Something's Not Right About This Rally

Global stocks posted their first weekly rally since early June for the week ending July 18th. Last week, the Dow gained 3.6%.

That sounds great, but something is wrong here. Normally, the credit markets would confirm a strong stock market rally. Usually all the credit indices would rise because investors would raise their risk parameters and buy high-yield bonds and other risky fixed-income securities.

But that's not happening. This rally has not been confirmed by tightening credit spreads across most investment-grade credit markets. As I said Monday, that's partially why I believe this rally is a dead-cat bounce. Also, high yield or junk bond yields widened, not narrowed, last week.

And finally, look at the LIBOR or the London Inter-Bank Borrowing Rate. The LIBOR didn't change last week. That suggests banks are still nervous about lending to each other. Worse, long-term mortgage rates widened to 6.44% last week from 6.25% a week earlier. That's another dose of bad news for the housing industry.

If stocks continue to power ahead this week, be sure to follow credit spreads. If credit markets widen further, it will be a bearish omen for the market and the economy.

Until spreads begin to narrow again, remain extremely cautious.

Comments

[ev:]

I agree with your point, only I would add that until the bottom fishing in the institutional side of the equation has worked itself out the credit markets will maintain their unusual spreads. Valuations continue to be worked through as financials are having to meet regulatory requirements. This presents opportunity for financials in relatively good condition to use to their advantage in consolidating the market. Until this occurs, consumer and commercial credit will remain tight. Lets face it, BOA should make more on their utilization of 2.8 Billion to purchase Countrywide than they could hope to make investing 2.8 Billion in consumer loans. And besides, the regulatory requirements are going to expose the weaker financial institutions and opportunities for significant ROI, in the meantime Joe Blow consumer/commercial customer has more time to expose their inability to remain solvent, further limiting credit markets exposure to risky loans when they do tighten the spreads.

2008 Jul 23 05:51 AM

[bluesmoke:]

There seems to be an undercurrent of thought regarding the size of the national debt. I've read several pieces questioning how we will ever "pay it back". If a country like Kuwait is recognizing the weakness of the US dollar, it doesn't bode well for the financial system as a whole. But I'm just a simple man....

2008 Jul 23 09:29 AM

[User 223684:]

1. There was a Hindenberg Omen last month.
2. Markets cannot function as long as property markets struggle (because property markets are based on appreciating value)
3. Property markets cannot function when resource prices (fuel and food) are high - in other words, suburbia contracts

2008 Jul 23 10:19 AM

[OldLimey:]

It looks as though the government (jawboning the USD via implausible interest rate talk and helicoptering a few more billions onto trading desks) is trying hard to force major indices and currency pairs through key technical levels to turbocharge the rally. How sustainable it'll be given the truly dreadful fundamentals will be interesting to see. Seems to be a battle between those fundamentals on the one hand and the 'no chance of a recession/sub-prime can be contained/might be a shallow dip but wait for the second-half recovery/sunlit-upland... crowd'.

2008 Jul 23 10:44 AM

[notsosmart:]

just roll the dice-nobody knows anything.who got us into this mess?

2008 Jul 23 03:34 PM