Credit Spreads: Like 1998 and 2008

By: Bob Hoye | Thu, Jul 9, 2015
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The following is part of Pivotal Events that was published for our subscribers July 2, 2015.


Signs of The Times

"More than 4,000 new Chinese hedge and private equity funds have launched in the past three months."

- Financial Times, June 15.

"I want to make some money from the stock market and use the profits to restart my manufacturing business, for later when the economy turns for the better."

- Wall Street Journal, June 17.

"Why There Is No Growth: The Entire S&P 500 Free Cash Flow is Going Back To Shareholders: Dividends and Buybacks"

- Zero Hedge, June 30.

Stock Markets

Perhaps the sharp swings were driven by statements and guesses about Greece's obligations. This is the theme if one assumes Random Walk or efficient-market thesis. The setback is then due to news and news is a string of unpredictable events. So it was all a surprise.

Universities have places for theoreticians. Toleration of theoreticians in central banks and financial capitals could soon begin to diminish.

The alternative is that stock markets were overbought and vulnerable to seasonal forces. Our case has been that speculative surges could be accomplished in the May-June window. Particularly for outlying stock exchanges as in Europe and Asia. The STOXX set its high in mid-April, London in mid-May and Shanghai in mid-June. Close enough and the declines have been significant.

Why May-June?

The greatest bubbles in financial history since 1720 blew out in May or June.

And as we have been noting, on the bubbles of 1873 and 1929 the NY market peaked in September.

The pattern now calls for churning around into August and an attempt at new highs for the NY senior indexes.

Outlying exchanges may not make new highs.


The venerable Dow Theory is indicating a bear market. In taking out the last low, DJIA has joined the long decline in TRAN. For more conviction the DJI would have to stay below the 200-Day, which would be Step Two.

The NYSE comp (NYA) is below the hitherto supportive 40-Week ema. That is a form of Step Two.

Update On "Friends of the market".

NYSE margin debt dropped in May, suggesting April was the spike high. As noted two weeks ago, the spike precedes the stock market peak by a number of months.

Advance/Declines peaked in April and have declined more distinctively than on the setback last September. The peak leads that in the senior indexes by a number of months. STOXX has been weaker as rally attempts have been unable to get above the 50-Day. Monday's low was below the 40-Week ema and serious deterioration would be signalled on staying below. The support number is 3447.

The pattern in 2007 is worth updating. The high was 4532 in June and the next rally made it to 4500 in October. The hitherto supportive 40-Day ema was taken out in July.

The pattern for churning through the summer and attempting a high in September could be impaired by rapidly deteriorating credit conditions. Credit markets are global and have little regard for specious notions about economic and financial nationalism.

Credit Markets

The key to this cycle seems to be in the action in credit spreads.

Last week's update on the chart of US Corporate spreads noted that an important step in the 1998 problem was the breakout on widening spreads. That was accomplished on July 1st. On this year's extravaganza in spreads, the equivalent breakout was accomplished on Friday's posting at 193 bps.

In 1998, the next serious step was achieved at the end of July 1998, when as we noted, LTCM was already losing - big time.

Is it reasonable to make these comparisons?

It would be an oversight not to review the pattern, particularly as it anticipated the top of the last bull market.

On the the equivalent transition in 2007, the initial breakout in spreads was also accomplished at the end of June. The more serious widening step was achieved at the end of July.

On US Treasuries, last week we noted that the TLT could enjoy a brief rally. The low was 114.65 on Friday and on news about "fresh disasters" in Greece it jumped to 118.45. Our view was that it was oversold and the low was tested on Wednesday. The next bounce could make it to the 120 level.

The "flight to quality" knee-jerk was evident over the weekend. Another similar jump is possible, but Treasuries as a means to make some money on bad news may not prevail for long.

The whole point of a truly liquid instrument is the feature of parking funds without pushing the price. One of the serious concerns is that long-dated Treasuries have suffered a huge loss of liquidity.

The most ideal liquid items continue to be the US Treasury bills and gold.

Precious Metals

Our November study "Caveat Venditor", looked for a bottom for the Precious Metals sector. This would need gold shares outperforming the bullion price and silver outperforming gold. This turned positive in December and we advised accumulating some stocks on weakness. Then it did the "too soon, too fast" rally. On the rally after that, we advised taking some money off the table, which we repeated on the rally into May.

The GDX/GLD and SLV/GLD have been negative since early May.

On the nearer term, we don't see making money in the sector, either long or short. Many have noticed how precarious the gold lows are at the 1130 to 1140 level. Breaking would be a disaster. However a more likely event would be a slow erosion taking out the low and setting up a buying opportunity.

That's for the gold itself.

Most precious metal stocks remain vulnerable to the potential of a generally heavy stock market after August.

Stock Buybacks

Stock Buybacks
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US Credit Spreads - 2007 - Calamity

US Credit Spreads - 2007 - Calamity
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US Credit-Spreads - 2015 - ????

This year's initial breakout was accomplished at 193 bps on June 29th.

If spread-widening continues and takes out resistance at 213 bps it will be equivalent to the key moves in July 2007 and of July 1998.

The Poster Child
Wells, Fargo: Representing Money-Center Banks

Wells, Fargo: Representing Money-Center Banks
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Link to July 3 Bob Hoye interview on



Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

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