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Why Stocks Have So Far Ignored The Carnage In Credit: Goldman's Five Reasons
One of the biggest disconnects in the market in recent years has been the unprecedented divergence, shown below, between stocks and (initially) junk bonds, although the weakness is spreading across all fixed income verticals.
That all changed last week when the very same mutual and hedge fund gating shockers that unleashed the 2007 crisis made a very unwelcome appearance, leading to a very unpleasant episode of deja vu even among equity investors who until this point were happy to keep their heads planted firmly in the sand.
As a result, even Goldman has finally been forced to observe over the weekend that "despite the decline in stock valuations, US equities have performed far better than credit, causing investors to ask us, “What does the credit market see that the equity market does not?” Goldman also adds that "high yield credit spreads have widened dramatically since June and are currently in territory typical of recessionary environments." Which makes sense: after all at least half the US economy, that which relies on industrial production and manufacturing is in a recession:
And while it won't come as any surprise to our readers, Goldman also observes that the HYG ETF has fallen to its lowest level since 2009 (and is even lower in the premarket). In contrast, the S&P 500 is just 6% below its all time high of 2131 reached in May of this year.
How is this possible? Here are Goldman's five proposed answers:
1. Credit is sending another false recession signal. While credit spreads at current levels gave advance warning of recession in 1990 and 2001, our credit strategists note that spreads in 2008 didn’t reach current levels until the recession, and in 2011 were a false signal. Most economic data suggest current recession risk is low and we expect credit spreads will tighten in 2016. See Global Credit Outlook 2016.
Unless of course, credit is sending an accurate recession signal, and it is Goldman's equity strategists who are unwilling to admit that their 2100 price target for 2016 is woefully inaccurate in a year when the Fed is set to soak up trillions in excess liquidity.
2. Liquidity is one reason for the sell-off in credit that is not an issue for stocks. Liquidity in the corporate credit market has been a widespread concern during the past two years and grabbed headlines again today. In contrast, liquidity in the equity market remains robust, with trading turnover higher YTD than during the first 11 months of 2014.
Liquidity in equity markets remains robust? You mean like on August 24?
3. The narrow mega-cap equity market leadership has exaggerated the difference between YTD performance of equity and credit. The top few contributors to S&P 500 YTD return have pushed our breadth index to nearly the lowest level in its 30-year history. While the S&P 500 total return YTD is 0%, the median stock has returned -2%, and the HY index has returned -6%.
Oh so the equity market isn't really so "sanguine" if one excludes just the top 4 names which have accounted for all the S&P's gains... well, there are no longer any gains but you get the idea.
4. The HY market’s large weight in Energy and commodity-exposed industries is a major driver of weak credit returns. At the start of the year, Energy and Materials firms accounted for 12% of S&P 500 market cap but roughly 25% of the HY credit market, as measured by the BAML High Yield Master II Index. If the S&P 500 shared the same sector composition as the HY index, it would have returned -3% YTD rather than its actual 0%.
Actually this is total bull: as we have shown previously, while this statement may have been valid a year ago, the junk bond rout has long since spread to every sector, even those that were supposedly expected to benefit from low oil prices.
Finally:
5. Credit markets are reacting to a real deterioration in corporate balance sheets that the equity market has yet to digest. Ex-Financials, the median S&P 500 firm’s net debt/EBITDA is at the highest level in more than a decade, rising from 0.8 in 2010 to 1.0 at the start of 2015 to 1.3 today.
So after building up a strawman in 4 points why credit is wrong, Goldman finally admits that it is credit that is always ahead of the game and stocks either get a central bank bailout or are whacked on the head with the usual several month delay in which they take the elevator down and after the fact complain how "nobody could have possibly foreseen this."
Needless to say, with every incremental hedge fund liquidation and gating, the elevator ride gets closer.
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#1 reason, they were artifically proped up, so GS took advantage to position for a collapse in stocks and get some powder to buy distressed debt once the fed is about to unleash TARP 2.0, which will be 4 times larger than TARP 1.0.
Volatility is coming. It will be sourced from liquidity evaporating. http://hedgeaccordingly.com/2015/10/were-headed-for-a-crash-spy.html
1.) The market is lying.
2.) What problem?
3.) It's not THAT bad.
4.) It's not our fault.
5.) The market made me do it.
5. Credit markets are reacting to a real deterioration in corporate balance sheets that the equity market has yet to digest.
This.
Any other "reason" is simply delusional rationalization.
The iceman cometh.
"market"... LMFAO!!!
you're funny.
6.) The Fed has our back.
dup
Yeah, and this time they won't even make a courtesy call to Congress or the WH to get it approved because there won't be time.
You mean we won't even get a courtesy lick before we get f*cked?
One reason. The pods hope QEIV is $1.2 tr.
The "markets" are spoiled children in that they are coddled and supported regardless of how foolish or badly they behave. Of course eventually their actions will exceed their parents ability to save them and something terrible will happen. They likely will die in a horrible crash suffering from the illusion that the expensive car and insurance their parents have purchased them will save them even when driving at high speed on ice covered roads.
#1 reason, they were artifically proped up, so GS took advantage to position for a collapse in stocks
your context is a little wrong in the way you phrase this sentence. You make it sound a touch too benign in that GS took advantage of a situation that just simply arose. GS didn't just take advantage, they MADE the advantage from scratch. The markets are propped up because GS wants the markets propped up. The markets are as GS says the markets will be and the FED is their instrument in which to direct their wishes.
....just so we're all clear
You're close but not quite there yet, you've got it backwards. The Fed and Goldman are connected, but utltimately it is the owners of the Fed that call the shots, Wall Street is their instrument, not the other way around.
you might have misread my post, that's what I was saying GS controls the Fed but hey its 6am for me so my writing could be poor
No, I didn't misunderstand, but GS does NOT control the Fed, it's the other way around, basically. The people who control the Fed also control Goldman, but Goldman doesn't call the shots, they just execute the higher level decisions.
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"2. Liquidity is one reason for the sell-off in credit that is not an issue for stocks. Liquidity in the corporate credit market has been a widespread concern during the past two years and grabbed headlines again today. In contrast, liquidity in the equity market remains robust, with trading turnover higher YTD than during the first 11 months of 2014."
Given the margin calls ongoing in the relatively illiquid corp credit market, why wouldn't selling relatively liquid and absurdly high valued stocks be the first place to go in order to cover those calls?
you have just been MUPPETED
you have just been MUPPETED
if you like your muppet you can keep your second muppet
166 Trillion in debt and going up fast. Www.usdebtclock.org
Going back at least to the Guelph Black Nobility's banking empire (who had such power as to be able to change the British monetary standard from gold to silver and China's monetary standard from silver to gold) monetary power has been used as a system of overt power consolidation and control.
Either Goldman is part of the current monolithic monetary power or they are not. You be the judge.
If Goldman is part of the monetary power then every explanation they give aside from "this is what we have done and you have no power to stop us" (they will never tell us in advance what they are doing because heck, then people being ingenius critters will try to counteract it)... is total B/S.
If Goldman is not part of the monetary power and they are scratching for explanations as to what is going on, then maybe there is a bridge you would like to purchase that will provide all of the answers to you.
A third possibility is that there are two Goldman's, just as there are two US governments. The overt Goldman believes in faeries and unicorns and the covert Goldman is doing its part to manage the world for their "god".
Because they are rigged is the only reason. And everyone knows it.
6. Don't fight the Fed.
7. Because WE WANT TO SELL BEFORE YOU FOOLS
...waiting for the installation of Blankfien as Treasury Secretary...as sure sign that they are panicked.
"The HY market’s large weight in Energy and commodity-exposed industries is a major driver of weak credit returns."
If the sector doesnt do what you want it to do, just pull it out of the equation and pretend it doesnt exist. That works equally as well................
Trillion$ fleeing into fed-backstopped equities after the corrupt 2009 bailout constitute the biggest refuge rally in history: Picture the recurring images of, say, 100 passenger ferry boats, struggling across rough, open waters, overweighted with 400 desperate refugees, fleeing to save themselves and their possessions - moments before the overloaded ship capsizes, sinks, and all is lost.
Half the people I talk to don't even know where the middle east is. But like everywhere else, if you don't pay attention, it will catch up with you. Ask anyone who fogs a mirror in Europe about how the middle east caught up with them. Next: the stock market.
It's a casino. Can you read trends from a casino's??
6. Don't beleive a word of what we say because we are muppet slayers.
Because the carnage in commodities and the strong dollar is just going straight to the bottom line as Prices are fixed by Monopolies. Hence Stawks are unaffected.
1) Is your heating bill lower this year if you use Nat Gas or Oil --- No.
2) $35 dollar Oil and $2 gas... yeah right. Watch XOM etc have record quarters...
3) Buy an Airline ticket lately--- Old Planes long since payed for and high ticket prices....
4) Corn nearing cyclic lows Meat prices High - Doesnt take much time to raise a hog or chicken... bought eggs lately?
5) Ship a package lately... Notice the fuel surcharges are still in?
Seeing any great sales on Chinese or asian electronics --- Outside of TVs I thought not....
The list can keep going...
Most companies are "making money" by laying off people, and borrowing at artificial Fed rates to buy back stock (which makes EPS appear higher / makes EPS fall less).
Lots of financial engineering, very little "real" profit growth. Yes, some companies are making money from their business -- but in aggregate the economy is not.
Subtract out the increase in debt, there hasn't been any growth at all. That's why you are so frustrated on your 5 items above
Readers digest version: Yellen thinks if she buys enough high yield debt, she will lose (our) money on every bond, but she hopes to make it up on volume.
Yellen would have made a fine Soviet economic planner.
Readers Digest abridged version is that the fed will via QE4 buy a ton of Junk Debt... Calling the exact inflection point is a bitch, but HYG is a screaming buy at this point...... I think the fed announcement will be along the lines of no rate increase, and the fed stands ready to support the credit markets if necessary.....
You have to be careful to predict what the Fed will do, which is not necessarily what they want to do (or what you/your portfolio want them to do).
Pensions are in terrible trouble already, and most assume they can get 8% total returns (that would be after subtracting losses on HY bonds from the 2% Trsy 10yr?).
QE4 means pensions will all be terminated. I don't dispute that the Fed *wants to* print like the irresponsible kleptocrats that they are. I just don't see how they could pull it off and still pretend the baby boomers can retire.
Something has to give -- Japan has a positive savings rate and they now admit Japan's pensions are in trouble.
Inflation could be a problem (if you have to pay taxes or health insurance costs or buy food). But if your pension check doesn't arrive at all and Social Security checks get 0% COLA adjustments?
Inflation is "only" 2% (if you pretend really hard), but your bond income is "growing" -4%... it feels the same as if you had 6% inflation (your money buys a lot less).
There is no free lunch. Sorry.
The fed will have no choice in what they do... If borrowing locks up, then it all comes down. They have to get HYG and JNK back in line.... or the shit show is over real soon.
Pensions for corproations will all be handed back to the pension benefit guarantee corp. Giverment pensions will be most likely guaranteed by the Printing press, with no haircuts.
Retirees have been fucked for the last 5 years.
That plan worked great in Argentina, Venezeula, Bolivia, Zimbabwe and Greece. Its not really working in Japan (they tried).
They can always print you $100, but if the $100 doesn't buy anything (eg because the producers go out of business, because they can't raise prices on bankrupt customers)...
Bernanke isn't the first con-man to propose printing money instead of fixing the economy. A lot of other people had the idea before him, some of them (UK, France, Spain, ... Rome) were the global reserve currency of their day.
I have no disillusion that the plan will in anyway work. I just said thats what they will have to do. This patient died along time ago (we are well past the palliative care phase), now its just machines and life support. I strongly believe that they will do whatever they can to keep it nose up past the next election.
Robbing Peter to pay Paul, while also robbing Paul to pay Peter? The same people who depend on bankrupt pensions to pay their taxes that fund the pension benefit guarantee corp are now going to pay whatever bureaucratic overhead to run this ponzi scheme?
Even though the media doesn't get it, the reason Trump is a viable candidate is because Peter and Paul have been talking and have figured out the folks in Washington are absolutely full of it.
The Fed has a very serious credibility problem. They claimed (obviously wrong) that the economy was recovering -- ergo rates could be normalized.
Now they have to admit they were lying (more debt did not fix too much debt, who'd a thunk it?). Or else they have to admit that promises (pensions, bond payments, etc) are not going to happen.
The Fed has a lose-lose situation, made worse because the muppets have finally figured out the Fed screwed them.
Stocks are bets; bonds are promises. Bonds very sensitive to promises not being kept.
How to understand "promises" like bonds...
Subprime auto loans, student loans -- read my lips! Ain't got job, ain't gonna pay!
Fracking / shale energy bonds -- if you like your current health insurance, sucks to be you!
Pension promises -- we assumed we could get 8% total return, but 10yr notes are paying about 2% and stocks indexes have only recently returned to 2000 levels when adjusted for CPI (add 2% dividends, still way short of 8%). Outside of FANG (facebook, apple, ...), not even treading water.
If you think your pension is money good with the Fed keeping rates at 0%, you might be better off buying the Brooklyn Bridge from a homeless guy instead.
Goldman has finally been forced to observe over the weekend that "despite the decline in stock valuations, US equities have performed far better than credit,
THE EFFECTS OF WHICH are investors asking us:
“What does the credit market see that the equity market does not?”
There, fixed it for ya.