Corporate Bond markets and their implications for stocks

The bond markets are far ahead of the stock markets when it comes to the fact that the real distress of capital markets needs to be addressed. The left hand chart shows a degree of distress by means of yields already approached, but in reference the selling pressure of the funds is still moderate. Equity funds do have the biggest redemption in a long time which is typical around troughs but the redemption character of Bond funds still holds risks of further redemption, which would put equities under further distress as their borrowing costs did/would rise sharply. In any case, the earnings of companies will be decreasing substantially by matters of sharply higher credit costs combined with retreating demand that needs to be factored into the overall valuations of stocks medium-term.

Buying longer dated corporate Bonds is very risky though as an investor as we will see in 2-3 years unprecedented rates of default - hence keep it in the 12 month range for now.

Excerpt from Bloomberg:

Cash-Strapped Companies Grow to Record, Moody's Says (Update1)

By Gabrielle Coppola

Nov. 17 (Bloomberg) -- The number of companies at risk of running out of cash reached the highest level since 2002 in October as job losses and tightening credit weakened consumer spending, according to Moody's Investors Service.

The percentage of companies with an SGL-4 rating, Moody's lowest level of liquidity rating, rose to 14 percent last month from 12.6 percent in September, the highest since the index was designed in 2002, analysts led by John Puchalla wrote in a report released today.

Companies are increasing capital reserves as banks tighten access to credit following more than $966 billion in writedowns and losses since the start of 2007. What began as a cash crunch for small companies with limited amounts of debt has spread to major U.S. companies, with ``tens of billions'' of dollars in rated debt being downgraded, Moody's said.

``This is a sign of how things are worsening in the second year of the credit crunch,'' wrote Puchalla, who is based in New York.

As of October, 28 percent of the 72 issuers with an SGL-4 rating had more than $1 billion of rated debt on their balance sheets, totaling $128 billion. That compares with 18 percent of the 39 borrowers in that category at the end of 2007, representing $21 billion of debt, the report said.

General Motors, Ford

The New York-based ratings company reduced its rankings of the liquidity positions of 19 companies in October, including U.S. automakers General Motors Corp., Ford Motor Co., and Trump Entertainment Resorts, the Atlantic City, New Jersey-based casino company founded by Donald Trump.

``Even with the benefit of the U.S. government's $25 billion guaranteed-loan program, we think GM's liquidity profile will continue to erode in 2009,'' the analysts wrote. Detroit-based GM had its rating cut to SGL-4 from SGL-2.

Ford's $29.6 billion in cash and committed credit lines will cover expected requirements through 2009, the report said. Dearborn, Michigan-based Ford's rating fell two levels to SGL-3.