NEW YORK (MarketWatch) -- Kevin Cassidy, a senior credit analyst at
Moody's, recently referenced the $700 billion in risky high-yield
corporate debt on the horizon and offered, "An avalanche is brewing in
2012 and beyond if companies don't get out in front of this."
Minyanville offered a similar assessment entering September 2008 as
$871 billion of corporate debt was set to mature into year-end. We
opined there were two plausible scenarios; a credit cancer that would
chew through the financial body, or a car crash that would crack the
system under the weight of an indebted world. Read Minyanville's "Pirate's
Booty."
I agree that another avalanche is building atop Credit Mountain; while
risk transferred from corporate coffers to sovereign strongboxes, the
magnitude is cumulative in cause and effect. And despite scary
parallels between the 2008 financial crisis and our modern day sequel,
savvy investors continue to monitor corporate credit as a timing
mechanism for an equity downturn.
As stocks grind to fresh 18-month highs, we're left to wonder if the
upside window of opportunity will remain open until corporations are
again forced to pay their bar tab. Credit markets are exhibiting
surreal strength and through that lens and that lens alone, the equity
market has plenty of room to run.
The question is therefore begged-- will this singular proxy again ring the bell
when a crimson tide is about to turn?
Raptors await
There's no denying the bulls have captured the year-over-year crown.
While you can agree or disagree with the synthetic catalysts, price is
the ultimate arbiter of variant financial views. The market is never
wrong; we should never let an opinion get in the way of making money.
We build statues out of snow, and weep to see them melt.
Sir Walter Scott
As investors key on corporate credit, there is a litany of causal risks
waiting in the wings. With a conscious nod that these could conceivably
create building blocks in a wall of worry, I humbly submit 10 reasons
why we're witnessing a cyclical bull market in the context of a
prolonged and painful secular bear stretch.
Questions remain on a Greek aid package in front of 20 billion euros in
debt that comes due in April and May. This dynamic is not bound by
borders; should an accord be reached, as expected, the approach will be
tested when the next "lifeguard" begins to drown. Read Minyanville's "A
Five-Step Guide to Contagion."
New health care legislation could add hundreds of billions of dollars
to already yawning budget deficits. That chasm can only close through
upward taxation or austerity initiatives; neither is pro-growth and
both drain consumption. This, of course, comes at a time when the
"interconnectedness" of governments and markets has never been higher.
State budgets are cracking and a recent report from the Pew Center
estimates unfunded pension liabilities are an eye-popping $452 billion.
While I expect a Federal bailout package, as discussed in January, it's
akin to moving money from one pocket to the other. Read Minyanville's "Ten
Themes for 2010."
Social mood is tenuous at best and deteriorating at worst. As the great
divide continues to evolve -- red states vs. blue states, Main Street
vs. Wall Street, haves vs. have nots -- societal acrimony has evolved
into social unrest in some parts of the world, and economic hardship is
pointing an unfortunate needle towards geopolitical conflict
Complacency abounds, as measured by traditional volatility measures such as the
Volatility Index
/quotes/comstock/20m!i:vxo
(VXO
16.59,
+1.34,
+8.79%)
.
While we've witnessed prolonged periods of subdued volatility
(2004-2006) and healthy debates rage regarding the indicative validity
of this measure, risk premiums are at levels last seen in June 2008 --
a few short months before the financial crisis arrived.
By Todd Harrison
Continued from page 1
Page 1Page 2
>From Google Inc.
/quotes/comstock/15*!goog/quotes/nls/goog
(GOOG
557.33,
+8.33,
+1.52%)
-China to USA-Toyota Motor Corp.
/quotes/comstock/13*!tm/quotes/nls/tm
(TM
81.58,
-0.77,
-0.94%)
to EU-Greece, the seeds of protectionism continue to sow. That
posturing is on the opposite end of "globalization" on the prosperity
spectrum.
While the stated unemployment rate hovers just below 10%, almost
one-in-five Americans is underemployed; that means they're not working,
stopped looking, working below their abilities or working part-time
because they can't find full-time employment.
Economic perspective. Interest rates have one way to go,
price-to-earnings multiples never troughed, and debt-to-GDP ratios will
approach or exceed 100% in all G7 countries by 2014, with the exception
of Germany and Canada, according to John Lipsky at the IMF.
The Congressional Oversight Panel warns that commercial real estate
losses at banks alone could reach $300 billion starting in 2011. Almost
half of those loans are concentrated at smaller institutions with total
assets under $10 billion, and those are the same banks that account for
almost half of all small business loans. " Read Minyanville's "What to Expect
from the Commercial Real Estate Crisis."
It's easy to forget about the housing crisis; in terms of "what matters
now," this concern almost feels passé. We must remember that massive
amounts of residential mortgage backed securities are mis-marked at
best and toxic at worst, sitting on the balance sheets of private and
public institutions and by extension, in bank accounts across America.
This is in addition to the manifestation of under-water mortgages
(negative equity) and foreclosure trends throughout the land.
Total recall
Do I think the system is broken beyond repair? No; I believe there will
be massive opportunities once we've taken the medicine of debt
destruction so long as calmer heads prevail. Read Minyanville's "The Great
Expression."
That could take another five to seven years but it's difficult to
foretell; a lot depends on how we navigate a multi-linear dynamic that
includes currency readjustments, the evolution of credit, $500 trillion
of global derivatives, two-sided regulatory reform, the shifting social
mood, geopolitical fragility and trade relations.
Is it possible we "echo" higher before that comeuppance arrives? Sure;
these aren't natural markets anymore and we must respect both sides of
the financial equation. Given the path we take trumps the destination
we arrive at, there's only one way we can reconcile these seemingly
disparate data points: carefully, and one step at a time.
With quarter-end bearing down and performance anxiety picking up,
market psychology is emerging as the most important of our four primary
metrics. The last round of fundamental data points (earnings) beat
expectations on the aggregate, the bulls have the technical baton above
S&P /quotes/comstock/21z!i1:in\x
(SPX
1,168,
-6.45,
-0.55%)
1150 and the bank index
/quotes/comstock/10w!i:bkx
(BKX.DJ
52.34,
+0.22,
+0.42%)
50 (resistance comes into play at S&P 1200) and while stateside
structural dynamics are currently steady, we haven't heard the last of
sovereign situations on the other side of the pond.
If you asked me for my near-term opinion, I would offer that the tape
tops out before quarter-end under S&P 1200, consistent with the
path of maximum frustration as fund managers reach for performance.
Remember, when S&P 1150 was surmounted, a lot of shorts covered,
removing a natural layer of forward demand. From there, we'll monitor
the second quarter flows, which should help shape the tape into the
beginning of April.
We each have unique time horizons and risk profiles, which is why
blanket advice is so very dangerous. I don't believe in punditry; I
believe in proactive preparedness and individual responsibility for our
financial choices. It's my hope that by painting the big picture
landscape -- and adding color by numbers in the near-term -- I've added
some value as we together find our way.
Harrison has a position in the S&P.
Salam Kasih
Gema
www.stocksforliving.com
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