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Ten Reasons Why This Is Not a Bull Market


It's important to understand that this cyclical bull is part of a prolonged and painful secular bear stretch.

The Falcon and the Snowman

"We build statues out of snow, and weep to see them melt." -- Walter Scott

Kevin Cassidy, a senior credit analyst at Moody's, recently referenced the $700 billion in risky high-yield corporate debt on the horizon and offered, "An avalanche is brewing in 2012 and beyond if companies don't get out in front of this."

Minyanville offered a similar assessment entering September 2008 as $871 billion of corporate debt was set to mature into year-end. We opined there were two plausible scenarios; a credit cancer that would chew through the financial body, or a car crash that would crack the system under the weight of an indebted world. Read more in Pirate's Booty.

I agree that another avalanche is building atop Credit Mountain; while risk transferred from corporate coffers to sovereign strongboxes, the magnitude is cumulative in cause and effect. And despite scary parallels between the 2008 financial crisis and our modern day sequel, savvy investors continue to monitor corporate credit as a timing mechanism for an equity downturn.

As stocks grind to fresh 18-month highs, we're left to wonder if the upside window of opportunity will remain open until corporations are again forced to pay their bar tabs. Credit markets are exhibiting surreal strength and through that lens and that lens alone, the equity market has plenty of room to run.

The question is therefore begged -- will this singular proxy again ring the bell when a crimson tide is about to turn?

Raptors Await

There's no denying the bulls have captured the year-over-year crown. While you can agree or disagree with the synthetic catalysts, price is the ultimate arbiter of variant financial views. The market is never wrong; we should never let an opinion get in the way of making money.

As investors key on corporate credit, there is a litany of causal risks waiting in the wings. With a conscience nod these could conceivably create building blocks in a wall of worry, I humbly submit ten reasons why we're witnessing a cyclical bull market in the context of a prolonged and painful secular bear stretch:

1. Questions remain on a Greek aid package in front of €20 billion in debt that comes due in April and May. This dynamic is not bound by borders; should an accord be reached, as expected, the approach will be tested when the next "lifeguard" begins to drown. See A Five-Step Guide to Contagion.

2. New health care legislation could add hundreds of billions of dollars to already yawning budget deficits. That chasm can only close through upward taxation or austerity initiatives; neither is pro-growth and both drain consumption. This, of course, comes at a time when the "interconnectedness" of governments and markets has never been higher.

3. State budgets are cracking and a recent report from the Pew Center estimates unfunded pension liabilities are an eye-popping $452 billion. While I expect a Federal bailout package, as discussed in January, it's akin to moving money from one pocket to the other. For more, read Ten Themes for 2010.

4. Social mood is tenuous at best and deteriorating at worst. As The Great Divide continues to evolve -- Red States vs. Blue States, Main Street vs. Wall Street, Have's vs. Have Not's -- societal acrimony has evolved into social unrest in some parts of the world, and economic hardship is pointing an unfortunate needle towards geopolitical conflict.

5. Complacency abounds, as measured by traditional volatility measures such as the VXO. While we've witnessed prolonged periods of subdued volatility (2004-2006) and healthy debates rage regarding the indicative validity of this measure, risk premiums are at levels last seen in June 2008 -- a few short months before the financial crisis arrived.

6. From Google (GOOG)-China to USA-Toyota (TM) to EU-Greece, the seeds of protectionism continue to sow. That posturing is on the opposite end of "globalization" on the prosperity spectrum.
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