Once again… Credit was right!

By James Dondero | August 24, 2015

  • US Stocks had a very rough week, suffering their biggest declines since their 2011 lows. Technically speaking, stocks have now decisively broken key areas of support such as 2,050 on the S&P 500 and 1,200 on the Russell 2000.
  • Naturally, US Treasuries benefitted from the volatility, pushing yields on the 10-yr Note below 2% on Monday. Yields traded as low as the 1.90% area before bouncing, which is within 5bp of their 2014 lows.
  • While it remains to be seen whether the break in stocks is merely a temporary blip or more extensive bear market, we believe investors should take it seriously based on the weak market internals and degrading credit conditions which led into it.
  • One strategy we employ is to focus on assets which typically show a low correlation to the stock market, such as Energy MLPs, as well as sovereign & special situation debt such as Argentina and TXU (please see links for our previous commentary on these topics).
  • Others strategies include patience & discipline, as markets typically need time to heal and repair after such quick, violent moves. Our point being, we are expecting any initial low to be tested before stocks mount their next meaningful advance, giving investors time to methodically search for valuable dislocations, such as those noted above.

 

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