Headed for The Junk Pile
Posted on Sunday, November 18th, 2018
We said last week that the latest FOMC statement and inflation numbers had the Feds firmly on track to continue raising rates. Well, the thrill a minute rollercoaster ride continues as Jay Powell was out making statements this week that are leading us to think that he is getting a bit gun shy. Perhaps, GE’s latest stumble might have something to do with that or maybe it is the 20% drop in oil. Markets are now pricing in a 65% chance of a rate hike next month that looked like a sure thing a month ago.
We seem to be in the midst of a rolling bear market as one market after another sees things blowing up. Most investing assets around the world are in the red for 2018. Even bitcoin took a tumble this week. That rolling bear market hit the US corporate debt market this week as GE debt was slammed. A real problem could be brewing in corporate debt land as the massive GE debt seems to be headed for a junk rating. Put GE alongside Pacific Gas and Electric, who is struggling to deal with the ramifications of the California fires, and we have two large debtors headed for the junk pile. Low rates have gotten US corporations hooked on debt. Shares of those corporations could be re-priced as they begin to rollover that debt into higher interest rate debt. Large numbers of major US corporations could be headed for junk status and that could overwhelm the debt market. The risk of contagion is real. How interconnected are things and assets? What could tip the scales? We don’t know but we suspect that the risks are rising. Buybacks from corporations may be the next victim of rising rates. Corporations have been some of the biggest buyers of stock.
A hold on rates hikes might take some of the pressure off of stocks. While we noted last year that Trump’s tax cuts were giving the Fed the cover it needed to raise rates that time may be running out. Oil’s slide over the last month is not engineering confidence in the global economy and neither is GE. Good thing they raised rates when they did.
We have noted that are stuck in a very large trading range and that range stretches from 2550 – 2880 on the S&P 500. The S&P closed on Friday at 2736. The market is in no man’s land. We suspect that the Holiday week will slow things down. Markets will be thin and all eyes will be on the Donald’s Twitter account. S&P 500 is still below its 200 DMA but markets are slightly oversold. We give the edge to the bulls with the holiday week on hand. Holiday weeks tend edge higher. Enjoy the turkey but leave room for pie.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.