GS, COF, SAN-ES, POP-ES
Widened the most vs last month: XL, MBI, ABK, AGO
2. High Yield (YTM) Monitor - High Yield rates rose 11 bps last week, remaining above their elevated levels preceding the Greek bailout. Rates closed the week at 9.09% up from 8.97% the week prior. Conclusion: Negative.
3. Leveraged Loan Index Monitor - Leveraged loans were almost flat last week, closing at 1463, down one bp from 1464 the week prior. Conclusion: Neutral.
4. TED Spread Monitor - The TED Spread is a great canary. It rose last week closing at 39.7 bps up from 37.1 bps in the week prior. Conclusion: Negative.
5. Journal of Commerce Commodity Price Index – This week the JOC smoothed commodity price index replaces the VIX in our Risk Monitor. We believe it to be a more useful leading indicator than the VIX, which is coincident. A sharp sell-off in this index starting in July ’08 heralded further declines in the stock market. This week, the index fell from 25.97 last Friday to 23.02 on Wednesday. (No price data is available Thursday and Friday.) Conclusion: Negative.
6. Greek Bond Yields Monitor - The Greece situation remains in flux and so we include Greek Bond 10-Year Yields as a reflection of that dynamic. Last week yields rose 41 bps to 762 bps from 823 bps. Conclusion: Negative.
7. Markit ABX Index Monitor - We use the 2006-2 series and look at the AAA, AA, A and BBB- series. The Markit ABX Index was generally up vs the prior week. We include this measure as a reflection of what is going on in deep subprime distressed paper. Conclusion: Positive.
8. AAII Bulls/Bears Monitor - The Bulls/Bears survey grew more Bullish on the margin vs last week. Bulls increased by 7.27% to 37.09% while Bears fell 10.03% to 40.85%, putting the spread at 4% on the bearish side, versus 21% to the bearish side last week. Conclusion: Positive.
Joshua Steiner, CFA