credit spreads (3)

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Credit Spreads And Earnings Estimates. Random Thoughts

This week’s EVA brings the second edition of our new Random Thoughts format. The goal with this approach is to cover several key, but often unrelated, topics in a quick overview fashion.

In this issue, we are looking at, once again, the powerful financial force known as credit spreads.   Fortunately, they are not indicating financial stress at this time. We are also examining the supposed truism that this is one of the most detested bull markets of all time. Then, we wrap up with a look at the Fed’s and Wall Street’s forecasting track record (hint:  both make a dart-board look good!).

As always, your feedback is welcomed and appreciated.

RANDOM THOUGHTS

When the spread isn’t the thing. One of the themes this newsletter has emphasized most heavily this year has been the importance of the spread—or difference—between government and corporate bond yields. As we have repeatedly cited, when that gap is widening in a pronounced way bad things tend to happen both to the economy and financial

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The Bloomberg US Financial Conditions Index and the S&P 500 tend to move in pretty close unison. In March, however, they started to move apart in a manner similar to late last year, before the market took a nosedive. Once again, either financial conditions improve or the stock market corrects.

bloomberg financial conditions spx
Source: Bloomberg

Shown below we see a similar wide divergence when looking at credit spreads (inverted in red) compared to the S&P 500 (in black). When financial conditions are healthy, credit spreads narrow since investors require less compensation for the risk of holding non-government securities. As financial conditions deteriorate and default risks increase, credit spreads widen. The credit markets were confirming the message of the stock market up until mid-2014 and have continued to diverge ever since. Either credit spreads narrow or the stock market adjusts.

BBB spread spx
Source: FinancialSense

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Sunny Saturday Reads May 10th

And what are we doing at our computers. It's beautiful outside - go enjoy the day........and don't forget to pick up somethinworkplace-safety-charts_2.jpgg for Mothers Day tomorrow!

  • More pain ahead for small caps, saysCredit Suisse.  Since the mid 1990′s the average and median pullbacks in the Russell 2000 have been 21% and 14%.
  • Some measures of corporate credit spreads have reached their tightest levels in the past 23 years. Does this mean that optimism has peaked and it's time to sell? Not necessarily says Califia Beach Pundit.
  • Pope Francis calls for return to morals, generosity and redistribution of wealth TCC
  • Fracking has done phenomenal things for North Dakota, including making it the deadliest state in which to work. MotherJones

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