The Credit Market Overview provides a quick snapshot of key issues relating to the credit market. This summary is compiled (usually daily) by our credit strategist Jim Delaney. If you have any questions about the information contained in these reports, contact Lance Baraker by email or phone (212-422-1760). www.saratogaprime.com

Credit Market Overview

July 3, 2008

CEC Portfolio Composition

In yesterday’s comment I asked three what to some extent were rhetorical questions concerning the price of Lehman (LEH) and General Motors (GM) as well as one regarding the level of the stock market as a whole in relation to where the oil/Dollar combo seemed to be headed.

It is rare that we get answers to rhetorical questions at all. Even more so when they are market related as what seems logical seldom occurs. With all this considered yesterday was a bit of a banner day. A hat trick in hockey or 3 for 3 at the plate.

LEH shares it seems have rallied the past few days as the firm prepared to award all its employees a mid-year stock bonus. This was intended as a show of strength and was extended to all employees. Additionally, there was a piece on Yahoo Finance yesterday quoting Morgan Stanley analyst Patrick Pinschmidt saying the company is vulnerable "but near-term concerns appear overdone." Patrick went on to say that "We see a forced fire sale at a distressed discount to book value as highly improbable, and thus see little reason for the firm to explore a sale at this juncture," Mr. Pinschmidt said Lehman's book value, or the amount of assets the company would have if it went out of business immediately, could fall 7 percent from a second-quarter level of about $33 per share. He set a price target of $31 per share.

Based on this information and a financial stock that was one of the few that was up as the Dow headed firmly into Bear market territory I chose to cover the short in LEH and take the multiple double digit gains the position had produced since the beginning of June.

The question concerning GM was a horse of a different color. The stock which had closed at $11.50 on Monday put in an intra-day high on Tuesday of $13.26 after less than totally catastrophic sales numbers were released for the June selling period. I had questioned how large rebates and zero percent financing could add to the long term profitability of a company that had lost its two breadwinner products. It seems the market woke up to this fact yesterday as the stock closed at its lowest level in 54 years, $9.98 and concerns for the company’s viability began to be questioned. For those of a technical nature the price action from 6/25/2008 through yesterday is a classic fill the gap and continue pattern.

On the third point; the Dollar, oil and the stock indexes: the final answer will not be known until the ECB announces its rate decision and the accompanying rhetoric can be analyzed. Suffice to say however that with oil closing at another record yesterday and trading higher in the after market as the Dollar and stock indices headed for the basement it appears that the initial part of that question has been answered as well.

As the saying goes, even a stopped clock is right twice a day. Please don’t expect this level of prescience everyday. You will be sorely disappointed.

The weekend starts today at 1pm for the equity markets and just 1 hour later for the bond boys. Enjoy the extra long weekend! God bless America!

Jim Delaney

The Credit Market Overview provides a quick snapshot of key issues relating to the credit market. This summary is compiled (usually daily) by our credit strategist Jim Delaney. If you have any questions about the information contained in these reports, contact Lance Baraker by email or phone (212-422-1760). www.saratogaprime.com

Credit Market Overview

July 2, 2008

CEC Portfolio Composition

A pre-holiday week shortened by 1½ days seems to be delaying the start of 3^rd quarter trading as although 1.6BN shares changed hands on the NYSE yesterday the intraday swings seemed to indicate that there were not a lot of kids at the playground.

The exacerbated moves in certain names and instruments gave rise to a few questions which I will ask here. First, there is an article in the current issue of Business Week talking about the possibility of a bid for Lehman (LEH) at a “substantial discount from its current price.” Given that the article came out this week it would stand to reason that it was written in the latter half of last week when the stock closed on Friday at $22.25. The stock closed yesterday at $20.96 up 5.81% on the day. So the question is does $1.29 represent a discount that can be considered “substantial”? If not, why were people willing to bid the stock up over 5% on the day. Also, if as they say, something is only worth what someone else is willing to pay for it, then why should the stock trade any higher than whatever the price is after you subtract “substantial” from it regardless of whether that deal goes through or not?

My next question regards General Motors (GM). The company released sales figures yesterday that were, by any objective measure, abysmal. An 18% decline in the sales of cars and light trucks in a month (June) that Auto-data Corp. labels as one of the year’s strongest for auto sales. The company was said to boost sales late in the month by offering big rebates and no-interest loans so as not to be overtaken by Toyota. Now I understand the market’s role as a forward looking mechanism but even in that case does the prospect of lower profit margins on the vehicles you are selling and negative profit on the financing aspect of the transaction really bode well for the company offering these incentives? Additionally, does it make more or less sense to do so to stay in front of a Japanese auto manufacturer? Didn’t that war end in 1945?

My last questions come from the oil/U.S. Dollar/U.S. Stock relationship currently being hashed out in these markets. On June 6^th the WTI crude oil contract had a $10+ up day. This closing high, as well as the shadow from the price action of that day remained intact until the 27^th of June when we closed above the $140 mark for the first time. We have not closed below $140 in the days since the 27^th so technicians might tell us that the “breakout” does not appear to be a false one, to date at least. Even if oil moves below the $140 level, let’s say to $138 or so. Does that mean that the pump price of gasoline is going back down to $1.00? Does it mean that the drag on the economy that is high fuel prices causing things like an 18% decline in cars and light trucks becomes an 18% increase? If not then why does the stock market move 10 S&P points every time the price of oil changes by $0.50?

Finally, my last set of questions is also tied to this triangle made up of oil, the Dollar and stocks but this time it’s the first two that generate the questions. The Dollar is tied to the price of oil as that is the currency used to pay for the raw material form of that commodity. It makes sense then that there is a negatively correlated relationship between the two. It seems however that there are times when the weakness of the Dollar is driving the price of oil up and others when the strength in oil is driving the Dollar down. Poor Dollar.

With Claude Trichet’s announcement tomorrow of a ¼ point increase in the ECB rates essentially factored into exchange rates at the moment the world seems to be focused on the language contained in the accompanying statement. The FT reported yesterday that Eurozone inflation rose to its highest level since 1999 in June and at 4% is double the ECB’s target for that measure. The ECB, unlike the Fed here in the U.S. has a single purview, contain inflation. How, in the face of a double of the target rate can Trichet be dovish about inflation?

Its Wednesday, there are 1½ market days left to this week. Maybe that’s enough time to get some answers.

Enjoy the day,

Jim Delaney

The Credit Market Overview provides a quick snapshot of key issues relating to the credit market. This summary is compiled (usually daily) by our credit strategist Jim Delaney. If you have any questions about the information contained in these reports, contact Lance Baraker by email or phone (212-422-1760). www.saratogaprime.com

Credit Market Overview

July 1, 2008

CEC Portfolio Composition

The last day of the 2^nd quarter and 1^st half of 2008 was relatively quiet. It would appear that all of the positioning to be done occurred on Tuesday and Wednesday of last week so that adjustments would be settled by the 30^th. It also seemed as if once that was done the market was free to go where it wanted and decided to drop 38.82 S&P points last Thursday. The question as to whether, at the index level, Friday and yesterday were all about consolidation or marking time will begin to be answered today.

The financials and homebuilders as well as the insurance and REIT names never took a break but continued on the journey described in Dante’s tome. Talk of the revenue generation model that was “securitization” being dead with no clear predecessor is making its way out of the mouths of the talking heads these days. If the axioms are correct and they are axioms for a reason, it could mean that the sectors that led the last rally and ensuing decline is would no longer be expected to lead the market higher from the current malaise. Hence the adage: new bull markets require new leadership.

CDS spreads throughout the sectors mentioned continue, for the most part, to widen. There are some names that go sideways for a day or two before moving higher at rates that make up for the days spent in limbo. Other names appear to prefer a slower but continuous plod upwards. Given that once a position is on the books in the CEC Portfolio it takes a confirmed change in direction of CDS spread movement or a reversal in the trend of the stock to remove that position it does not appear that any of the shorts in the four sectors mentioned will be covered anytime soon.

Interestingly, the continued news of write downs and capital raising seems to be creating less stir these days as the erasure of Bear Stearns and more recent failed attempt to do the same to Lehman have annealed investors to the situation as long as they know good ‘ol Uncle Sam is around to play lifeguard at the swim club known as Wall St.

The price of Crude, the story Mr. Trichet spins tomorrow when he announces whether or not he’s raised the ECB rate by ¼ of 1 percent and the June unemployment figures due out on Thursday should be more than enough for the markets to focus on in this holiday shortened week.

Answers will be revealed as the story unfolds.

Enjoy the day.

Jim Delaney