SP 500: Eminence Front?

Summary

Discussion of the potential effects on equity, bond, commodity, capital and asset markets regarding:

Leveraged high-yield contagion.

Markets in transition; buybacks and Dividends.

Reversal of fortune.

A definition: "Eminence" means a lofty or distinguished position, "Front" in this context means a facade or a false impression. So "Eminence Front" is about someone or something pretending to be more than they are?

Put it in perspective: Eurodollars $15tr; Mutual funds $30tr; shadow banking $75-100tr; bond market $100tr; derivatives $550tr. And there's a lot of interest rate sensitive tinder in there. This time, it may not take a Bear Stearns blow up to ignite things, perhaps like a child playing with matches in a pile of kerosene soaked tinder, just a few debt defaults (energy or oil, Eurodollar based EM or offshore debt, HY junk and or sovereign such as Greece) and a corresponding widening of credit spreads. Despite being awash in "dollars", we may witness a large dearth of "moneyness", which amongst other things, would cause a sudden sharp increase in interest rates, which could cascade into something much, much worse, like under The Midnight Sun where the days are longer, hotter and few in number. - The Midnight Sun Part 3

That is a lot of tinder or "white powder" out there. We Nattered again about that "dearth of moneyness" in Davos: Black Swan Lake?

Leveraged High-Yield Contagion?

Half the HY universe by market value today trades at 310bps, while the other half is at 1050bps. The distressed list has a disproportionate representation of commodities (33%). However, this dispersion doesn't bode well for US as HY, default and distress ratios are increasing, even outside commodities. The higher the "distressed glut", the lower will be the recovery rate. As well, the number of distressed bonds is rising in Europe... CCC issuance has plummeted. - Martin at Macronomics.

Martin would say that canary in the coal mine CCC is singing that financial conditions are tightening, distress is spreading and it is NOT limited to energy and commodities. For more pertinent info on debt spreads and the ongoing contraction of credit liquidity in Europe, Asia and the US, we recommend youread Macronomics' latest missive.

Want proof that the well of liquidity is drying up? YoY corporate gross issuance high yield -40%; YoY 3mo MA investment grade -20%; muni issuance -42%.

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