Daniel Alpert of Westwood Capital and Jerry Webman of Oppenheimer Funds were recently on CNBC discussing the credit markets. Alpert mentioned that while the panic has left the market, and many banks are doing well due to widening credit spreads, the spreads are wide in-part since the assets on which many of the loans are made are still underwater. This gives room for some concern. Alpert also believes that while the recent funding for CIT was a positive, a bankruptcy at CIT is still about 50-50 given that their collateral will be difficult to collect upon. Alpert also still has some worry as to whether there will be enough capital available in the markets and banking system to absorb the level of losses that will still need to be taken.

Source: CNBC Video

Webman was a little more encouraging and believes that it is a positive that private funding was available for CIT. Nonetheless, credit spreads in the investment grade area are still pricing in defaults and poor recoveries at 4-5 times the historical averages, signaling that people are still cautious. Webman did mention one good trend that is showing up - people are breaking apart the "toxic" assets into their good and bad component parts, with the good assets being put back into less toxic and less complicated assets. This is good since banks are trying to become more capital transparent, which will allow them to make more loans of the type that CIT made. This makes a CIT-type of failure less difficult to deal with, and may explain the somewhat muted market reaction. Webman also believes that the latest earnings news is illustrating a gradual rebuilding of economic momentum, and strength in many parts of the financial world. With the current playing field, the big players will continue to be able to make money, even without the extreme levels of leveraged that were observed in the past.

Nouriel Roubini was recently on CNBC (the video is provided below) discussing his views on the economy, and clarifying his recent comments last week that were interpreted as being more positive than earlier in the year. Some comments/observations from the interview include the following:

• Roubini still believes the recession will last 24 months, causing it to be over by the end of this year.
  
• The recovery will be weak, sub-par, and below trend, with 1% growth for a few years.
• The "recovery" will feel like a recession, even if growth is positive.
  
• The unemployment rate will peak around 11% next year.
• Including partial employed/unemployed workers, the unemployment rate is over 16%.
• We have seen the worst, given that the free-fall in the economy is over.
• Nonetheless, even though we will not have an "L" shaped depression, we will also not have a "V" shaped recovery, and he has worries of a "W" shaped double dip recession.
  
• The slow and lower growth are being driven in-part by current debt and spending levels.
• There is a thin line as to when it is best to exit current monetary policy. This also adds risk.
  
• A second stimulus bill is needed by the end of the year (we need to wait until later in the year to let the current stimulus start working).
  
• The second stimulus should include more shovel-ready infrastructure projects.
  
• If the second stimulus is too small, it will not be effective. If it is too large, the bond market will panic. He believes it should be around $200 billion.
• He feels that the U.S. will be the first advanced economy to exit the recession. While China and India are seeing growth already, it will be weak until the G3 recover and start helping to drive their economies.
• Equities, commodities, and credit markets have gone up too far, too fast.
  
• There is possible downside surprise regarding marcoeconomic numbers, earnings, credit shocks.
  
• The risk in the market is still on the downside. Investors should continue to stay away from risky assets.
• The market will not test the lows of March (the levels of which were pricing in depression), but could see a sell-off below current levels and the March lows if his forecast of downward surprises in economic data come true (which he still expects to happen).
  
  Source: CNBC Video

The Yale University Endowment is looking for opportunities in the credit markets and distressed debt, including bank loans, investment-grade debt, and lower-grade bonds (see Bloomberg article). David Swensen, the Yale endowment investment chief, believes that distressed corporate securities will produce "equity-like" returns. He also mentions in the article how corporate governance helped the Yale endowment steer clear of the Madoff investment mess, and believes that others need to take a similar direct and transparent approach to investing. Of interest is Swensen's views on Funds-of-Funds. The Yale Investment chief states that "the reason I don't like funds of funds is that they facilitate the flow of ignorant capital." Of course, the same could be said for most mutual fund investments, and Swensen states as much, stressing that most investors should stick with passive investments like index funds since attempts to outperform the market are usually unsuccessful for retail investors. Yale recently announced that its endowment had fallen 25 percent since June (see previous post), not unlike the 22 percent loss at the Harvard endowment (see previous post). Nonetheless, even with some of the luster off the past outstanding returns from both endowments, each fund is still outperforming the general market - although, with an increasing amount of capital in alternative investments, and an equally shrinking amount in equities, comparing against traditional benchmarks such as the S&P 500 is becoming less reliable.

Thursday, the investment-grade CDX North America Index rose from 130 bps to above 150 bps in a little over a month (see Financial Times article). The Counterparty Risk Index of the 15 leading dealers in the credit derivative markets rose almost 30 bps to rise above 210 bps, sending the CRI to its highest level since the March 14 pre-Bear Stearns Federal Reserve bailout (ie, sale to JPMorgan). The recent Lehman Brothers issues are certainly shaking the market once again, as each new proposal by Lehman to stay afloat is rejected by the market, driving the prices of Lehman down further. Swaps measuring the difference between three-month dollar Libor and the Federal Reserve’s overnight rate for the next three months was trading near 85 bps, just below the 90 bps peak last April. The increase in Libor is signaling rising concerns over counterparty risk. The market has been waiting for the next shoe (financial company) to drop, expecting that Bear Stearns was not the end of the story. Whether a Lehman sale, or failure, will signal a turning point in the level of fear that is continuing to be priced into the credit derivative markets should be known shortly. If not, additional banks and financial institutions may be placed under the liquidity microscope.