Tuesday, August 25, 2015

Chart updates

Given the rather extraordinary volatility and nervousness of the market, I'm going to post updates of key charts as I'm able, with minimal commentary.

The following charts show the most recent data as of today, Aug 25th:

High-yield credit spreads are rising, but still relatively low compared to periods of real economic distress. Swap spreads are declining, and are at levels which typically coincide with periods of economic tranquility.

The energy sector is clearly the one most impacted by current conditions (i.e, collapsing energy prices). Defaults are very likely. The market has already priced in defaults on energy bonds of roughly $45 billion. However, that's less than 1% of the value of outstanding traded corporate debt in the U.S.

All credit spreads have widened, but investment grade spreads are still relatively low and HY spreads are not at levels that are extremely worrisome (the energy sector accounts for most of the spread widening in the HY sector).

The Vix/10-yr ratio backed off a bit today, but is still VERY high, almost as high as it was at the apex of the PIIGS crisis in late 2011. The market is very fearful of the global economic and financial market fallout of a slowdown in the Chinese economy and collapsing energy prices. Lots of bad news is being priced in.

At 16.5 today, the PE ratio of the S&P 500 (according to Bloomberg) is equal to its long-term average.

In the great scheme of things, stock prices remain in a long-term uptrend. The recent selloff appears to be a minor bump in the road.

The prices of gold and 5-yr TIPS still appear to be slowly trending down. This suggests that the market is gradually losing the significant degree of risk aversion that it acquired in the wake of the PIIGS crisis. It also suggests that the market's demand for "safe" assets is declining on the margin. Both are consistent with a market that is regaining some lost confidence. This is of course very much at odds with the huge rise in the Vix/10-yr index, and is perplexing, to say the least.

Commodity prices have been trending down for several years now, but are still quite high relative to where they were a decade ago.


Dave said...

This is very helpful Thanks for updating.

Benjamin Cole said...

Lots of telling graphs. I just wish I could be sure what they are telling me!

The Vix 10 year inex up and falling interest rates are consistent with central banks chokng off a recovery through passively tight money.

As Milton Friedman said, lower interest rates are a sign of tight money.

Good luck everybody---and remember, public agencies evolve very slowly (if at all).

marcusbalbus said...


Hans said...

Marcus, two lames in a row...There is a gaggle of geese
preparing to take flight..Please join them and you will
receive your reward points and make new friends.

For the investors, these charts are of little helf..The
data points will arrive much too late to offer any guidance
whether to shift market strategy..

The last chart on the other hand is extremely useful, especially those following
the precious metals markets..The correlation between the index
and Au, is stunning! The chart indicates further downdraft
for gold, in the weeks and months ahead.

Richard H. said...

Question regarding commodity prices. You mention, Scott, that commodity prices are still quite high compared to where they were a decade ago. I find this a strange comment. Notwithstanding efficiencies in their production, shouldn't they be higher than a decade ago - like everything else. In other words, commodity prices are not immune to the very large increase in total money supply over the last 10 years (more like 30 years).

Scott Grannis said...

Unknown: you make a good point: the prices of most things tend to rise over time because of inflation. But consider: since commodity prices bottomed in late 2001, the CPI is up by about one third. Meanwhile, industrial commodity prices have doubled, and crude oil is up 135%. So most commodity prices have increased significantly relative to other things, even after their recent "plunge."

Richard H. said...

Thank you. Finished goods have even more efficiencies wrung out of them than commodities (explaining why CPI is not higher), but it is strange why there has not been more inflation. Things do not move in lockstep however. Who knows?!

steve said...

bought "junk" bonds with both hands today. I'm a trader so this isn't long term BUT I like the signs of capitulation I have seen. specifically; a vix the spiked to 50 on monday as well as the 10 year spiking to below 2%. this could kick me in the ass but as a trader you gotta embrace risk sometimes...

Benjamin Cole said...

Good call Steve. I cannot speak to specific issues, but in every scare-debacle, yields on junk bonds skyrocket. Making for a buying opportunity.

William said...
This comment has been removed by the author.
marcusbalbus said...

low for wti in 2001 was $26. its now $39. that's not 135%.

Scott Grannis said...

I'm using Arab Light. Low $18 and change, now $43. Crude futures tells the same story: low $19 and change, now $39.

Benjamin Cole said...

Medium-term blight? H1 global trade down YOY.

Is the Fed exporting its tight money policy? Many say so, and I think I agree. See China and the pegged yuan. Hong Kong too, Singapore in deflationary recession.

Unfortunately, we may have to rinse and wash a few more times before central bankers evolve.

Central bankers think they are "fighting inflation." That may be yesteryear's war.

But then, when did public agencies quickly adapt to changing circumstances?

marcusbalbus said...

you are using a non std crude benchmark. you are fitting your facts to your argument.

Scott Grannis said...

Arab Light and crude oil futures are about as standard as you can get.

Scott Grannis said...

In fact, WTI and crude futures are one and the same, and the 2001 low was indeed $18 and change:


honestcreditguy said...

Buying junk right now while it's being shunned by the big houses is recipe for disaster.

The deleveraging is not over yet....