INSTITUTIONAL ADVISORS
FEBRUARY 19, 2008
BOB HOYE
PUBLISHED BY INSTITUTIONAL ADVISORS
INTERESTING BOND ACTION AND THE STOCK MARKET
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Since early last year, each significant slide in the stock market was anticipated by by a plunge in the sub-prime bond price. Initially, the lower-grade BBB "rated" broke, and when the AAA failed the stock market soon followed.
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On the July hit to the sub-prime BBB, we wondered if the lead-time was diminishing. As August showed, this was the case.
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Last week, the BBB did not take out the last low, but, both the AAA and AA did.
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With the stock market panic into January 24, the long bond future rallied to a very overbought condition, upon which we advised bond trading desks to play the short-side.
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Last week the long bond sold off with the AAA sub-prime and took out its last low.
These "ratings" are becoming absurd. For example, the A plunged to 52 prior to the August financial storm, and with the panic rebounded to 75 near the end of August. The key to the next stock market plunge that began in early November was the take-out of the 52 level in mid October.
It is preposterous that a supposedly "A" rated bond fell to as low as 52 and still maintained its rating. On Friday this was priced at 26.33. Truly theater of the absurd.
One can't help but notice the sirens of attraction in the stock markets. While everyone knows that "Lady Bountiful" will on the long term always be generous, there have been some expensive distractions.
A generation ago, the compelling attraction was "Rosie Scenario" who led those-who-stay-the-course onto the reefs of the Savings and Loan collapse. On that disaster in oil, other commodities and real estate, Congress just had to have some hearings. When working over a banker from Oklahoma about "where did the money go?" – the response was "Well, we spent most if it on wine, women and song, and the rest we just pissed away." That was reported in the Wall Street Journal.
Of course, the next great attraction was "Goldilocks" who was so compelling right up to the first half of 2000, when the Dot.Coms blew up.
Oddly enough, Goldilocks was also the attraction in the financial mania that topped out last year.
Considering the systemic dysfunction in the credit markets, it is likely that Prudence will be the next attraction.
HOYE, INSTITUTIONAL ADVISORS
