US Stock Rally Is a Dead-Cat Bounce
Jul 23rd, 2008 | By Eric Roseman | Category: Featured, Financial NewsGlobal stocks hit a three-week high today. The MSCI world index is up 0.56 percent at 349.90.
Even US stock markets are enjoying a breather from the bear. US indexes rose for a second day today on crude oil’s retreat and news that Washington has hammered out a rescue deal for toxic mortgage twins Fannie Mae (FNM) and Freddie Mac (FRE).
It all sounds great, says The Sovereign Society’s Investment Director, Eric Roseman. Credit spreads aren’t narrowing as they should on a genuine stock-market rally…
Normally, the credit markets would confirm a strong stock market rally. Usually all the credit indexes would rise because investors would raise their risk parameters and buy high-yield bonds and other risky fixed-income securities.
But that’s not happening. This rally has not been confirmed by tightening credit spreads across most investment-grade credit markets. As I said yesterday, that’s partially why I believe this rally is a dead-cat bounce. Also, high yield or junk bond yields widened, not narrowed, last week.
And finally, look at the LIBOR or the London Inter-Bank Borrowing Rate. The LIBOR didn’t change last week. That suggests banks are still nervous about lending to each other. Worse, long-term mortgage rates widened to 6.44% last week from 6.25% a week earlier. That’s another dose of bad news for the housing industry.
If stocks continue to power ahead this week, be sure to follow credit spreads. If credit markets widen further, it will be a bearish omen for the market and the economy.
Until spreads begin to narrow again, remain extremely cautious.
P.S. See Eric’s blog for the full story on this development.
Source: Something Stinks…and for Once It’s Not Stocks
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