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You know what the bond market is saying, or rather, screaming? That the stock market is toast!
Take a look at this chart. It shows the relative performance of the SPDR Barclays High Yield Bond ETF (JNK) versus the SPDR S&P 500 ETF Trust (SPY) …
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One pattern should be blatantly obvious to you: High-yield (or “junk”) bond prices and stock prices are generally linked at the hip. And that makes sense when you think about it. After all, both stocks and junk bonds are risky bets on a company’s prospects.
If the company’s earnings and sales grow nicely, its stock price rises and its ability to service its debt rises, too. So that leads to corresponding gains in junk bond prices. The opposite occurs when fundamentals deteriorate.
If anything, I’ve learned over the years that bond investors tend to be a bit smarter than stock jockeys. So you’ll often see declines in junk bond prices before you’ll see declines in stock prices. Or in other words, deterioration in the junk bond market is a solid “leading indicator” for the stock market.
That’s why charts like these worry the heck out of me. JNK just sank to a three-year low. As a matter of fact, it’s all the way back to a level it first traded up and through back in September 2009.
Its sister ETF, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), doesn’t look much better. Yet the major stock averages are paying little heed, down just a few percentage points from their recent highs.
If you look at the spread, or difference, between junk bond yields and underlying Treasuries, you see much the same story. Spreads are rising sharply amid increased fears of credit losses. We’re back to levels we haven’t seen since late 2012 – as you can see in this chart of a benchmark spread index produced by BofA Merrill Lynch.
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Do you know what the Dow Jones Industrial Average traded at in late 2012? Around 13,000 — 4,400 points below current levels. The S&P 500 went for 1,400, give or take a few points. That’s almost 700 points below current levels, or around a third cheaper.
Now I’m not saying stocks have to crash hundreds or thousands of points overnight. And I’ll be the first to admit this divergence has persisted for some time. The typical bullish pundit on CNBC will also tell you the junk bond weakness stems entirely from problems in the energy sector, so it doesn’t “matter” for the broad averages.
Me? That sounds a lot like rationalization and excuse-making to me. It’s a lot like what I heard in 2006-2007, when we saw early signs of stress in the credit markets, too. The bulls said it was all because of mortgages and housing, so you could ignore it. But we know how that panned out.
Bottom line: The bond market is speaking loudly, saying that stock investors are in for rough seas. That doesn’t guarantee the averages are going to tank. But it sure as heck should have you concerned about that possibility.
So if you haven’t taken those protective steps I’ve been highlighting lately, I’ll ask again: What are you waiting for? The worst case is you end up forgoing some upside potential, and you just buy back in later. The best case is you raise cash and put profits in the bank before the stock market lemmings catch on.
Now it’s your turn. Do you watch the bond market, and does the recent action have you concerned about stocks? Do you think we can excuse the action because a significant chunk of the weakness is related to weakness in energy? Or do you think that’s a dangerous line of thinking, particularly with problems popping up in all kinds of other commodities and emerging markets? Let me know what you’re thinking over at the Money and Markets website.
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The stock market, the Chinese currency and Obamacare were just a few of the topics you were discussing online in the last day.
Reader H.C.B. offered the following take on China’s latest moves: “China is just compensating for the accomplished fact their currency has already appreciated quite a bit in the past year, effectively. China is just doing Janet Yellen’s job for her, but on their terms.
“We are becoming less relevant in the world every day when we let foreign countries take away our initiative and let them make the changes on their terms. We no longer lead. The next president won’t likely change this imbedded trend as it reflects our collective views and attitudes (apathy).”
But Reader Mike S. noted that China is still very dependent on the U.S., no matter how much the country may protest otherwise. His view:
“Think the Chinese are in control? Wait until the average American decides that they are NOT going to buy anything made in China! Yea, I know it will take a while for America to retool. But if the Chinese screw around too much, they are very likely going to get themselves a huge reaction from the biggest consuming nation in the world.”
As for the impact of China’s moves on the markets, Reader Gary said: “It seems more and more financial bloggers are predicting a collapse in markets and currencies. I think it is more about fear than economic reality and that we will continue to muddle along until governments get out of the way and let smaller businesses compete.”
On the other hand, Reader Frank said the writing is on the wall already when it comes to markets. His take: “On the stock market, the 50 day moving average just crossed over the 200 day moving average. Just another of many things saying this market is about ready to roll over.”
Lastly, Reader Richard G. weighed in on the decline in uninsured Americans with this thought: “Obamacare is not good insurance, with its high deductibles and copays. The cheapest plan has a $6,000 deductible . The users of Obamacare can’t afford that.
“Medicaid would have been better. All it did was increase persons ‘with insurance’ (statistical games). Exchanges (unfunded mandate) are losing money. That raises rates for all of us who have real insurance.”
I appreciate all the feedback, and hope you keep it coming. We managed to rally off the lows yesterday, which is a sign to me that true capitulatory panic hasn’t taken place yet.
Plus, as I wrote today, stock investors seem to be whistling past the graveyard when it comes to the message emanating from the bond market. That’s a dangerous thing to do, historically speaking. So I’m not sure we’ve seen the worst of this correction/pullback/possible collapse.
Any other thoughts? Then be sure to post them here.
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Officials from China’s central bank tried to defend the yuan’s value at a rare press conference in Beijing overnight. They said there was no basis for further depreciation. Vice Governor Yi Gang also said China wasn’t trying to bolster exports by depreciating its currency. But traders ignored the comments, selling the yuan again anyway.
There’s a lesson here, one I’ve learned in my almost two decades of following markets and central bankers. Forget what officials say. Watch what they do if you want to be successful. After all, Baghdad Bob also said in Gulf War II that there were no American tanks in Iraq’s capital city … even as you could hear them rumbling down the street in the background.
Speaking of China, huge explosions rocked the port city of Tianjin on Wednesday night – explosions caught on multiple scary videos posted online. They went off at a hazardous cargo storage lot, killing at least 44, injuring hundreds, blowing out windows as far as a mile away, and laying waste to a wide swath of goods, cars, and shipping containers.
Tesla Motors (TSLA) announced plans to sell another 2.1 million shares worth $500 million as part of its factory expansion plans. The company is bleeding red ink like mad, forcing it to sell billions of dollars worth of shares and debt to fund operations. But CEO Elon Musk still believes his company could be profitable … by 2020.
Donald Trump. Bernie Sanders. Ben Carson. They aren’t exactly the mainstream candidates that tend to win elections, particularly a presidential one. But that’s also why they’re surging in popularity, according to this Washington Post story.
The reason? Americans are fed up with bought-and-paid-for, special interest-funded candidates spoon feeding them the typical claptrap, rather than actually getting things done in D.C. Definitely a trend that bears watching, though many political pundits believe candidates like Trump will ultimately flame out.
So do you think a true Washington outsider like Trump or Sanders is what this country needs? What about Tesla’s ongoing losses – do they make the stock uninvestable or do you think all this capital raising will pay off with big profits down the road? And how about China’s latest currency comments? Truth or fiction? Let me hear about it at the website.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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According to the Flow of Funds data, ‘smart’ money has been increasingly selling stocks for well over a year. As of last month. even the ‘dumb’ money investors have been net sellers! So what is holding up stocks? Companies borrowing ‘cheap’ money to buy back their own stocks. How long can that last!?!
Stocks in the energy sector are in a bear market, so if the junk bond market decline is related to the energy sector, then stocks have confirmed. As far as the broader market, we can only hope that “this time is different”. And it may be, in light of international money flows.
True, bonds are sending a message and I would not be long on long maturity bonds. However, there are a few good quality closed end funds specializing in short and short-medium term bonds that offer a good yield and sell at a discount to net asset value. These have a cushion against moderately rising interest rates and are worth looking into.
I guess it would be okay to look… Just don’t buy… kinda like playing with fire… You’ll always end up getting burnt.
I had question about the Unemployment Rate in America and I came across the complete and unabridged explanation by Abbott and Costello:
COSTELLO: I want to talk about the unemployment rate in America.
ABBOTT: Good Subject, but these are terrible times. It’s 5.6%.
COSTELLO: 5.6%? That many people are out of work…?
ABBOTT: No, that’s 23%.
COSTELLO: You just said 5.6%.
ABBOTT: 5.6% are unemployed.
COSTELLO: Right 5.6% are out of work.
ABBOTT: No, that’s 23%.
COSTELLO: Okay, so it’s 23% unemployed…?
ABBOTT: No, that’s 5.6%.
COSTELLO: Wait a minute. Is it 5.6% or 23%…?
ABBOTT: 5.6% are unemployed. 23% are out of work.
COSTELLO: If you are out of work aren’t you are unemployed…?
ABBOTT: No, the bureaucrats in Washington said you can’t count the ‘Out of Work’ as the unemployed. You have to LOOK for work to be unemployed.
COSTELLO: BUT THEY ARE OUT OF WORK…!
ABBOTT: No, you miss their point.
COSTELLO: What point…?
ABBOTT: Someone who doesn’t LOOK for work can’t be counted with those who LOOK for work. It wouldn’t be fair.
COSTELLO: To whom…?
ABBOTT: The unemployed.
COSTELLO: But ALL of them are out of work.
ABBOTT: No, the unemployed are actively LOOKING for work. Those who are out of work gave up LOOKING and if you give up LOOKING, you are no longer in the ranks of the unemployed.
COSTELLO: So if you’re off the unemployment roles that would count as less unemployment…?
ABBOTT: Unemployment would go down. Absolutely…!
COSTELLO: The unemployment just goes down because you don’t LOOK for work…?
ABBOTT: Absolutely it goes down. That’s how it gets to 5.6%. Otherwise it would be 23%.
COSTELLO: Hold on there, I’ve got a question for you. That means there are two ways to bring down the unemployment number…?
ABBOTT: Two ways is correct.
COSTELLO: Unemployment can go down if someone gets a job…?
ABBOTT: Correct.
COSTELLO: And unemployment can also go down if you stop LOOKING for a job…?
ABBOTT: Bingo.
COSTELLO: So there are two ways to bring unemployment down, and the easier of the two is to have people stop LOOKING for work.
ABBOTT: Now you’re thinking like an the President’s administration and the Washington elite bureaucrats.
COSTELLO: I don’t even know what I just said…!
ABBOTT: I said, now you’re thinking like Obama.
COSTELLO: Now, that’s no way to talk to a friend…!
OK Mike I have been listening and have taken action.I agree with everything you say and was waiting for a day like Monday to bail.Sold all my winners and am only holding on to some energy stuff that will come back in time.It will take a while,the world is going to be awash in oil for a while unless something crazy happens which probably will at some point.
I bought the energy stocks pretty close to the bottom.
Thanks for staying on top of everything for us.
For background ~ i am 71, retired bank president/ceo, Tampa, FL. Been investing in the stock market since 1968. The yellow “market risk” warning signs are blinking loudly. I am sitting on a bunch of cash, out of the stock market……and am not NOW willing to invest in equities/fixed incomes just yet!! There WILL be a market correction ~ we just don’t know when/magnitude!! Will you please give me 2 days notice of “WHEN” so i can load up???
Thanks!
I believe you are right, and I think it is time to hedge your bets, 25% gold sounds good to me ! Or value stocks and commodities such as ConAgra the food supplier, or Budweiser or Oil refineries !
First a comment about todays talks: Remember the PPT or the banking and federal reserve position to keep the markets from falling [ Plunge Protection Team ]. Perhaps if that governmental market insurance was removed perhaps the markets just might get more closer to a free market. Just a thought.
As far as Trump and Sanders going the distance to nomination is a clear sign that Americans are fed-up with government as usual. Perhaps the grid lock in congress can be broken by not voting for the incumbent and force retirement of congressional staffers.
Ben Carson is beginning to look like the real deal. Jim
I agree with Mike. I also should have agreed with Larry. His call on oil appears to be spot on. I’m selling everything but my refineries, tankers, and gold. I just bought some Goldcorp (GG). For the adventuresome I would look at Exeter Resources (XRA). It has very little debt and lots of gold in the ground. Who’s on first ? Jim
I agree Mike — the “smarter” bond market is indeed signaling that all is not well with the world economies and that stock markets are due for at least a correction (but more likely a crash imo).
On the world stage, I wouldn’t be surprised if Putin tests the resolve of Nato by either invading Ukraine and/or the Baltic states. I think Putin figures that Nato will only fire back with rhetoric, not guns. He wants to reclaim as much of the “old” Russia that he can.
And about that huge explosion in Tianjin —- was it chemical as the media suggest, or could it have maybe been an accidental mini nuclear explosion?
Finally, could we see a “retaliation” by Russia and China involving the selling of their treasury holdings as early as this fall? Or maybe even Russia and China coming out with significantly increased gold reserve figures? Interesting times just ahead.
I keep hearing about gold going down to $700 an oz. What’s this all about?
Allowing border states of Russia into NATO runs counter to our promises to them made in the 1990’s. I’m no fan of Putin, but he does have his own national interests to consider.
If you follow history, you will find that it was always the West that instigated the wars with Russia. Russia is a brute bear that hibernates for many years and the West likes to prod it and take from it but not expecting it to react. Putin happens to be wiser than his predecessors. He waits for the bolt of lightning and strikes when he sees a break. The US should have let Russia take Afghanistan when it was about to. Look at what happens when the US arms Muslims. They turn on the US! The next war will put the US at a disadvantage with the rest of the world because all this gloom and doom is blamed on Wall Street, the FED and the White House. When the general public turns against you, you are doomed. SORRY MATE!
The high yield bond market has been falling ever since oil crashed. There is a high possibility of defaults among oil related company bonds that, in some cases, make up a sizeable percent of the holdings of some high yield funds. JNK is one of them. Also the Chinese slowdown and the rising value of the dollar have caused commodities to crash, raising the possibility of defaults among emerging market sovereign debt as well as emerging market corporate bonds.
IMHO the high yield bond market is signaling a slowdown in emerging markets and the oil industry. If the slowdown is deep and long enough, eventually it will affect the US economy.
I am neither an American citizen nor a US resident and believe there is a large silent majority of Americans who are disappointed with the Bushes , Clintons and tired testing the new young upcoming politicians of America and want someone like Donald Trump to run their country for a better change!
I keep hearing that gold will be going down to $700 an ounce. What is this all about it should I be concerned?
The value of gold has plummeted since a high point before the waning bear market, taking some big hits just recently.
Like oil and stocks, volatility is everywhere and monitoring your commodities daily is important. I don’t think gold has hit near its potential bottom yet. When it does, I’ll move on it.
Not “bear” – should have been “bull.”
Everywhere I go people are talking about voting for Trump, even after the FOX debate.
Debbie, Gold is currently $1,115. an ounce right now. It’s bounced between $1,200 and $1,080 for a little while. I have also heard that Gold will fall more. Who knows if it will be $700., $900., or $1,000. an ounce. Everyone collectively says Gold is being manipulated down and I agree. I’m just a simple, middle class, Veteran who believes this to be true. Based on current figures, the physical to paper Gold ratio has been said to be 1:134. What that means is if everyone right “now” demanded delivery of physical Gold, it would not be available. Because, that much does not exist. There is not enough above ground Gold to cover all of these positions. So, if you have physical Gold (in hand) you are way ahead of the power curve. If you don’t have it in hand, demand delivery. If they deliver your gold at $1,200. an ounce and Gold falls to $700. an ounce….keep hanging on. It’s going to bounce and when it does all of that “Paper” Gold will not be worth a dime. Now you need to look at the reverse side of this. When Gold corrects (and it will) these same experts say that Gold will bounce to $5,000., $7,000., $10,000. and as of yesterday another has said $20,000. an ounce. I personally believe the initial bounce will be around $3,500. to $5,000. an ounce. People will start selling thinking this is the peak and it won’t be. After this I believe it will bounce to around $7,500. – $10,000. an ounce. If it’s more, so be it. REMEMBER this….Goldman Sachs and HSBC have been telling their customers not to buy Gold. Yet, they each just purchased over 3 Tons of Gold a few days ago. Germany has been wanting the FEDERAL RESERVE to return/repatriate their Gold, the U.S. Fed Res would not. Germany wanted an Audit and the Fed Res refused. The U.S. Fed Res made a deal for the repatriation of the Gold to be complete by 2020. Why??? Because they don’t have it. It’s been sold “out of the back door” to the paper buyers. There’s to much history to type in here. Bottom line, hang on to your Gold no matter where the bottom ends up right now, because once it corrects, it’s going to be worth a lot. It could be as early as this fall or 2 years from now. One things for sure, it’s coming!!!
Debbie, These big boys know when things are going to happen way before we do. Just take Goldman Sachs during the last market crash. Just before the crash, they changed from an Investment Bank to a Commercial Bank, so they would be covered by the bailouts and the FDIC. Goldman Sach’s and HSBC have been telling their clients/investors not to buy gold, yet Goldmans just bought 3.2 Tons of Gold (over $126 Million Dollars) and HSBC just bought 3.9 Tons of Gold (over $127.6 Million Dollars). This is just one transaction during this year. A lot more transactions have occurred. Don’t listen to what tell you, watch what they do. China just bought 19 Tons of Gold, yet we know that’s a lie. They bought a lot more…..The U.S. is not quiet at the end of the road yet, although I think we can see it, so there’s more kicking to be done.
China is setting us up…look for IMF to add the Yuan as an alternate Reserve Currency end of this October. When the truth comes out…the world will find that China has the gold and lied about that while keeping the Yuan undervalued. Watch what happens after the announcement and after they pick up 50 percent of the a Reserve Dollar usage world wide. What will happen to the U.S. dollar if revaluation indicates China indeed has twice the gold reported and the Yuan was severely undervalued all along. Yuan sky’s…dollar falls like a brick.
New technology in electricity and energy sectors will cause electrically operated devises to become the next windfall but it’s real birth or beginning is still a year or so off and even then, development of new products and capability will take years…Tesla will be a forerunner…they already are but their time has not yet come. 2020 is probably dead on!
I’m not sure anyone can get enough votes to win over the Democrats in America now. Too many have kept quiet while many minoroties moved aggressively to change the American way. True Freedom which comes at a great price and is ultimately founded in Christ has been replaced with a sloppy do whatever whenever quasi freedom that will ultimately place America in bondage if left to reign as is. Carson is smart and he is smooth. The Don is ruff…not as smart but makes up for it with his cut to the chase approach which is very refreshing. Cruz is also convicted and smart..,maybe even a David but that remains to be seen. One can hope and pray and that’s exactly where we all better be as nations rise up against nations before us!
Are you implying minorities are not “real” citizens and thus do not merit the rights always held by white, male property owners?
Are you also suggesting that the US was envisioned as a Christian theocracy?
You are in error on both fantasies.
Yes,America does need a Trump in office instead of the regular jelly bellys.Not to far in the past one of your subscribers down played Donald Trump as what can he do,why he was even bankrupt.Well guess what Bimbo,America is also bankrupt,no better experienced person then, to fix it other then Donald……….Dahhhhh!
“Guess what Bimbo”?
You cannot punctuate your way out of a paper bag, and you use the word “bimbo.” That says all we really need to know about Trump supporters.
I would suggest you take an intro economics class, but you wouldn’t understand the most basic concepts.
Hi Mike
At some point the world will have to deal with accumulated debt and currency weakness. The only sure investments longer term are hard assets and being currency smart.
Thanks for your article on junk bonds. Wonder about the bonds not considered junk. There seems to be a general opinion to get out of all bonds. I have not had a good return on the investments for over a year… those managed by Fidelity. Comment please.
All of these debates and speeches by presidential hopefuls are just background noise, white noise the media and political pundits can regurgitate for the masses. Hillary Clinton is your next president – put her name on the door. At the end of the day behind every winnning campaign is a story the media and the public can get behind. Case in point, Barack Obama, first black president. Now Hillary Clinton – first female president.
Anyone who believes Hillary Clinton would make a good president would not get a job in my factory.
“Lastly, Reader Richard G. weighed in on the decline in uninsured Americans with this thought: “Obamacare is not good insurance, with its high deductibles and copays. The cheapest plan has a $6,000 deductible . The users of Obamacare can’t afford that.”
Why do you repeat false statements from uninformed readers? Absolutely everything Richard G. said is false, and you know it! First, Obamacare is regular insurance. Many plans are offered. People of all income levels hold policies. If a $6,000 deductible is too high for comfort, get a different plan! As it is, many users can afford that deductible, but may choose a plan with NO deductible if medical needs call for it. As for Richard’s suggestion that Medicaid should have been used instead of Ocare, what does one do with an income of $60,000? That certainly doesn’t qualify for Medicaid! The ACA is excellent for small business owners, sole proprietors, independent contractors and parents who wish to work part time when their children are young. Voluntary PT workers have dramatically increased since the ACA went into effect. Workers are no longer tied to their jobs by a health insurance policy, since the marketplaces offer more than what their employer could.
While I certainly prefer single payer models such as Medicare and feel it should be an option for workers under 65, what we have is what wasn’t blocked by Republicans, since the senate only had a supermajority for 12 working days due to situations involving recounts, illness and deaths of members. Thank goodness the ACA was passed. It remains a terrible slight to low income workers that Medicaid has not been expanded in many red states whose governors hate their constituents so much that they force them to remain uninsured.
If Queen Hillary becomes President – don’t worry, nothing will change – just 4 more years of Obama. The NRA will make more money fighting gun control. More guns and Ammo will be sold.
More jobs will go to middle Asia.
Someday the Democrats will ask what happened. Most people can’t see the train wreck coming down the track until it’s too late.
The establishment on both sides has picked their candidates – Queen Hillary and King Jeb. King Jeb said he is trying to get the Republican message out, but Trump rained on the parade. Queen Hillary is laughing.
Watch these two series on Netflix – “The Men who Built America” and “Monarchy” – this will help you understand how we got to where we are in our nation.
Nothing has really changed since the beginning of time. The faces are the only thing that changes and they now ride in BMW’s.
Many of you will mock me and that is ok.
My new future prediction: Quick future growth in the Good ole US of A has been given away by our politicians to China and India. That ship sailed a few year back. Obama with the help of the Republicans are throwing the last shovel of dirt on our grave with TPP, etc. Just my thoughts. I’ve seem a lot in 70 years.
To see our future just take a close look at Japan and their economy with no growth. They have been at zero interest rates for over 25 years. The world will not end, but ours will slow down even more.
This is where we stand.
Manufacturing: Factory capacity utilization — 76.2% for July 2015 — an increase of 1% year-over-year July 2014
http://www.federalreserve.gov/releases/g17/Current/
Check it out — Yep, a booming economy – at this rate, full Cap. Util. in 20 years
LOL
There will be a wall of maturities that come in 2018 and 2019 and if interest rates are rising these companies will have to roll over the debt at higher interest rates, that’s something that has never happened in the history of the junk bond market,” he said. Gundlach said this could conceivably have implications for future corporate default rates, which average 4 percent.