From: G Simmons
Sent: November 1, 2005
STEPHANIE POMBOY, WHOSE scintillating and informative MacroMavens is on our short list of must weekly reads just put out one of her periodic issues devoted to trading tips. Stephanie, by way of brief background, is flat-out bearish on the economy and most markets.
Envisioning the twin drags of higher interest rates and energy prices carrying us into recession, her first theme is what to do when credit problems bubble to the surface. Among other things, she points out, $1 trillion in adjustable-rate mortgages are slated to reset in the next 18 months and no less than half of these will hit subprime borrowers. That's destined to take a toll, not only on the lenders, but on the poor souls who can't cough up the extra dough and on discretionary spending generally.
Switching to bonds, she notes that the investment-grade universe "has shriveled to almost nothing." Currently, over two-thirds of the industrial bond market merits junk status, compared to only 3% in 1980. Only seven U.S. companies are rated triple-A credits. The value of the entire Treasury market, $4 trillion, is dwarfed these days, she sighs, by the $5.6 trillion in mortgage-backed securities, $2 trillion in asset-backeds and over $3 trillion in high-yield corporates.