Friday Focus

The markets ended the day pretty much where they began. Ford surpassed GM in sales. GM blamed the snow and Ford benefited largely from fleet sales indicating that consumers remain under stress. It is because consumers are strained that the markets are focused on this Friday's employment data. Judging by recent news stories and comments made by corporate executives, employment does not appear ready to make a comeback. Unless a new technology spurs on the economy or consumers are able and willing to borrow and spend well beyond their means, jobs will be slow to return.

This does not mean that the economy will experience a double dip recession, but it probably means that the U.S. economy will grow as the population grows, assisted by replacement spending. After all, some items, such as clothing, appliances and vehicles wear out.

OK, so how should one approach fixed income investing. One should be an investor. There truly are not that many trading opportunities in the taxable fixed income markets. Some banks (BAC / CFC, PNC / NCC, MS, MER and GE Caoital) offer some spread tightening potential. However, spreads could tighten by having treasury yields rise toward corporate bond yields. This would not result in price gains for corporate bonds. In fact, bonds with little tightening potential are likely to lose value as their yields move higher along with treasury yields (albeit modestly).

I am often asked about high yield bonds. Most sectors have already been played out (although I cannot justify the strong recovery in this sector fundamentally). Here may be some upside in the auto finance companies and related companies such as Good Year Tire. Please understand that these bonds would be suitable for aggressive, equity oriented investors more interested in total return (possibly at less than par in a distressed scenario) rather than for reliable income. In this environment fixed income investors should be just that and not attempt to be traders.

I have also been asked about AIG's sale of its Asia insurance united to Prudential PLC of the UK. This is good news for tax payers are the proceeds will be used to pay back the government (although it only makes a modest dent in the over all amount owed). However, the sale of this attractive asset with the proceeds going to the government means that there are fewer assets to back unsecured bondholders (most corporate bonds). There are ways that the government can pay itself back, secure policy holders ./ customers of AIG and its counterparties without making bondholders whole. In fact, proposed bank legislation introduced by both parties include provisions which would cause creditors (including bondholders) to absorb a larger portion of the losses from a failure and break up of a bank while wiping out shareholder. Extending such policies to creditors of AIG is not far-fetched. I am not saying that haircutting AIG creditors is the most likely scenario, but it can happen. Just ask GM and Chrysler creditors.

My prediction for Nonfarm Payrolls: Somewhere between the street consensus of -50k and -100K. It is not all weather related either.