Gold Stock Investing 1
Corporate Bond Rates 0
Greg Silberman CA(SA), CFA (Retired)
The single biggest factor affecting credit and stock markets is the risk that sub prime carnage will spread to corporate bond rates. Unfortunately, a contagion now looks likely. Gold stock prices are responding favourably.
Here is an updated chart of credit spreads:
Chart 1 - Corporate Bond rates are rising quicker than Treasuries (the price is falling)
Chart 1 measures the performance of investment grade bonds versus treasury bonds. The theory is that investment bonds should yield more than treasuries of the same maturity because default risk is higher. When the chart is trending downwards it means that the spread between investment grade bonds and treasuries is widening and the risk of default is increasing.
Until recently, the spread between corporate bond rates (the above index comprises corporate bonds of A rating) and treasuries were at an all time low. That was until investors began to suspect the carnage in the sub prime market was not being contained but was beginning to spill over into higher rated debt.
That's certainly what the above chart is telling us as the spread between Treasuries and Corporate Investment Grade Bonds (i.e. not only sub prime paper) has recently broken support (blue dotted line) and implies that further spread widening is on the cards.
In the face of these credit concerns we are beginning to see large Wall Street banks -- the progenitors of derivative based on credit paper - showing signs of major deterioration. None is starker than Lehman Brothers who broke below 8 month support on Friday. Bear in mind that the Lehman Brother Mortgage Lender Network was one of the biggest and most successful mortgage networks in the run up in home prices.
Chart 2 - Lehman Brothers breaking 8-month support
The Good news if you are into Gold Stock Investing is that Gold Stock Prices are responding positively to the burgeoning credit problems and have recently broken out of a 1-year consolidation.
More commentary and stock picks follow for subscribers…
Greg Silberman CA(SA), CFA
greg@goldandoilstocks.com
July 26, 2007
I am an investor and newsletter writer specializing in Junior Mining and Energy Stocks.
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Click here: http://blog.goldandoilstocks.com
This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.
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