Frown Grinch

Is The Grinch About To Steal Christmas?

“Your a mean one, Mr. Grinch…”                  

From the Song Your a Mean One, Mr. Grinch By Theodor Geisel & Albert Hague

Last night, post-close, a news article was published on MarketWatch about a bond mutual fund restricting investor access to funds.  The article can be assessed by clicking the hyperlink below.

This is a news story reminiscent of the 2008 financial crisis, and it should be alarming to investors.

Stocks and bonds, especially high yield bonds typically move together (correlation), and during 2014, the trend of high yield bonds began to “diverge” significantly from the trend in the equity market.  The high yield bond market has continued to move lower during 2015.  This phenomena is usually an ominous sign for equity values, and it is one of the major reasons Sachem Rock has advised investors to remain aggressively hedged, and to not commit additional funds to equities since early August.

Since 2008, the worldwide governments and corporations have been adding debt to “unprecedented” levels. They have responded to the more aptly named, 2008 Debt Crisis, by adding piles of debt.  Corporations, particularly in the US, have been adding debt to buyback share of stock, which only increases financial leverage and hence risk.

We spoke of this in our last post, “Rational Irrationality” and it is encouraged by negative real rates of interest (inflation-adjusted).

In past speeches and testimony before Congress, Janet Yellen, Chairman of the Federal Reserve, has voiced concerns about overall bond market liquidity in the decision-making process about raising the level of US interest rates.  Yellen has “boxed” herself in, and she is in a classic Catch-22; damned if she does, and damned if she does not.  

Unlike the children’s story, there may be no happy ending here.

Geisel closes his story with the phrase “And he… HE HIMSELF! The Grinch! …carved the Roast Beast!”

This morning, with stock futures deeply in the “red”; it may be private and public stockholders alike that are “carved like Roast Beast”.

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