By Ross Silver, Principal Analyst
As we speculated in our November Newsletter, panic has gained momentum and massive selling has ensued. The bond market is responsible for much of this carnage and things aren’t looking bright. According to the Financial Times, not a single company has borrowed money through the $1.2 trillion US high-yield corporate bond market this month. If that freeze continues until the end of the year, it would be the first month since November 2008 that not a single high-yield bond priced in the market, according to data providers Informa and Dealogic. That is some statistic, and while the bond market won’t remain frozen forever, it sure explains the velocity of the selling that has taken place since November. Guy LeBas, a strategist at Janney Montgomery Scott stated, “What we’re seeing now is pretty typical for end-of-credit-cycle behavior. A prolonged period of low interest rates since the financial crisis a decade ago has seen companies binge on cheap debt. However, as financial conditions have tightened, the high level of corporate leverage has raised widespread concern among regulators, analysts and investors.” The junk bond freeze and loan indigestion has remained confined to lower-rated issuers. Should we see a spread to the high-grade sector, where the bulk of issuance is to fund buybacks and M&A, things get ugly but we have a ways to go before ugly ensues.
A great article I found in Zero Hedge discusses a potential black swan event which is the Fed not raising interest rates on Wednesday. Basically, the market (and everyone in the free world for that matter) is anticipating another rate hike by the Fed tomorrow.
To us, that’s a great opportunity to go long. Why? Because the risk/reward profile is extremely attractive. The Fed raising rates is already baked into forecasts, so if everything goes as planned then the market shouldn’t react too violently. However if the unexpected occurs, we’re set up for the mother of all short squeezes. So we’re long the market heading into tomorrow.
Beyond that, however, it becomes problematic. The yiled curve in the US and Europe have already inverted meaning credit is tightening and a recessing is likely on the way within the next 9-16 months.
Last month I had lunch with a friend of mine who’s an analyst, and he summed it up like this, “we’re in a car going 120mph, which is really, really fast. But a year ago we were going 170, so we’ve slowed down a lot.” This sentiment was echoed by a recent op-ed in the Wall Street Journal authored by Stanley Druckenmiller and Kevin Warsh, who warned that, “no ocean is large enough to insulate the US economy” over the long term. As the world economy continues to cool, the US will have to follow suit.
The bottom line is, if Fed Chair Powell pauses rate hikes on Wednesday, the mother of all short squeezes may happen.
The Sports Desk
I am going to stick to bullet points for the sake of brevity:
- The NFL needs to shorten their season. Too many marquis players are getting hurt and as such the quality of the game erodes. No preseason, 9 regular season games and then playoffs.
- I have no idea how Georgia lost to Alabama
- I think Bama is getting way too much respect against Oklahoma, a 14 point favorite???
- The NBA deemed it wise to televise Phoenix (worst team in the NBA) versus Dallas last week and then redeemed itself for that decision when Phoenix “somehow” beat a playoff team in Dallas.
- My oldest son’s youth basketball team is finally hitting its stride; the kids have learned that they must dribble in order to advance the basketball on the court. (1st graders)
- My middle son’s youth basketball team could be confused as a rugby team. No easy baskets allowed by this squad. (Kindergartners)
Have a wonderful holiday season and thank you for reading!