Eq: Large Cap

(New York)

As analysts and the market try to sort out how the new division in Congress will play out in markets, one beneficiary is becoming increasingly clear. Aerospace analyst Ron Epstein of Merrill Lynch had this to say the day before last week’s election, “The change to Democratic control of the House is the best scenario for defense spending. It points to upside in the defense budget. Gridlock keeps budgets intact, and defense is a bipartisan issue”. That argument is a bedrock of the new view that defense stocks are likely going to surge in the new Congressional environment. Epstein points out that aerospace companies are simultaneously seeing commercial and defense businesses growing strongly.

FINSUM: Earnings seem like they will stay in very good shape for the defense sector, and because budget changes look unlikely, the whole industry seems to be in for smooth sailing.

(New York)

One of the best indicators of stock market performance is actually in bonds. Because they trade based on fundamentals, high yield bonds tend to be strong leading indicators of stock performance. With markets swinging all over the place, now might be a good time to see what junk bonds are doing. The answer is that the sector looks to be in good shape, with spreads holding steady and no real sign of concern.

FINSUM: Junk is probably not going to really worry until we get very near, or into an inverted yield curve, as a recession would be rough on the high yield market.

(New York)

Something very ominous has been occurring in junk bond markets over the last week. The lowest tier of junk credits—which had been outperforming the market for much of this year—have been getting hammered. There has been a crash in CCC credits. According to Bank of America, since early October CCCs “have lost 3.25% in total and 3.50% in excess returns … effectively wiping out five months of performance”. That contrasts with the highest quality credits in the junk universe, which appreciated.

FINSUM: CCC had been doing quite well, so one can see this either as a normal return to earth, or early signs of trouble.

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