It's Friday cocktail hour in Auckland, New Zealand. What a week! With one day remaining in the U.S. trading week, it has already been a wild ride. As of this writing, futures are trading higher and the S&P 500 seems to be holding the support level of 2,400 that I have identified in several RM columns.
So, we made it, right? The worst is over? The selloff is done?
If one only focused myopically on the U.S. equity market, that might seem to be the case. But, as my current location conclusively proves, it's a big world out there.
While stocks were delivering a relatively muted rally in Thursday's trading, the crash in the corporate bond market actually intensified. It is not easy to obtain real-time news on the actions of the corporate bond market, unlike the markets for stocks. The St. Louis Fed's wonderful FRED database gives a reading, but the data is current as of the previous day's close. Spread data is also monikered with mellifluous names such as the ICE-BofAML High Yield II Option Adjusted Spread.
So it's not as easy as typing in "F stock" in Google to get a quote for Ford (F) (if you dare) but the charts are amazing. There has NEVER been a widening of spreads in such a short timeframe. Not even in 2008.
Thursday's trading saw the plummet continue as investment-grade spreads widened an additional 37 basis points to 349 points and high-yield spreads widened 66 points to a jaw-dropping 959 points.
Does that seem like a recovering market to you? It's not. But it is an efficient one. COVID-19 and the associated government reactions are going to cause corporate cash flows to seize up in the U.S. That is the only possible outcome.
Exactly one month ago, stocks were pricing in such an incredibly rosy best-case scenario that I was screaming from the rooftops -- and in my RM column -- that you should sell them. Well, today the opposite has occurred, as the bond market has priced in a worst-case scenario that is more dire than that seen during the Great Financial Crisis.
So, you should -- carefully -- be initiating positions in corporate fixed income securities here.
Corporate bonds, especially those rated BBB and below, and preferred stocks are offering yields that are simply too good to pass up: 10%, 15%. In Wednesday's panic, I even saw some 30% yields on preferreds for companies that I deem creditworthy.
That's the key. To absorb the risk that is inherent in a double-digit yield, one must possess deep knowledge of the credit markets. Believe me when I say it doesn't make me a hit at cocktail parties, but I have such knowledge.
So, drop me a line at jim@excap.biz or on social media and we can geek out over fixed income and which individual securities you should be buying here. Panic always creates trading opportunities as long as one is confident enough to see the herd... and head in the opposite direction.
