Despite the 30% move in equities over the past 6 weeks we continue to see practically no improvement in the credit markets. This alone confirms my feeling that we are in the middle of a mean reverting bear market rally. You can’t begin to climb out of a credit crisis when credit doesn’t improve. The numbers speak for themselves:
LIBOR/OIS is marginally improved over the course of the bull run. TED spread is essentially flat. Mortgage rates are flat. 10 year treasuries are flat. CMBS spreads have widened substantially. ABX is flat on its back. Credit card delinquencies are at record highs. Foreclosures are at record highs. The TALF is a failure. JPM won’t participate in the PPIP. These are not good signs for the credit markets. If the credit markets were confirming this 30% move in equities we would have seen substantial improvement in almost everything listed above during the past 40 days. It just isn’t happening.
I am not trying to be a doom and gloomer, but these are the facts. The debt markets are pricing in substantial risk. On the debt side, things just aren’t any different than they were on March 9th when it felt like the world was going to end. And for those new readers who have been emailing me about what appears to be a persistently gloomy message – I should note that I have been both bullish and bearish this year and was bullish at various points in 2008 (though my macro outlook was gloomy). I was bearish entering 2008 and became bullish on March 8th just before the market bottomed. I am not a perma-bear. What I am is a risk manager. My goal is not to outperform the markets on a relative basis, but on a risk/adjusted basis. Working within the macro idea that we are in a bear market I sold into the rally as we moved higher (yes, I sold much lower than today’s closing level). But I don’t chase a higher moving market. I am not a trend follower or a buy and hold investor. In my opinion those kinds of strategies tend to produce VERY low risk/adjusted returns. Once the risk/reward appears unfavorable in a market I leg into hedged or high cash levels. At current levels, my risk metrics are off the charts and I am entirely cash. My proprietary TUI/risk metric is higher than I have ever seen it. For those interested in an update on the TUI I will post it some time over the weekend after the week closes out. Apologies for the rant, but I have gotten a number of emails accusing me of a being a perma-bear which is just flat out wrong.