April 10, 2013

From 660 To 390: Not Sufficient, But Necessary Fuel For A Sustainable Bull Market


If the last hundred years of market cycles teaches anything, it’s that one can’t be a great equity investor without also being a solid credit analyst. Credit crunches and financing booms have killed and fueled bull markets. Analysis of the corporate credit markets today provides one fundamental reason for the stock market rally to continue. It’s not enough by itself; however, it is a necessary element. Our aggregate credit default swap calculation of the riskiest “high-yield” companies in the USA tells us that the financing fuel is coming and in a big way. That’s the “660 to 390” move that we’re seeing in aggregate CDS.

The importance of the availability of financing to bull markets is unquestionable when looking at the late 1920s or more recently the Big 80s, the tech rally into 2000, or the bull run into 2007. Without available financing for growth, we simply would not see the earnings acceleration that fuels the justifiably higher multiples of great bull markets.

Without the availability of credit to corporations, the sustainability of a bull market is surely doomed. And, if our attention is on corporate credit, we cannot afford to ignore credit default swaps.


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