Monday, March 29, 2010

'Goldilocks' Was a Fairy Tale

Bloomberg.com is reporting Junk Bonds in 'Goldilocks' Market Reach Record:

Companies worldwide issued $38.3 billion of junk bonds in March, passing the previous high of $36 billion in November 2006, according to data compiled by Bloomberg. Yields fell 0.95 percentage point to within 5.96 percentage points of government debt, the narrowest gap since January 2008, Bank of America Merrill Lynch index data show.

In other signs of giddiness, The Technical Tape reports as of March 27:

The sentiment indicators would suggest that this is not investing nirvana. While prices can certainly go higher, the lack of buying power should be obvious. Who is left to buy if everyone is all in? But judging by the emails I receive, most market participants believe that this is a new paradigm, where the Fed is engineering a new prosperity founded on gains in the market. Investing nirvana? I think not. This market environment is more like a high wire act. A new paradigm? Every era is new, but fear and greed never go away. I have yet to convince myself that "this time will be different".

Shorter term Rydex measures continue to suggest excessive bullishness. . .
(See nearby pic and click on it to enlarge.)

Finally, Bloomberg.com goes for circular reasoning that supports The Technical Tape's contrarianism in S&P 500 Cheapest to Junk Bonds Since ‘07 Signals Gain:

The Standard & Poor’s 500 Index is trading at the lowest valuation compared with junk bonds in two years, a sign the stock-market rally will continue, if two decades of history are any guide.

The lowest-rated debt pays 3.22 percentage points more than the earnings yield on the S&P 500, the smallest gap since 2007 and a discount to the average 5.93 points of the past 22 years, data compiled by Bloomberg show. The measure of profits compared with share prices shows stocks may be undervalued next to the fixed-income investments most closely correlated with equities.


I didn't bother reading the rest of the article. Who knows if two decades of history are any guide? Who knows if two millenia are any guide? The future exists to surprise us. Who would have thought 3 years ago that 2008 would occur, and then who would have guessed we would be reading about shortages of ships to bring containers to the U. S. and Europe as inventories are replenished?

All we can say is that more and more sentiment indicators are meshing with fundamental, multi-decade tested measures of fundamental valuations of stocks that suggest that stock prices have gotten ahead of themselves.

In the first article in this post, a later section mentions that the world's largest commodity trader, Glencore, is looking to raise multi-billions of dollar from banks in Asia. What's that about? Sounds like leverage ramping up to me. Meanwhile if we are in another cycle similar to the last one, with the Fed likely to stay too easy too long, we note that gold went through periods in the aughties where it lagged stocks, but ultimately did better.
Given a higher relative gold price now than then, my sense is that at least the two asset classes will track each other. Separate from a long-term core position, it makes sense now to tack toward gold on that basis if only on a trader's time frame.

Copyright (C) Long Lake LLC 2010

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