This morning, the market opened with a pop to the downside. The sellers arrived early, sold, and I would not be surprised if they took the rest of the day off. After all, the last three weeks or so the bears have threatened to take the market down, way down, and every time they had a shot at that goal, they went home and took a nap. David Moenning sums it up nicely.
- Three-and-a-half long weeks ago, there was fear the world was unraveling: Markets were set to crash, Cyprus was about to implode, and budget cuts would throw us into recession again. Somehow, amid all that worry and doubt, we not only survived, but thrived.
Yes, we have survived and thrived. Cyprus did not destroy the global banking system, Italy’s electoral misfortune was not the catalyst that would finally bring down the Eurozone, and the highly feared sequester has so far been somewhat benign, economically speaking. Yes, since those dark, bearish days, the S&P 500 has kept going up. Shhh … if you listen, and you don’t have to strain, you will hear the reason the market is going up, again Mr. Moenning’s words.
- Stocks are only going up because central bankers around the world have a gun to investor’s heads and are forcing hedge funds, mutual funds, pensions, banks, insurance companies, and good ‘ol mom and pop to buy stocks.
Markets go up or down on both perception and reality. It is a reality the central banks around the world have propped up the financial system, provided liquidity, and held interest rates down. It is perception that this support is the only reason the market has flourished. One must totally dismiss global economic reality to believe that central banks are the only reason the market is up so much this year.
Interestingly, both perception and reality are in line to the upside. The question will become: Will perception trump reality when the Fed begins withdrawing from QE later this year (if it does)? Maybe, but for now, the reality is that the market is looking at reality and that is keeping it striving to the upside. One of the real things the market sees is the use or non-use of credit in the world of high finance, the world of corporate credit. Consider the following.
- As the US stock market entered January 2007, on its way to stock market highs, credit default swaps on “high-yield” corporate debt in the United States were priced at about 2.00% (200 basis points or “bps.”) For a mere $20 per year for every $1000 of debt investment, an investor could trade away much of the risk that the debt would not be paid back by the corporation.
The year before the Great Crash, the financial market could see no bad credit. It was all good. Today, the financial market is a bit more wary, so much so that corporate financing is much more in line with reality.
- What we are seeing today is the exact opposite of late 2007. Our aggregate credit default swap analysis shows a price of 660+ bps just six months ago dropping to below 395 bps this past March for the risky debt-laden “high-yield” companies. This means that financing to corporations is becoming more and more available and much cheaper. It’s not as inexpensive as in early 2007, however, it’s an amazing downward trend that signals one of the core necessities of a bull market rally… credit availability and a signal of greatly increasing company credit-worthiness.
Sure, it is possible that the financial market is so full of greed that it might not have learned a thing from the financial collapse of 2008. Yes, it is possible, but unlikely, at least for now. Maybe down the road the inevitable push to create more wealth for the wealthy will blind them to reality once again, but it appears in the last few years, the financial market has kept creditworthiness in the forefront of any deal.
The bottom line here is that leverage for corporations is becoming cheaper, and that means businesses have room to expand and become more productive, in short, to make more money. Along with the expansion comes more hiring, which means more consumer spending, which brings me to a point I made in yesterday’s piece –
- Clothing is a discretionary item, at least some of it is, and so as spring rolls in and winter wears off, and the not-man consumer is feeling better financially, perhaps one should look specifically to discretionary clothing manufacturers and retailers for opportunity, perhaps the higher end manufacturers and retailers.
Okay, so today, we get the retail news and lo and behold, we have information such as what I give you below.
- Costco Wholesale Corp reported a slightly smaller-than-expected jump in same-store sales in March on Thursday, hurt by weak international results and lower gas prices, while Victoria’s Secret parent L Brands Inc reported better-than-expected sales at all of its chains.
Oh, and just so you know …
- L Brands, Inc. operates as a specialty retailer of womens’ intimate and other apparel, beauty and personal care products, and accessories.
Finally, let me close out this back-to-downside day with another follow up to a point I made in yesterday’s writing.
- The price of oil fell to near $92 a barrel Friday, dragged down by a combination of lukewarm forecasts for demand and ample supplies.
Get your money in the game.
Trade in the day; Invest in your life …
