Category Archives: Bubbles (Asset)

Is The Stock Market Experiencing A Bubble?

Recently there have been a variety of discussions as to whether the stock market is experiencing a bubble.  Among the main drivers of such discussion is the stock market’s seemingly near-constant price advancements, frequent record-high closes, and the duration of the advance, all of which are against the backdrop of the (at best) slow-growth economy.  For reference, here is a daily chart of the S&P500 from 2009, with the 50dma and 200dma:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

EconomicGreenfield 11-21-13 SPX daily since 2009

One such article discussing whether the stock market is experiencing a bubble is the Saturday, November 16 Barron’s article titled “Bubble Trouble?”  An excerpt:

The S&P 500 is valued at 16 times projected 2013 operating profits of $109 and at 15 times estimated 2014 earnings of $120. Those price/earnings ratios are about equal to the long-run average. Even if next year’s earnings growth is closer to this year’s projected 5% than to the aggressive current estimate of 10%, the S&P 500 forward P/E is 15.6, which doesn’t look excessive at a time of near-zero short-term rates, a 2.71% yield on the 10-year Treasury note, and sub-6% average yield on junk bonds. The S&P 500 dividend yield is 2%, but the earnings payout ratio is historically low at about 35%, meaning companies have room to further boost dividends.

As well, Janet Yellen, during her testimony on Thursday, was asked about asset bubbles.  Here is what she said (as seen in the Bloomberg article of November 14 titled “Yellen Signals Continued QE Undeterred by Bubble Risk”) concerning the stock market:

“Stock prices have risen pretty robustly but if you look at traditional measures,” such as price-earnings ratios, “you would not see stock prices in territory that suggests bubble-like conditions,” she said.

My comments:

My posts concerning the existence of the stock market being an asset bubble date back to 2011.  I view the argument as to whether the stock market is experiencing a bubble based upon two general areas:  technical analysis and fundamental analysis.

While I believe there to be many reasons to believe stocks are in a bubble based upon technical measures, in this post I will focus on fundamental measures.

In particular, the common (and seemingly predominant) argument made that stocks are fairly or attractively valued is based upon a (forward) PE basis.  Various year 2014-2015 S&P500 earnings forecasts continue to portray attractive growth in earnings.  While, as indicated by the Barron’s article mentioned above, stocks don’t appear to be in a bubble based upon (forward) PE-based valuation measures, current levels of earnings are, in many ways, favorably impacted by various factors.

Even if one assumes that EPS is – or should be – the primary stock market valuation metric – these numerous benevolent factors within the current earnings environment seem to lack general recognition.  Whether these factors will persist – and whether they “deserve” to be accorded full valuation – should perhaps be the focal issue.

While a full discussion of these factors would be exceedingly lengthy and, at times, very complex, below are some of the more notable factors:

(Ultra) Low interest rates –  While, due to numerous factors, it is difficult to accurately quantify how much the (ultra) low interest rate environment has directly and indirectly bolstered earnings, the (ultra) low interest rate environment has had a (very) significant impact on earnings.  I discuss this in the ProfitabilityIssues.com posts of September 25, 2013 (“Corporate Interest Cost Savings“) and the July 29, 2013 post (“Impact Of Low Interest Rates On Corporate Profitability.”)

Lagging Revenue Growth – While S&P500 earnings have no doubt been robust, corporate revenue growth has consistently lagged.  This is problematical in many ways, both from a corporate performance standpoint as well as a general economic standpoint.  From a corporate performance standpoint, it raises many issues, including both the “quality of earnings” as well as to the sustainability of earnings.  From a general economic standpoint, it strongly appears as if employment growth, among other factors, would likely be considerably higher if revenue growth was higher.

Share buybacks – While, from an overall perspective, share buybacks aren’t a predominant factor, this is yet another area in which EPS has been significantly bolstered. (note:  this share buyback factor, as well as others, is also discussed in Lance Roberts’ post titled “Analyzing Earnings As Of Q3 2013.”)

Also of note is that various levels of profitability – including the S&P500′s operating margins, operating profits, and After-Tax Corporate Profits as a Percentage of GDP – are at or near record-high levels.  Cumulatively, these levels raise questions about the sustainability of corporate earnings growth.  As well, they raise the issue of what a decline in corporate earnings may look like.  These “decline” scenarios, although estimates, often look rather precipitous, especially if one starts thinking about such issues as long-term mean reversion as well as a “reversal” of the positive earnings factors mentioned above, such as the ultra-low interest rate environment.

As to the valuation of the stock market, when one uses stock market valuation measures other than PE, one often sees the stock market as either being (very) expensive or in “bubble” territory.  These other valuation measures include the Q-Ratio, market capitalization to GDP, CAPE (“Shiller PE”), etc.  (note:  these factors are discussed in Doug Short’s “Market Valuation Overview” updates as well as various of John Hussman’s commentaries, including that of November 11, 2013 titled “A Textbook Pre-Crash Bubble.”)

Cumulatively, on an “all things considered basis,” my analysis continues to indicate that not only is the stock market experiencing a bubble but – although it doesn’t necessarily outwardly appear as such – also that this stock market bubble is enormous.  While some choose to use (forward) PE ratios as the main determinant of whether the stock market is a bubble, I believe this is misleading.  

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1781.37 as this post is written

Is The Collector Car Market Experiencing A Bubble?

The collector car market is one that I have followed on a casual basis over the years.

I find that it is an interesting market in many respects.  One of the more notable characteristics is its volatility.

Recently, there have been a variety of auction reports that I find very notable.

Specifically, here are some of the more notable recent auction results I have seen:

The Bloomberg Ferrari article has some notable commentary.  A couple of excerpts include:

The HAGI F index of private and public sales of rare Ferraris was up 54.52 percent for the year, the London-based Historic Auto Group said in a report in August.

also:

Hatlapa said that prices of the rarest Ferraris have risen at an average annual rate of 15 percent for more than 30 years.

Perhaps the main question is whether the collector car market is experiencing a “bubble.”  Unlike stocks and bonds, the collector car market lacks a well-organized, standardized history of valuation measures, and as such, “proving” whether a bubble exists (or doesn’t exist) and its extent is difficult.  How does one “value” rarity, styling, or nostalgia?  Why are certain Ferrari models worth so much more than other models?  Why are vintage Ferraris valued much more highly than other car brands? Much of the valuation in collector cars seems subjective and emotions-driven.

While I find many of these collector cars to be highly attractive and notable, like any other asset class bubbles can form.  While one can argue whether the entire collector car asset class is currently experiencing a “bubble,” there certainly seems to be (at least) “froth” in various segments.  As well, many “bubble” characteristics seem to be manifesting, including many frequent “record sales prices” achieved at auction and a rapid (upward) “revaluation” of various lower-priced cars.  Overall, I would say that the asset class is experiencing a bubble, albeit one that is not as astounding as various other current and past asset bubbles.

Another question is whether other “alternative” asset classes are experiencing bubbles.  While I have little familiarity with some of the other “alternative” asset classes such as art,horses, or yachts, I wouldn’t be surprised that some of these other alternative asset classes are also showing signs of “froth” or “bubbles.”

From a broader economic perspective, this collector car market and its “froth” / “bubble” status is an(other) example of how prevalent asset bubbles have become.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1656.40 as this post is written

Corporate Bond Yields And OASs

I often write about interest rates and related topics as my analyses indicates that the overall bond market is an exceedingly large asset bubble.

The characteristics and price levels of corporate bonds is highly noteworthy.

For reference purposes, here are three bond indices and their FRED charts, as well as depictions of their spreads (as seen in OASs) :

The BofA Merrill Lynch US Corporate Master Index

An excerpt from the FRED description of the BofA Merrill Lynch US Corporate Master Index :

This data represents the effective yield of the BofA Merrill Lynch US Corporate Master Index, which tracks the performance of US dollar denominated investment grade rated corporate debt publically issued in the US domestic market.

A chart of the BofA Merrill Lynch US Corporate Master Index,  with an effective yield of 3.58% as of September 13, 2013:

(click on chart to enlarge images)(chart last updated on 9-16-13)

BAMLC0A0CMEY_9-16-13 3.58 percent

The BofA Merrill Lynch US Corporate Master Index Option-Adjusted Spread (OAS)

An excerpt from the FRED description of the BofA Merrill Lynch US Corporate Master Index Option-Adjusted Spread (OAS):

The BofA Merrill Lynch Option-Adjusted Spreads (OASs) are the calculated spreads between a computed OAS index of all bonds in a given rating category and a spot Treasury curve. An OAS index is constructed using each constituent bond’s OAS, weighted by market capitalization. The Corporate Master OAS uses an index of bonds that are considered investment grade (those rated BBB or better).

A chart of the The BofA Merrill Lynch US Corporate Master Index Option-Adjusted Spread (OAS), with a value of 1.54% as of September 13, 2013:

(click on chart to enlarge image)(chart last updated on 9-16-13)

BAMLC0A0CM_9-16-13 1.54 percent

The BofA Merrill Lynch US High Yield Master II Index

An excerpt from the FRED description of the BofA Merrill Lynch US High Yield Master II Index:

This data represents the effective yield of the BofA Merrill Lynch US High Yield Master II Index, which tracks the performance of US dollar denominated below investment grade rated corporate debt publically issued in the US domestic market.

A chart of the The BofA Merrill Lynch US High Yield Master II Index, with an effective yield of 6.51% as of September 13, 2013:

(click on chart to enlarge image)(chart last updated on 9-16-13)

BAMLH0A0HYM2EY_9-16-13 6.31 percent

The BofA Merrill Lynch High Yield Master II Option-Adjusted Spread (OAS)

An excerpt from the FRED description of the BofA Merrill Lynch High Yield Master II Option-Adjusted Spread (OAS) :

The BofA Merrill Lynch Option-Adjusted Spreads (OASs) are the calculated spreads between a computed OAS index of all bonds in a given rating category and a spot Treasury curve. An OAS index is constructed using each constituent bond’s OAS, weighted by market capitalization. The BofA Merrill Lynch High Yield Master II OAS uses an index of bonds that are below investment grade (those rated BB or below).

A chart of the BofA Merrill Lynch High Yield Master II Option-Adjusted Spread (OAS), with a value of 4.60 percent as of September 13, 2013:

(click on chart to enlarge image)(chart last updated on 9-16-13)

BAMLH0A0HYM2_9-16-13 4.60 percent

The BofA Merrill Lynch US High Yield CCC or Below Effective Yield

An excerpt from the FRED description of The BofA Merrill Lynch US High Yield CCC or Below Effective Yield :

This data represents the effective yield of the BofA Merrill Lynch US Corporate C Index, a subset of the BofA Merrill Lynch US High Yield Master II Index tracking the performance of US dollar denominated below investment grade rated corporate debt publically issued in the US domestic market. This subset includes all securities with a given investment grade rating CCC or below.

A chart of The BofA Merrill Lynch US High Yield CCC or Below Effective Yield, with an effective yield of 9.87% as of September 13, 2013:

(click on chart to enlarge image)(chart last updated on 9-16-13)

BAMLH0A3HYCEY_9-16-13 9.87 percent

The BofA Merrill Lynch High Yield CCC or Below Option-Adjusted Spread (OAS)

An excerpt from the FRED description of The BofA Merrill Lynch High Yield CCC or Below Option-Adjusted Spread (OAS):

This data represents the Option-Adjusted Spread (OAS) of the BofA Merrill Lynch US Corporate C Index, a subset of the BofA Merrill Lynch US High Yield Master II Index tracking the performance of US dollar denominated below investment grade rated corporate debt publically issued in the US domestic market. This subset includes all securities with a given investment grade rating CCC or below.

A chart of The BofA Merrill Lynch High Yield CCC or Below Option-Adjusted Spread (OAS), with a value of 8.12 percent as of September 13, 2013:

(click on chart to enlarge image)(chart last updated on 9-16-13)

BAMLH0A3HYC_9-16-13 8.12 percent

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1698.51 as this post is written

The Impact Of Rising Interest Rates

With the recent increase in interest rates, perhaps the paramount question is what impact a rising interest rate environment will have on the economy.

First, for reference, here is a long-term chart of interest rates from 1962, as seen in Doug Short’s post of August 17 titled “Treasury Yields In Perspective” :

(click on chart to enlarge image)

Dshort 8-17-13 - treasuries-FFR-since-1962

As one can see, the overall trend in interest rates has been declining, dating back to the peak seen in the early-80s.

The impacts that these falling interest rates have had is extensive, and many of the impacts lack (full) recognition.  As I have previously commented, most recently in my February 6, 2013 post, “Falling interest rates over the last 20 years have been an “enabler” of much of our current day economy.”

While the list of ways in which lower interest rates have acted as a benevolent factor to the economy is exceedingly lengthy, one such notable area is the impact lower interest rates have had on corporate earnings.  I highlighted two estimates concerning the positive impact of declining interest rates on corporate profitability in my July 29 ProfitabilityIssues.com post titled “Impact Of Low Interest Rates On Corporate Profitability.”

Although there are various areas which benefit from increased interest rates, from an “all-things-considered” basis rising interest rates have many problematic aspects for our current-era economy.  While 10-Year Treasury Yields were above 5% as recently as 2007 – with no seeming adverse economic impact – I believe that the economy will have difficulties “absorbing” higher yields far before that 5%+ rate on the 10-Year Treasury is again reached.

The impact of the recent rising interest rate environment is particularly noteworthy, not only because of the historically-rapid speed of its ascent, but also because, as I have commented before, my analyses indicate that interest rates can rise to levels much higher than generally expected.  I have written extensively about my belief that there is an exceedingly large bond bubble; if one believes that such is the case, the implications concerning the level of future interest rates is disconcerting.  A “deflating” or “bursting” of such a large bubble will have widespread negative impacts on the economy and markets.

For reference, below is a chart depicting the recent movements of various (3-month, 2-Year, 5-Year, 7-Year and 10-Year) Treasury yields:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

EconomicGreenfield 8-21-13 interest rates

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1642.80 as this post is written

Corporate Bond Yields And OASs

I often write about interest rates and related topics as my analyses indicates that the overall bond market is an exceedingly large asset bubble.

The characteristics and price levels of corporate bonds is highly noteworthy.

For reference purposes, here are three bond indices and their FRED charts, as well as depictions of their spreads (as seen in OASs) :

The BofA Merrill Lynch US Corporate Master Index

An excerpt from the FRED description of the BofA Merrill Lynch US Corporate Master Index :

This data represents the effective yield of the BofA Merrill Lynch US Corporate Master Index, which tracks the performance of US dollar denominated investment grade rated corporate debt publically issued in the US domestic market.

A chart of the BofA Merrill Lynch US Corporate Master Index,  with an effective yield of 3.15% as of June 11, 2013:

(click on chart to enlarge images)(chart updated as of 6-12-13)

BAMLC0A0CMEY_6-11-13 3.15 percent

The BofA Merrill Lynch US Corporate Master Index Option-Adjusted Spread (OAS)

An excerpt from the FRED description of the BofA Merrill Lynch US Corporate Master Index Option-Adjusted Spread (OAS):

The BofA Merrill Lynch Option-Adjusted Spreads (OASs) are the calculated spreads between a computed OAS index of all bonds in a given rating category and a spot Treasury curve. An OAS index is constructed using each constituent bond’s OAS, weighted by market capitalization. The Corporate Master OAS uses an index of bonds that are considered investment grade (those rated BBB or better).

A chart of the The BofA Merrill Lynch US Corporate Master Index Option-Adjusted Spread (OAS), with a value of 1.58% as of June 11, 2013:

(click on chart to enlarge image)(chart updated as of 6-12-13)

BAMLC0A0CM_6-12-13 1.58 percent

The BofA Merrill Lynch US High Yield Master II Index

An excerpt from the FRED description of the BofA Merrill Lynch US High Yield Master II Index:

This data represents the effective yield of the BofA Merrill Lynch US High Yield Master II Index, which tracks the performance of US dollar denominated below investment grade rated corporate debt publically issued in the US domestic market.

A chart of the The BofA Merrill Lynch US High Yield Master II Index, with an effective yield of 6.44% as of June 11, 2013:

(click on chart to enlarge image)(chart updated as of 6-12-13)

BAMLH0A0HYM2EY_6-12-13 6.44 percent

The BofA Merrill Lynch High Yield Master II Option-Adjusted Spread (OAS)

An excerpt from the FRED description of the BofA Merrill Lynch High Yield Master II Option-Adjusted Spread (OAS) :

The BofA Merrill Lynch Option-Adjusted Spreads (OASs) are the calculated spreads between a computed OAS index of all bonds in a given rating category and a spot Treasury curve. An OAS index is constructed using each constituent bond’s OAS, weighted by market capitalization. The BofA Merrill Lynch High Yield Master II OAS uses an index of bonds that are below investment grade (those rated BB or below).

A chart of the BofA Merrill Lynch High Yield Master II Option-Adjusted Spread (OAS), with a value of 5.08 percent as of June 11, 2013:

(click on chart to enlarge image)(chart updated as of 6-12-13)

BAMLH0A0HYM2_6-12-13 5.08 percent

The BofA Merrill Lynch US High Yield CCC or Below Effective Yield

An excerpt from the FRED description of The BofA Merrill Lynch US High Yield CCC or Below Effective Yield :

This data represents the effective yield of the BofA Merrill Lynch US Corporate C Index, a subset of the BofA Merrill Lynch US High Yield Master II Index tracking the performance of US dollar denominated below investment grade rated corporate debt publically issued in the US domestic market. This subset includes all securities with a given investment grade rating CCC or below.

A chart of The BofA Merrill Lynch US High Yield CCC or Below Effective Yield, with an effective yield of 9.94% as of June 11, 2013:

(click on chart to enlarge image)(chart updated as of 6-12-13)

BAMLH0A3HYCEY_6-12-13 9.94 percent

The BofA Merrill Lynch High Yield CCC or Below Option-Adjusted Spread (OAS)

An excerpt from the FRED description of The BofA Merrill Lynch High Yield CCC or Below Option-Adjusted Spread (OAS):

This data represents the Option-Adjusted Spread (OAS) of the BofA Merrill Lynch US Corporate C Index, a subset of the BofA Merrill Lynch US High Yield Master II Index tracking the performance of US dollar denominated below investment grade rated corporate debt publically issued in the US domestic market. This subset includes all securities with a given investment grade rating CCC or below.

A chart of The BofA Merrill Lynch High Yield CCC or Below Option-Adjusted Spread (OAS), with a value of 8.75 percent as of June 11, 2013:

(click on chart to enlarge image)(chart updated as of 6-12-13)

BAMLH0A3HYC_6-12-13 8.75 percent

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1612.52 as this post is written

Postcard From The Stock Market Bubble

This post is the latest I have written concerning the stock market.

For reference, below is a one-year daily chart of the S&P500 through May 15 (with a closing price of 1658.78), indicating both the 50dma and 200dma:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

EconomicGreenfield 5-16-13 SPX 1658.78

There are many aspects of the “price action” of the S&P500, as well as many individual stocks, that are notable.  I commented upon this in a variety of past posts, including that of February 19 (“Excessive Positive Sentiment And Froth In The Stock Market.”)

As I mentioned in that post:

Many stocks and indices show an increasingly “parabolic” trajectory.

Since that post, one can see from the above chart that the S&P500 has continued its rather remarkable upward trajectory, especially since mid-November.  The “parabolic” price action has intensified.  I believe this “parabolic” trajectory is highly notable when viewed from a long-term historical perspective.

While this strong rally is not in itself necessarily indicative of impending problems, there are a variety of measures that are cause for concern.  Some of those measures were discussed in the aforementioned February 19 post.  Many others also exist, including both those that are “technical” in nature as well as those that could be considered “fundamental” in nature.

Among commonly stated reasons (as seen in the popular media among others) for this strong stock market rally and resulting recent new record high levels in the S&P500 (as well as Dow Jones Industrials) include the oft-stated “accommodative” (or  “easy money”) monetary policies as well as the “strong earnings” that are projected to further increase in 2013 & 2014.  The conclusion drawn by such reasoning is that unless there is a substantial change in either monetary policy, or a significant fundamentally-led change in earnings projections – neither of which is seen in prominent forecasts – the stock market’s current levels are not only “justified” but the stock market is seen by many as being “attractively” valued on such measures as (forward) PE Ratios.

My analyses, however, continues to indicate a starkly different conclusion.  I continue to view this stock market as not only an asset bubble, but also one that is exceedingly large.  While I concede that this view is very unique and not necessarily an “obvious” conclusion,  like many bubbles it will be evident in hindsight.

As well, my analyses indicate that the “popping” of this equity bubble will have a profound and lasting negative impact on the economy.  While many people believe that bursting equity bubbles don’t represent a substantial threat to the larger economy, I continue to believe that their analyses and conclusions are not pertinent to our present situation.

Cumulatively, this parabolic stock market and its various “mania” characteristics are yet another “danger signal” in the overall financial system.  As I have written, my overall analysis continues to indicate a building level of financial danger, very large by historical standards.  My analyses indicate that such danger and its resolution will have highly notable future consequences, including that of a stock market crash that is outsized by historical standards.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1658.78 as this post is written

Corporate Bond Yields And OASs

I often write about interest rates and related topics as my analyses indicates that the overall bond market is an exceedingly large asset bubble.

The characteristics and price levels of corporate bonds is highly noteworthy.

For reference purposes, here are three bond indices and their FRED charts, as well as depictions of their spreads (as seen in OASs) :

The BofA Merrill Lynch US Corporate Master Index

An excerpt from the FRED description of the BofA Merrill Lynch US Corporate Master Index :

This data represents the effective yield of the BofA Merrill Lynch US Corporate Master Index, which tracks the performance of US dollar denominated investment grade rated corporate debt publically issued in the US domestic market.

A chart of the BofA Merrill Lynch US Corporate Master Index,  with an effective yield of 2.72%:

(click on chart to enlarge images)(chart updated as of 4-10-13)

BAMLC0A0CMEY_4-10-13 2.72 percent

The BofA Merrill Lynch US Corporate Master Index Option-Adjusted Spread (OAS)

An excerpt from the FRED description of the BofA Merrill Lynch US Corporate Master Index Option-Adjusted Spread (OAS):

The BofA Merrill Lynch Option-Adjusted Spreads (OASs) are the calculated spreads between a computed OAS index of all bonds in a given rating category and a spot Treasury curve. An OAS index is constructed using each constituent bond’s OAS, weighted by market capitalization. The Corporate Master OAS uses an index of bonds that are considered investment grade (those rated BBB or better).

A chart of the The BofA Merrill Lynch US Corporate Master Index Option-Adjusted Spread (OAS), with a value of 1.49%:

(click on chart to enlarge image)(chart updated as of 4-10-13)

BAMLC0A0CM_4-10-13 1.49 percent

The BofA Merrill Lynch US High Yield Master II Index

An excerpt from the FRED description of the BofA Merrill Lynch US High Yield Master II Index:

This data represents the effective yield of the BofA Merrill Lynch US High Yield Master II Index, which tracks the performance of US dollar denominated below investment grade rated corporate debt publically issued in the US domestic market.

A chart of the The BofA Merrill Lynch US High Yield Master II Index, with an effective yield of 5.83%:

(click on chart to enlarge image)(chart updated as of 4-10-13)

BAMLH0A0HYM2EY_4-10-13 5.83 percent

The BofA Merrill Lynch High Yield Master II Option-Adjusted Spread (OAS)

An excerpt from the FRED description of the BofA Merrill Lynch High Yield Master II Option-Adjusted Spread (OAS) :

The BofA Merrill Lynch Option-Adjusted Spreads (OASs) are the calculated spreads between a computed OAS index of all bonds in a given rating category and a spot Treasury curve. An OAS index is constructed using each constituent bond’s OAS, weighted by market capitalization. The BofA Merrill Lynch High Yield Master II OAS uses an index of bonds that are below investment grade (those rated BB or below).

A chart of the BofA Merrill Lynch High Yield Master II Option-Adjusted Spread (OAS), with a value of 4.87 percent:

(click on chart to enlarge image)(chart updated as of 4-10-13)

BAMLH0A0HYM2_4-10-13 4.87 percent

The BofA Merrill Lynch US High Yield CCC or Below Effective Yield

An excerpt from the FRED description of The BofA Merrill Lynch US High Yield CCC or Below Effective Yield :

This data represents the effective yield of the BofA Merrill Lynch US Corporate C Index, a subset of the BofA Merrill Lynch US High Yield Master II Index tracking the performance of US dollar denominated below investment grade rated corporate debt publically issued in the US domestic market. This subset includes all securities with a given investment grade rating CCC or below.

A chart of The BofA Merrill Lynch US High Yield CCC or Below Effective Yield, with an effective yield of 9.21%:

(click on chart to enlarge image)(chart updated as of 4-10-13)

BAMLH0A3HYCEY_4-10-13 9.21 Percent

The BofA Merrill Lynch High Yield CCC or Below Option-Adjusted Spread (OAS)

An excerpt from the FRED description of The BofA Merrill Lynch High Yield CCC or Below Option-Adjusted Spread (OAS):

This data represents the Option-Adjusted Spread (OAS) of the BofA Merrill Lynch US Corporate C Index, a subset of the BofA Merrill Lynch US High Yield Master II Index tracking the performance of US dollar denominated below investment grade rated corporate debt publically issued in the US domestic market. This subset includes all securities with a given investment grade rating CCC or below.

A chart of The BofA Merrill Lynch High Yield CCC or Below Option-Adjusted Spread (OAS), with a value of 8.41 percent:

(click on chart to enlarge image)(chart updated as of 4-10-13)

BAMLH0A3HYC_4-10-13 8.41 percent

 

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1592.27 as this post is written

Corporate Bond Yields And OASs

I often write about interest rates and related topics as my analyses indicates that the overall bond market is an exceedingly large asset bubble.

The characteristics and price levels of corporate bonds is highly noteworthy.

For reference purposes, here are two bond indices and their FRED charts, as well as depictions of their spreads (as seen in OASs) :

The BofA Merrill Lynch US Corporate Master Index

An excerpt from the FRED description of the BofA Merrill Lynch US Corporate Master Index :

This data represents the effective yield of the BofA Merrill Lynch US Corporate Master Index, which tracks the performance of US dollar denominated investment grade rated corporate debt publically issued in the US domestic market.

A chart of the BofA Merrill Lynch US Corporate Master Index,  with an effective yield of 2.86%:

(click on chart to enlarge images)(chart updated as of 3-14-13)

BofA Merrill Lynch US Corporate Master Effective Yield 3-14-13 2.86 percent

The BofA Merrill Lynch US Corporate Master Index Option-Adjusted Spread (OAS)

An excerpt from the FRED description of the BofA Merrill Lynch US Corporate Master Index Option-Adjusted Spread (OAS):

The BofA Merrill Lynch Option-Adjusted Spreads (OASs) are the calculated spreads between a computed OAS index of all bonds in a given rating category and a spot Treasury curve. An OAS index is constructed using each constituent bond’s OAS, weighted by market capitalization. The Corporate Master OAS uses an index of bonds that are considered investment grade (those rated BBB or better).

A chart of The BofA Merrill Lynch US Corporate Master Index Option-Adjusted Spread (OAS), with a value of 1.45%:

(click on chart to enlarge image)(chart updated as of 3-14-13)

BofA Merrill Lynch US Corporate Master OAS 3-14-13 1.45 percent

The BofA Merrill Lynch US High Yield Master II Index

An excerpt from the FRED description of the BofA Merrill Lynch US High Yield Master II Index:

This data represents the effective yield of the BofA Merrill Lynch US High Yield Master II Index, which tracks the performance of US dollar denominated below investment grade rated corporate debt publically issued in the US domestic market.

A chart of The BofA Merrill Lynch US High Yield Master II Index, with an effective yield of 5.92%:

(click on chart to enlarge image)(chart updated as of 3-13-13)

BofA US Corporate Master II Effective Yield 3-13-13 5.92 percent

The BofA Merrill Lynch High Yield Master II Option-Adjusted Spread (OAS)

An excerpt from the FRED description of the BofA Merrill Lynch High Yield Master II Option-Adjusted Spread (OAS) :

The BofA Merrill Lynch Option-Adjusted Spreads (OASs) are the calculated spreads between a computed OAS index of all bonds in a given rating category and a spot Treasury curve. An OAS index is constructed using each constituent bond’s OAS, weighted by market capitalization. The BofA Merrill Lynch High Yield Master II OAS uses an index of bonds that are below investment grade (those rated BB or below).

A chart of the BofA Merrill Lynch High Yield Master II Option-Adjusted Spread (OAS), with a value of 4.75 percent:

(click on chart to enlarge image)(chart updated as of 3-13-13)

BofA US Corporate Master II OAS 3-13-13 4.75 percent

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1559.31 as this post is written

The Bond Bubble – February 2013 Update

In previous posts I have discussed the Bond Bubble and its many facets.

Since my last post on the Bond Bubble (the July 25, 2012 post titled “The Bond Bubble – July 2012 Update“) yields of various Treasury maturities have started to increase.

Here is a chart depicting the recent movements of various (3-month, 2-Year, 5-Year, 7-Year and 10-Year) Treasury yields:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

EconomicGreenfield 2-6-13 Treasury Yields since 2011

It should be noted that current rates on 10-Year Treasury Yields, from a long-term historical view, remain extremely depressed.  This can be seen in the following chart of 10-Year Treasury Yields:

EconomicGreenfield 2-6-13 DGS10_2-5-13 2.00 Percent

In fact, even if one takes a view of interest rates from 1790-2011, one can see that the current era of ultra-low interest rates is very much anomalous.  While this era’s ultra-low rates are not necessarily “proof” of an asset bubble in bonds, other characteristics, including those discussed in previous posts, very much indicate that a truly enormous bond bubble exists.

While the duration of this “bull market” in bonds is outsized – and thus gives the appearance that ultra-low rates are not only normal – but such yields will remain depressed indefinitely – as with any asset bubble such seeming stability will prove illusory.  In fact, there are already various indications that the bond market bubble has seen its zenith.

What is particularly fearsome with regard to the bond bubble is its potential for damage once it “pops.”

The perils of this bond bubble and its future “bursting” can hardly be overstated.  As I mentioned in the April 6, 2010 post (“The Threat Of Rising Interest Rates“) :

Falling interest rates over the last 20 years have been an “enabler” of much of our current day economy.

As well, there remains the critical question that I mentioned in the October 4, 2010 post (titled “Thoughts On The Bond Bubble“) with regard to what the “natural” interest rate is:

Another critical issue with regard to the bond bubble is the following:  If one believes that there is a bond bubble that is serving to unduly depress interest rates, what might be the “natural” interest rate – i.e. one that may endure after the bond bubble pops?

While I have not spent considerable effort trying to ascertain the level of this “natural” interest rate, I have little doubt that such a “natural” rate on the 10-Year Treasury would be at least 5%-10% and most likely considerably higher (possibly multiples thereof).  Of course, such rates would have massive implications on a number of fronts.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1511.10 as this post is written

The Bond Bubble – July 2012 Update

In previous posts I have discussed the Bond Bubble and its many facets.

Since my last post on the Bond Bubble (the February 21 post titled “The Bond Bubble – February 2012 Update“) yields of various Treasury maturities have continued to decline and many have been establishing all-time lows in the last few days.

Here is a chart depicting various Treasury yields from 2007 as seen in Doug Short’s blog post of  July 24 titled “Treasuries Update:  More Historic Low Yields” :

It should be noted that current rates on 10-Year Treasury Yields are, from a long-term historical view, extremely depressed.  This can be seen in a monthly chart of 10-Year Treasury Yields dating back to 1994, on a LOG-basis, with a red trendline shown:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

Many investors, including those very prominent, currently believe that the biggest threat to the future value of bonds is inflation.  While I believe that the threat of inflation is a concern, there are various other factors that pose immense threats as well.

As I wrote in the August 15, 2011 post (“The Bond Bubble – Update“) :

While this Bond Bubble may have a little more “upside” left to it, I am of the belief that attempting to derive gains from bonds at this point is akin to “picking up pennies in front of a steamroller” – i.e. there is little to be gained, and much to be lost.

While the Bond Bubble continues, its risks to investors, financial markets and the economy in general has in no way diminished.

The perils of this bond bubble and its future “bursting” can hardly be overstated.  As I mentioned in the April 6, 2010 post (“The Threat Of Rising Interest Rates“) :

Falling interest rates over the last 20 years have been an “enabler” of much of our current day economy.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1337.88 as this post is written