"Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof"
John Kenneth Galbraith
Most individual investors out there tend to forget that the total value of the global equities (stock) market is actually several times smaller than that of the world fixed income (debt) market, and the conflicting signal being sent by the two recently thus deserve special attention. While the stock market has rebounded handsomely from its July lows pointing to supposedly improving conditions in the US/World economy, spreads and yields in the fixed income world actually gotten considerably worse recently, suggesting that there still could be a lot more pain to come on the economic front...
Spreads on commercial mortgage based securities widened dramatically and set a new record virtually every day over the last several weeks, even as financial stocks continued to rebound...
WSJ also reported that spreads on bonds sold by American Express this weekend were ridiculously high, suggesting very little appetite for risk out there...What's more, I actually now think that corporate bonds of "blue chip" companies like AXP could be a better deal than underlying stocks themselves, which is certainly not a bullish sign for stocks...
"The American Express Co. finance unit Friday sold $2 billion of five-year bonds with a yield of 7.34%, a person close to the situation confirmed. The premium to compensate investors for perceived risk was 4.25 percentage points over Treasury rates, at the high end of initial expectations and nearly one percentage point over the premiums on some of American Express Credit's existing bonds."
Another interesting development - yields on AXP bonds are consistent with a much lower rating than that currently enjoyed by the company... This means that: 1. Either these bonds are ridiculously cheap (very possible, but not yet probable?) or 2. Rating is too high (probable, but very unlikely to change...)
"The premium on the new American Express bonds is more typical on bonds rated Ba1, the first rung in the speculative-grade ladder, according to Moody's Market Implied Ratings Service. American Express Credit Corp. is rated A+, with stable outlook by Standard & Poor's. It is rated Aa3 by Moody's Investors Service."
I have already pointed out in my previous articles, that the biggest change during the most recent rally as compared to the one from early spring seems to be the fact, that current rebound has not been driven by a consistent set of even mildly positive economic data, but rather purely by the violent reversal of the long commodities short financials strategy.
Finding good stocks to short outside of the energy and materials sectors has been a pretty significant challenge recently, what's more- most of the good "fundamentally" based shorts have actually done phenomenally well.
As a part of my strategy, I try to adapt to market conditions regardless of how illogical they might seem on the surface, and thus my most recent screen results might seem a bit unusual... :)
Stay safe out there, email@example.com