You Know A Double Dip Is Imminent When...

Tyler Durden's Photo
by Tyler Durden
Tuesday, Aug 17, 2010 - 14:39

With endless lies bombarding the average American from all sides seeking to instill a false sense of calm that all is good (but, but, the market is up, up, up and GM is IPOing today), it is wise to step back and consider the common sense signals that a double dip is if not here, then arriving on the next much delayed flight.

From the Churchill Financial Group:

The prospect of a recession redux in the US continues to unnerve global equity investors. While we're doubtful such an outcome is likely, we didn't want to leave our readers without appropriate guidance as OTL heads for its two-week August hiatus. So we've come up with a few tell-tale signs of a potential double-dip for your consideration.

But first, take a look at the indicators pointing to some kind of transition in the capital markets:

  • Very slow GDP growth, so helpful to bonds (see our Chart of the Week), has been toxic to public equities. Corporate debt is hotter than it's ever been, while the stock market (nicknamed "the bond market's idiot kid brother" in this week's Barron's), has lost most of its gains for the year.
  • The US high-yield market is poised to issue over $30 billion in new paper between now and the end of August; a time when bankers typically are kicking back in Kennebunkport.
  • The summer surge comes on top of year-to-date junk volume of $150 billion for 349 issuers. That's roughly double last year's comparable numbers of $80 billion and 190 issuers, putting us already ahead of 2009's full year record results.
  • The Fed's "ease-to-please" rate policy has helped investment grade issuers as well. By pushing out the forward curve, continued money loosening has produced some eccentric corporate bond outcomes. IBM (A+), for instance, just issued three-year notes at 1%. That's almost free money, after taking into account the little inflation that's out there.
  • But that's mezz pricing compared to J&J's (AAA) ten- and thirty-year bonds in the market. Those beauties, each $550 million, are price-talked at 43 and 68 bps, respectively, over comparable Treasuries. The all-in spreads are expected to be the lowest in history. In fact, Deutsche Bank reports that the ten lowest-yielding new US corporate issues ever have been sold in the past 14 months.

So are we headed for a downturn? Here are a few clues to watch out for.

You know we're headed for a double-dip when:

  • your parents start referring to 2009 as "the good old days."
  • your CFO starts making finger-quotes when he refers to "corporate earnings."
  • what you thought was your cable bill, turns out to be your 401k statement.
  • instead of giving away toasters your bank starts selling them.
  • your mortgage shows up on eBay.
  • your accountant starts making finger-quotes when he refers to your "net worth."
  • you buy $50 of GM stock, and are named to the board.
  • the family dog asks for a severance package.
  • your spouse starts making finger-quotes when referring to "our vacation."
  • your recently graduated son moves back into your house...with his roommate.
  • you start making finger-quotes when referring to your five-year old's "allowance."
  • your parents move to Greece.