Commodity prices are plunging, the dollar is powering higher, Obamacare is collapsing, economies everywhere are faltering, and terrorism is spreading across the globe.
That's bad news. Unless you happen to be among the stock market investors who in the U.S. spent the last week bidding up stock prices like there is no tomorrow. They are playing with fire and are likely to get burned.
The Dow Jones Industrial Average rallied 3.5%, or 579 points, to 17,823.81, while the S&P 500 jumped 3.3%, or 66 points, back to 2,089.17. The Nasdaq Composite Index added 3.6% to reach 5,104.92.
Below the surface, however, market internals were horrible with anything energy related getting "schmeissed" in the words of legendary market guru Doug Kass.
And the high yield bond market, which we will get to in a minute, is even worse.
"Bad News Is Good News" Comes Roaring Back
It wasn't just U.S. investors ignoring obvious threats to their financial well-being. Stock markets around the world rallied last week. Asian markets were up around 1.5% while Germany jumped 3.8%, London 3.5%, and France over 2%.
The reason, of course, was the old "bad news is good news" idiocy that believes that the worse things get, the more central banks will do to prop up markets with more easy money. This was an odd reaction in the face of increasing signs that the Fed is getting ready to raise rates in December.
The Fed still has time to chicken out if markets turn south again, but investors decided to ignore the evidence of economic weakness to interpret signals of a coming hike as evidence that the Fed believes the economy is strengthening.
In view of the fact that the Fed has consistently misinterpreted jobs and inflation data throughout the Yellen years, this is not the conclusion I would reach or on which I would base investment decisions. The U.S. economy is not improving; it is faltering.
On the other hand, European Central Bank President Mario Draghi didn't disappoint. He promised another round of QE in the near future.
So, rather than face up to the fact that years and trillions of dollars of QE have failed to fix broken economies, investors decided to play along for another week and push stock prices to even more unsustainable levels.
In recent years, Europe has demonstrated that it cannot manage its economies or defend its borders. Why anyone would believe a word spoken by any European leader, especially Mr. Draghi, is a mystery to me.
The Picture Isn't Much Better Here
Back in the United States, the credit markets are falling apart. The average price in the leveraged bank loan market has dropped below $0.90 on the dollar, a warning sign to investors that serious problems are lurking in leveraged companies. After all, bank loans are the first to be paid back if a company goes bankrupt and rarely lead to significant losses.
The high-yield bond market has given back all of its October gains. The average yield and spread on the Barclays High Yield Index were back at 7.95% and 597 basis points on Friday, just below key 8% and 600 basis point levels breached in November.
But just as the market cap weighted stock market indexes don't tell the story of the stealth bear market in equities this year, the index data doesn't begin to describe the destruction in the bond market...
Liquidity is non-existent. Anything energy or commodity-related is trading at prices that signal that investors do not believe they are going to be repaid. Even highly leveraged companies that can pay their bills but have little prospect of reducing debt like iHeart Media Inc. (OTCMKTS: IHRT) (the old Clear Channel Communications) have seen their bonds plunge to well below $0.50 on the dollar.
Few if any credit hedge funds are showing positive returns for the year and most are sporting losses. Those of us who have been doing this for a long time know that credit markets are better readers of the economy than stocks. The warning signs are flashing red for anybody willing to pay attention.
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.
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