Morning Reading – Subprime II?; Junk Bond Bubble; The Message of the Market

“Negative sentiment took a firm hold of the [subprime bond] market” this past week.  “We think the weakness in the ABX will continue.”

– JP Morgan in a report from Friday June 15

In “Ills Deepen in Subprime Bond Arena” (subscription required), Serena Ng and Kate Kelly report on Moody’s downgrade on 131 subprime mortgage bonds and the declining fortunes of the ABX, an index of subprime mortgage bonds, which hit an all time low on Friday.

“No exaggeration is required to pronounce unequivocally that money is available today in quantities, at prices and on terms never before seen in the 100-plus years since US financial markets reached full flower.”

– Steven Rattner, Managing Principle, Quadrangle Group LLC, in “The Coming Credit Meltdown” (subscription required)

Strange the disconnect between subprime mortgage bonds (see above) and junk bonds.  While the ABX touched an all time low on Friday, the spread between treasuries and junk bonds also reached an all time low implying that junk bonds are at or near an all time high.

One reason is that default rates are at all time lows: just .8% of high yield bonds defaulted last year and there have been just 3 defaults this year.

All the same: “With the balance sheets of many leveraged buyouts strung taut, a mild breeze could topple a few, causing the value of many leveraged loans to tumble as shaken lenders reconsider their folly.”

Could it be too long before a front page article analagous to the one on HSBC’s subprime problems on Thursday February 8, 2007 (subscription required) wreaks havoc in the junk bond market – with effects on the stock market as well?

“The thing that I’m focusing on is what the underlying leadership is.”

– James Paulsen, Chief Investment Strategist, Wells Capital Management

In “It’s a Wild, Wild Market – Look For Clues” (subscription required) Scott Patterson counsels readers to pay attention to the message of the market itself.  The action in the consumer discretionary, consumer staples and transportation sectors will tell alot about what investors expect for the economy going forward.

Financials will be an important tell as well given the high liquidity environment that has fueled things (see above).