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Buyback Party Leaves the Bears in the Dust

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The corporate bond market remains extremely healthy and will continue to fuel the bull market.

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I have been arguing for a couple of years now that the seemingly relentless rise of the S&P 500 (SPX) will not end until the corporate bond market stops providing companies with money for buybacks and acquistions. Every month of 2014 except August has tallied at least $100 billion in new corporate bond sales, and the annual pace of issuance is at new post-crisis highs. That said, there are periods during the year that are more telling than others for gauging the health of the corporate bond market, and the 3-4 weeks that began yesterday is one of them. If the first day of post Labor Day activity is any indication, the "borrow -> buyback + buyout" dynamic may be about to kick into a whole new gear.

More than $23 billion of new bonds/perpetual preferreds were sold yesterday, making it the third most active day of the year. And it wasn't just a handful of issuers:

Bank of Tokyo - Mit UFJ: $4,500MM
Marathon Petroleum: $1,950MM
American Airlines: $215MM
Capital One Bank: $1,000MM
Wells Fargo: $4,350MM
Lloyds Bank PLC: $1,000MM
Korea Devel. Bank: $750MM
Plains All Amer. Pipeline: $750MM
Alleghany Corp.: $300MM
Florida Power: $500MM
Bank of America: $3,000MM (Preferreds)
National Australia Bank: $1,250MM
Fifth Third Bank: $850MM
Packaging Corp: $400MM
National Savings: $250MM

Of course, not all this money will go to fund buybacks, but that's not the point: the key is that the corporate bond market is wide open. And further evidence of that is how well received all this debt was. One would think that higher supply would lead to lower prices (higher yields), but there was no such luck for the buyers. With the bulk of the issuance in the Investment Grade category  (later this week we should start seeing junk issues), IG spreads did not budge a single tick and at 0.94 bps, they rest just 4 bps above the yearly and post-crisis lows.

Similarly, high-yield spreads were unchanged, as were both IG and HY CDX. To complete the picture, Credit Default Swaps (CDS) on EU Financials' subordinated debt made another post-crisis low despite an admittedly horrid string of economic data from all the main EU countries, including Germany. And lastly, my index of China-sensitive CDS is now only 14 bps from new year lows and has dropped from 600bps to 498 since August 8.

I'll keep it simple: if anyone wants to argue that the bond market is on the verge of collapsing and/or that the borrow-buyback game is reaching the end, they can. But there are zero facts supporting those views.

While I'm on my bullish soapbox, let me offer you some DeMark levels for stocks, which may be relevant to upside targets and potential corrections. My reference security is the S&P 500 Pit Traded Futures Contract (SPA).

On a daily basis, the TD Sell Setup that printed on August 21 failed to materialize. On August 25, the break of TDST Level Up was qualified.  The Combo Countdown Sell is on bar 10 of an expected 13, and the more conservative TD Sequential Countdown is only on bar 6. If you don't care to get up to speed on Demark indicators (here's a quick primer), I will again keep it simple: these indicators suggest that there's more room to the upside before it can be argued that the bulls may be getting exhausted.

How much more?

There's a qualified TD Propulsion Exhaustion Up target of 2032.90.

On a weekly basis, the news for the bears is even worse, as the counts are at an even earlier stage, and even a pullback to 1801.30 (yes, 200 SPX points from where we are) would not dent the upside trend.

So the bottom line I've repeatedly suggested remains the same: any kind of scary geopolitical and/or economic headlines can knock the market for a loop in the short-term, but the corporate bond market -- THE KEY THRUST behind equities -- is not only intact, but getting better, perhaps dramatically so if yesterday's tone is any indication. 

In this context, there will also be times when credit might get jittery and lead to credit-related corrections. But as long as the flow of money into credit funds continues, the odds overwhelmingly favor such drops being contained and the upside trend to resume.

Yes, eventually this process culiminate in a disaster that will make 2008-2009 seem like a walk in the park. But there is still no indication that an apocalypse is anywhere in sight. 

In fact to these eyes, the big call by Morgan Stanley (MS) for SPX 3000 by 2020 seems entirely reasonable. In fact, it may happen well before then.

For more ideas on how to navigate the shorter-term moves of the markets, and for more color on how/why the corporate bond market influences stocks, here are some past articles that you may find useful:

8/29/2012: Corporate Bonds, Derivatives and How They Wag The Equity Markets

4/15/13: Alphabet Soup Monsters

6/3/13: VIX Curves rather than single point

1/8/14: Margin Debt Balances

2/19/14: More Color on Bonds and Stocks

3/28/14: China Debt Bomb - How To Use CDS

4/14/2014: The Pundits are Wrong - the Bull Market is Not Over Yet

Enjoy the ride!

Twitter: @FZucchi

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Position in SPX,SPA
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