GAFM Expert Opinion

Credit's Divorce From Stocks Signals End of Global Equity

By Michael Preiss

Wednesday, October 14, 2009 13:05:44 PM

[b]For information only:[/b]

Dear all,

Our friends over at French Bank, BNP Paribas increasingly seem to join the camp of analysts and bearish strategists that warn that the stock rally might be riding on borrowed time:

[b]The thoughts / opinion:[/b]

· A breakdown in the relationship between Standard & Poor’s 500 Index and the cost of protecting corporate bonds from default may signal the seven-month rally in U.S. equities is ending, according to BNP Paribas SA.

· “The entire financial crisis has been led by credit markets,” said Rajeev Shah, a London-based strategist. “Credit gave us the right signals.”

· “ Investors should sell both stock and credit indexes “ , Shah said.

· The cost of insuring debt against default started falling before stocks took off, and has now risen about +10 percent since its Sept. 23 low.


[b]Credit’s Divorce From Stocks Signals End of Rally: Chart of Day
2009-10-13 07:13:43.869 GMT
[/b]

By Abigail Moses

Oct. 13 (Bloomberg) -- A breakdown in the relationship between Standard & Poor’s 500 Index and the cost of protecting
corporate bonds from default may signal the seven-month rally in U.S. equities is ending, according to BNP Paribas SA.

The CHART OF THE DAY shows the S&P 500 in red and the inverted Markit iTraxx Europe Index of credit-default swaps on 125 investment-grade companies in white. Equities may lag behind credit as correlation returns over the next three months, BNP Paribas forecasts.

“The entire financial crisis has been led by credit markets,” said Rajeev Shah, a London-based strategist. “Credit
gave us the right signals.”

The S&P 500 soared 59 percent from a 12-year low on March 9 as governments around the world flooded the financial system with cash, helping to pull the global economy out of the worst recession since the 1930s. The cost of insuring debt against default started falling before stocks took off, and has now risen about 10 percent since its Sept. 23 low.

Investors should sell both stock and credit indexes, Shah said. They can then profit should stocks or the cost of default
protection fall and the correlation between the gauges increases, he said.

The Markit iTraxx Europe Index was trading at 86.25 basis points, according to JPMorgan Chase & Co. prices at 7:56 a.m. in London, from a record 221 basis points Dec. 5. That means it costs 86,250 euros ($127,000) a year to protect 10 million euros of debt from default for five years. The S&P 500 closed at 1076.19 yesterday, up from 676.53 in March.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a
company fail to adhere to its debt agreements.


For Related News and Information:
Top bond stories: TOPH <GO>
News on credit derivatives: TNI CDRV <GO>
Credit-default swaps sector graphs: GCDS <GO>
World credit-default swaps pricing: WCDS <GO>
Biggest credit-default swaps movers: CMOV <GO>

--Editors: Michael Shanahan, Paul Armstrong

To contact the reporter on this story:
Abigail Moses in London at +44-20-7673-2118 or
Amoses5@bloomberg.net

To contact the editor responsible for this story:
Paul Armstrong at +44-20-7330-7185 or
Parmstrong10@bloomberg.net

Stock Rally 'Way Ahead' of Economy, Achleitner Says

By Michael Preiss

Wednesday, October 14, 2009 13:02:13 PM

[b]For information only:[/b]

Our German friend Achleitner used to be a Partner and Country head of Goldman Sachs in Germany. Now is with the Allianz. Europe’s biggest insurer and the manager of a portfolio of about $600 billion.

“The market rally right now is -- my personal view is -- way ahead of real-life developments,”

- Paul Achleitner, head of finance at Munich-based Allianz,

“The expectation level is so high, you’re going to have the risk that there’s going to
be a discrepancy in expectation” and economic data, Achleitner said.

Stock Rally ‘Way Ahead’ of Economy, Achleitner Says (Update2)
2009-10-13 15:56:56.613 GMT
By Andrew Frye

Oct. 13 (Bloomberg) -- Allianz SE, Europe’s biggest insurer and the manager of a portfolio of about $600 billion, expects stocks to fall because economic recovery is lagging behind the seven-month jump in the Standard & Poor’s 500 Index.

“The market rally right now is -- my personal view is --way ahead of real-life developments,” Paul Achleitner, head of finance at Munich-based Allianz, said yesterday in an interview at Bloomberg headquarters in New York. “The expectation level is so high, you’re going to have the risk that there’s going to be a discrepancy in expectation” and economic data, Achleitner said.

The S&P 500 has surged 59 percent from a 12-year low on March 9 amid signs the worst U.S. recession since the Great Depression is abating. Still, unemployment in the U.S. climbed in September to 9.8 percent, the highest level since 1983, and economists expect a rebound in consumer spending will wane as joblessness surpasses 10 percent.

“You’ve got to make sure that you don’t commit yourself too fast,” Achleitner said of managing assets backing Allianz’s
insurance policies. “We are cautious on the equity markets in terms of how much we are actually putting to work there.”

Allianz’s equity holdings dropped 47 percent to 27.2 billion euros ($40.3 billion) in the 12 months ended June 30. Achleitner said the company has about 9 percent of the portfolio in stocks amid the rally and is “comfortable” with the
allocation.

The S&P lost 0.1 percent to 1,075.11 at 11:56 a.m. in New York after rising for the previous six days, its longest streak of gains since June 2007. Allianz shares fell 1.26 euros, or 1.4 percent, to 86.65 euros in Frankfurt electronic trading.

[b]‘Sobering Reminder’[/b]

U.S. payrolls dropped by 263,000 in September as losses extended from cash-strapped state and local governments to retailers and builders, according to Labor Department figures this month. President Barack Obama called the jobless report a “sobering reminder that progress comes in fits and starts.”

Insurance companies, which invest premium in stocks and bonds before paying claims, suffered in the recession and the
credit freeze that followed the September 2008 bankruptcy of Lehman Brothers Holdings Inc. Allianz, led by Chief Executive Officer Michael Diekmann, posted a 2.44 billion euro net loss last year and a 29 percent decline in first-half profit in 2009.

Government stimulus plans such as the “cash for clunkers” used-car trade-in program and first-time homebuyer credits have helped ease the U.S. recession. The world’s largest economy shrank at a 0.7 percent annual rate in the second quarter, its best performance in more than a year, Commerce Department data showed on Sept. 30.

[b]Real Estate Opportunity[/b]

Achleitner said he expects commercial real estate prices to fall in the U.S. and that Allianz is prepared to increase its
property investments when deals become more attractive. The company is also “very bullish” on private equity opportunities and investments in infrastructure, he said.

“We definitely think that real estate is an attractive asset class,” Achleitner said. “We think there are going to be some very attractive buying opportunities, and they haven’t happened yet. The pricing isn’t where it ought to be yet.”

[b]For Related News and Information:[/b]
Allianz geographic segmentation ALV GY <Equity> PGEO G <GO>
For stories on U.S. consumers: TNI US CONS <GO>
For stories on the U.S. economy: TNI US ECO <GO>
Global insurance company securities monitor: INS <GO>
Top insurance news: TINS <GO>

--With assistance from Oliver Suess in Munich and Jamie McGee in
New York. Editors: Erik Holm, Dan Kraut

To contact the reporter on this story:

Andrew Frye in New York at +1-212-617-1869 or
afrye@bloomberg.net.

To contact the editor responsible for this story:
Dan Kraut at +1-212-617-2432 or dkraut2@bloomberg.net.