Certainly the sentiment is very jolly these days. Oh, how things have changed from the March lows! But, perhaps it’s one of the great ironies of finance… those that truly know the horrors lingering beneath the surface can never really enjoy a bull run such as this one.
I just witnessed the biggest bankruptcy the universe has ever seen. I was part of the team that tried desperately to hedge Lehman Brothers against its own lunacy. The problems in the system today are severe. America’s debt is quickly getting out of control. Even Warren Buffett is concerned about this monumental burden that weighs heavily on Uncle Sam’s shoulders. And there’s the consumer, with nearly 10% of them unemployed, with debt up to their eyeballs. The question must now be asked. How much longer can this euphoria last? How much higher can prime mortgage foreclosures rise before the market reacts?
These are questions I wouldn’t dare answer. Nobody is clever enough to know these things, but one thing is certain. Eventually, fundamentals will return. Top lines will once again be the gauge of our economy.
And the stock market was choppy last week, as China, corporate earnings, and concerns about the domestic economy all competed for headlines. Fears about a continued sell-off in China rattled the US stock market early in the week, which quickly dissipated. But there were some positive signs also, such as the Philadelphia Manufacturing index, which increased for the first time in a year.
The worst is certainly over. The eye of this violent storm which battered every economy on earth has entered colder waters, which will eventually kill it. But there will be houses to fix. Boats to remove from our gardens. Roads to clear. Water damage to attend to. Electricity infrastructures to mend. We have been left with carnage.
BEWARE: EQUITIES OUTPERFORMING CREDIT AGAIN LAST WEEK
Returning to last week’s stock market, here are some figures, which may bore you sideways, but I’ll try to be brief! Investment grade credit indices closed a little tighter on Friday (which means investors became more confident) as markets rallied after better-than-expected existing home sales. Then the CDXIG12 closed 6 points tighter at 114bp. But the HYCDX12, a basket of high yield bonds, was up $1.13, closing at $89.13 on Friday, well off it’s 2009 highs. The LCDX12, the highly watched basket of bank loans, gained $1.05, closing at $94.05, off it’s 2009 highs as well.
Don’t worry if that all seems backwards. That’s just Wall Street jargon. In short, the Dow Jones and the S&P are breaking out, and high-yield credit is being left in the dust. Equities continue to outperform the credit markets. This spells trouble. Lighten up on stocks into strength. We shall see how this continued divergence, the same one I pointed out in last week’s letter, effects equities.
The equity market is overbought, as many late comers chase performance, putting money to work in equities because they missed the big April-May party. But this recovery will be W-shaped, and not look like the present V.
My money says a correction is only around the corner. Enjoy the ride while it lasts!
Best wishes to you all,
Larry
Lawrence made $37 million for Lehman Brothers in 2007 shorting the subprime market. He is also the New York Times Bestselling Author of “A Colossal Failure of Common Sense - the inside story of the collapse of Lehman Brothers.”
He publishes a newsletter every week on his website.