by Dave Kranzler, Investment Research Dynamics:
It’s not just distressed debt or the energy sector. I was chatting with a friend/colleague in NYC who is connected with the high yield market. To begin with, the economic devastation to Texas from the collapsing price of oil is just beginning. Word to him from a big Texas bank is that the massive asset write-downs – i.e. energy and real estate loans – are just starting. Up until now the banks and financial firms have been able to hold off marking to market in hopes of a recovery in the price of oil. But distressed offerings in oil, gas and real estate assets are starting to hit the market and it’s going to force the issue. This is going to get ugly.
This is economic fall-out that will spread to the entire country.
Next we turned to the high yield market and he remarked that the junk market is collapsing. And it’s not just oil bonds – it’s gas, technology, healthcare, industrial, retail – everything. The few recent deals that got done soaked up all the cash available and now big outflows are starting again. There’s no liquidity and bids that show up within a reasonable context of the quoted bid/ask market get tattoo’d. It’s impossible to move any kind of stuff – i.e. big investors, mutual funds, pension funds are stuck.
Here’s two graphs that illustrate just how far off the rails the stock market has gone:
This graph from The King Report illustrates the current differential between junk bonds and the SPX vs. the differential in August. Recall that in August the S&P 500 plunged 11.2% in six trading sessions
The second graph compares the returns to the HYG I-shares high yield ETF and the S&P 500. As you can see the, divergence between the S&P 500 and the high yield bond market has reached an absurd level. The high yield market, in the absence of extreme intervention, typically will lead the stock market directionally. This is especially true on the downside because high yield investors typically are “privy” to bank credit information – trust me, this is true, as our high yield desk was next to the bank debt trading desk and we were very friendly with each other – and can see when corporate numbers are deteriorating well in advance of equity analysts and investors. As you can see from this
graph the divergence between high yield debt and the S&P 500 has never been greater
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